Bill Gross' prediction for stocks and bonds

Bill Gross, PIMCO bond king, wrote the following in his recent August Investment Oulook - Cult Figures.

1.  From 1912 to 2012, stocks had a real return of 6.6 percent per year and this is fading.  This 6.6% return will be hard to replicate in the future because two drivers that contributed to corporate profits are already at historical lows (i) labor costs (ii) corporate taxes.  Bond returns are fading as well.  The Barclays U.S. Aggregate Bond Index currently yields only 1.8%.

2.  Today, a diversified portfolio comprising stocks returning a nominal 4% and bonds returning a nominal 2% may produce an aggregate portfolio return of 3%.  After inflation, it becomes zero.  Bill Gross goes on to say that assumptions of 5-6% real returns used by portfolio and pension fund managers are unrealistic.  Realizing this, policymakers' solution will be to inflate ourselves out of the predicament.  But growth from inflation is not real growth as people will realize.

Ten Ways To Beat Inflation - Forbes

Great chart comparing real estate investment vs other options in terms of beating inflation.

TRATEGY	ANNUAL EXPENSES, BASIS POINTS1	HAZARD	TAX TREATMENT2
FOREIGN EXCHANGE3	76	COSTS	BAD
GOLD ETF4	26	NEW SUPPLIES	TOLERABLE
HOME5	20	REAL ESTATE CRASH	VERY GOOD
JUNK BOND ETF6	40	DEFAULTS	DREADFUL
MORTGAGE7	20	DEFLATION	GOOD
REAL RETURN FUND8	73	DEFLATION	TOLERABLE
RESOURCE STOCKS	0	BUSINESS RISK	TOLERABLE
SOCIAL SECURITY POSTPONEMENT	0	CONGRESSIONAL DOUBLE CROSS	GOOD
TIPS	0	RISING REAL RATES	BAD
TREASURY LADDER	0	HYPERINFLATION	BAD

¹ANNUAL HOLDING COST PLUS A TENTH OF ROUND-TRIP TRANSACTION COST. ASSUMES TREASURYS BOUGHT AT AUCTION. A BASIS POINT IS 0.01%.²IF ASSET IS OUTSIDE A TAX-SHELTERED ACCOUNT. ³COST SHOWN IS FOR POWERSHARES BEARISH DOLLAR ETF. ⁴ISHARES GOLD TRUST. ⁵REALTOR AND CLOSING COSTS ONLY, APPLIED TO A PORTION OF HYPOTHETICAL SALES PRICE. ⁶SPDR HIGH YIELD. ⁷CLOSING COSTS ONLY. ⁸FIDELITY STRATEGIC REAL RETURN.

Foreign / Overseas parents of New York University, Columbia students. Buy Manhattan property?

For affluent parents of students attending NYU or Columbia, a common question is whether to buy a condo investment property in Manhattan for their child to live in.  Of course, there is no right answer.  Here are high level pointers:

* Staying at the dorm is more expensive than renting an apartment outside.  The dorms, along with the meal plans are revenue streams for the universities.  Columbia and NYU are major landlords and own many properties, land and buildings.  They understand the benefit of owning.

* Renting is the lowest cashflow option.  It's cheaper than staying at the dorm and does not require the large capital outlay associated with buying.

* Buying a condo or building is obviously the long term wealth building strategy.  In this market (because prices have depressed enough).  However, Manhattan property requires tying up at least 40 percent down to break even with rent.  This is capital that may be more productive in another investment. 

Manhattan New York Condo Buying Process For Foreigner / Overseas Buyers

As guidance to our foreign / international buyer clients, below is the process for buying a condo in Manhattan, New York.  The process is similar for those buying the condo as an investment property or as a residence.  Main difference is that for investment property buyers, downpayment required by the lender is usually much higher. 

Estimated Time to closing after identifying property:
With Financing:  10 to 12 weeks
All Cash:  2 to 3 weeks

1.  Obtain pre-approval from lender (1-5 days)
Lender can be US bank or overseas bank at foreigner's home country with international mortgage programs. 

2.  Identify Property (2 days - several months)
Property viewing can be a pleasurable or tiring experience.  Make sure you work with a broker who will filter the properties to maximize productivity of your time. 

Inflation coming, fix your debt payments !

Manhattan Real Estate: What successful landlords know about real estate and inflation