Most medieval

Bill Gross' monthly investment outlook

In days of old when knights were bold and ladies most beholden straw seemed like silk and water, milk and silver almost golden

Not so sure about that limerick – it was probably a cruel world – those days of old. Yet much of it was fascinating and in some cases surreal. The relationship of “man” and God, for instance. Or better yet … “man,” animals and God. Unlike today, when most believe that animals were put on this Earth for humanity’s pleasure or utility, most people in the Middle Ages believed that God granted free will to Adam, Eve and all of His creatures. Animals were responsible in some strange way for their own actions and therefore should be held accountable for them.

Accountable? Well yes, animals were actually put on trial for their misdeeds. They might actually be considered “evil.” Beetles that munched on church pews, pigs that dined off of late evening drunkards, locusts that ravaged harvest wheat – all were viewed in a similar fashion much like their human counterparts – thieves, adulterers and murderers alike. Sometimes the animal would be brought before an actual court, sometimes (as with insects) tried in absentia. In the case of ravaging pigs, for instance, there might be a full judicial hearing with a prosecutor, defense and a robed judge who could order a range of punishments, including probation or even excommunication. No bad little piggies went to heaven, it seems. Often, there would be an actual execution with a hog being hanged by the neck until it was dead. The pork chops followed shortly thereafter, I assume. There was no Humane Society in 1500. Somehow I thought those “medieval” times needed a more reality-based ditty than the one cited above, so here’s a modern-day “Chaucer’s” attempt:

In days of old when pigs were bold and people very prayerful a locust might be canonized and drunkards had to be careful.

Now on to the world of investing, me Lords and Ladies, which by the way is full of little piggies feeding at the trough, scaredy “cats” afraid of their own shadow, and ostriches sticking their heads in the sand. And too, history will record that capitalism and its markets are a dog-eat-dog world. If so, we’ve currently got a menagerie to rival anything in those “days of old.” But let’s stick with the piggies for the following Investment Outlook. Hopefully the prose will be better than the previous poetry.

I find it fascinating the number of ways that investors approach the “value” of securities and other investments such as commercial real estate or homes. Many of them are legitimate and form a solid foundation in academic research or even common sense. “Natural” interest rates, P/E ratios, cap rates, risk and liquidity premiums, and even real estate’s “location, location, location” are ways to fundamentally price an asset. Add to that the emotional influence of human nature and you have a pretty good idea as to why prices go up and down; not necessarily a pretty good idea as to when they will go up and down, but at least the why part is partially visible.

But lost in this rather complex maze of why is the function of credit and credit expansion in a modern, financial-based economy that it dominates. Asset prices are dependent on credit expansion or in some cases credit contraction, and as credit goes, so go the markets, one might legitimately say, and I do most emphatically say that! What exactly do I mean by “credit?” Well, money in all its multiple forms. Cash is a form of credit in my definition because you can use it to buy things. Bonds are credit. Stocks are credit. Houses and real estate can be considered credit when they are securitized and sold to investors in mortgage pools. In our modern financial economy, credit is anything that can be transferred on a wire or a computer from one account to another and ultimately be used as the basis for spending money on things such as groceries or airplane tickets.

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