What the 3% really represents, of course, is the "risk premium" that equity investors demand for their investment. ,As Gross notes in his recent letter, real wages have fallen the past 40 years. During that period, we experienced a massive stock market boom, despite the past 12 years of trader-enriching, secular-bear-market, high-frequency-driven volatility

By Kirk Spano

"If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year."

Bill Gross
Right.
The opening quote from PIMCO's Bill Gross did not get all the attention of his proclamation that "the cult of equity is dying" did, but it probably should have.
I'm not going to argue the ethics of the above statement, even though Gross implies the 3% is morally wrong by his use of the word skim. Rather, I just think it is a statement of fact that stock investors will in general do better on a percentage basis than labor or bond investors.
As Gross notes in his recent letter, real wages have fallen the past 40 years. During that period, we experienced a massive stock market boom, despite the past 12 years of trader-enriching, secular-bear-market, high-frequency-driven volatility.
What is most interesting to me, though, is that the drop in real wages coincides more with the expansion of social welfare than it does with the secular bull stock market which only encompassed half of the time frame.
So is it wrong that equity holders have made better returns historically than bond investors or labor? Remember, the bond market is far larger than the stock market, so equity investors are not really skimming a full 3% from the economy.
What the 3% really represents, of course, is the "risk premium" that equity investors demand for their investment. The real question to ask is whether 3% is the appropriate premium level?
But let's ask another question. What is the equity premium for a small business owner? For the successful small-business owner, it is far above 3%. Why? Because his/her personal financial risk was likely exceptionally high — unless of course he/she was a Harvard dropout working with venture capital.
All of this, of course, raises the question: What next?
I have argued exhaustively the past year that stocks are once again the best game in town. A little early? Maybe, but accuracy generally wins enough over time that precision is forgotten.
For the record, I do not like all stocks. As Gross has implied, commodities might be the place to be during an inflationary period. I am not a big believer in commodity-linked securities, though there are some asset-backed vs. futures-backed ETFs that could be worthwhile for trading. What I do like are commodity-linked stocks.
While actual commodities do well during a high-inflation period, commodity-linked stocks do well during moderate inflation. We are much more likely to see moderate inflation in America due to our (still) reserve-currency status and ability to produce our own commodities.
Of course, this does presume some political brain power in the near future, such as policing cheating and hoarding, limiting foreign military deployments if possible, continuing to educate and favoring work over welfare. If we continue to get political partisanship over solutions, well, then, yes, all bets are off. I'm still with Churchill, though, and believe we will get around to doing things right.
I have discussed North Dakota oil shale plays such as Kodiak Oil and Gas /quotes/zigman/291911/quotes/nls/kog KOG +8.07%  and Oasis Petroleum /quotes/zigman/589997/quotes/nls/oas OAS -3.60%  as being some of the easier plays out there. There are dozens more commodity producers and servicers that should do well in a moderate inflationary period.
In looking at some of PIMCO's portfolios, it is easy to see they are entering both the commodity and commodity-stock plays. My firm has followed that lead with our Balanced Alternatives strategy which takes an inflation-sensitive growth and income approach that has the advantage of being nimble in a Lynch-identified way.
If you own bond funds, it is time to start swapping out for commodity-linked or commodity-stock investments. As Gross points out, bonds are in even worse shape than many stocks going forward.
Kirk and clients of Bluemound own shares of Kodiak Oil and Gas, and Oasis Petroleum. Neither Kirk nor Bluemound clients plan any transactions in the next 3 trading days. Opinions subject to change at any time without notice.