Bill Gross Delivers a Blunt Reality Check to America

Bill Gross Delivers Blunt RealityHe might only be the 342 richest person in the world with a net worth of $1.99 billion, but as the manager of Janus Capital, when this legendary bond investor speaks, the investing world listens. He’s not exactly bullish on the U.S. economy. In fact, he thinks everyone is too distracted to notice the terrible state of the economy run by the one percent.

Not surprisingly, Wall Street disagrees. But the fact of the matter is that the man’s right. Not because he’s a contrarian investor. Au contraire. He just looks at the economic data in front of him. Something we’ve been doing without fail in these e-pages for a long time.

It’s a Xanax World for the Lowest 99%

Bill Gross entitled his January investment newsletter It’s a Xanax World, noting that things are going to get so bad, everyone is going to need a Xanax. At the beginning of his outlook, Gross compares the U.S. to a pre-fall Rome and pre-revolutionary French Bourgeoisie. (Source: “Investment Outlook from Bill Gross,” January 7, 2016.)

The U.S. is a distracted population too busy to notice the miserable state of an economy controlled by the illusive one percent. By keeping us distracted, we forget that half of the U.S. population doesn’t go to work in the morning and that our real wages, after factoring in inflation, have not really budged since the mid-1980s.

Meanwhile, thanks to the Federal Reserve manipulating interest rates and stocks for almost 10 years, corporate American has been dining on caviar. It’s been a wonderful life, Gross says, for the one percent—and a Xanax existence for the 99%.

But don’t expect the November elections to make life any better. With or without eight years of Hillary, the U.S. economy is at the mercy of central bankers, superpacs, and K street lobbyists.

America Is Broke and Doesn’t Even Know It

Just because the future looks bleak doesn’t mean there aren’t opportunities for the 99% to invest in. The main thrust of Gross’ argument is that the changing demographics are a liability facing the U.S. government. The aging baby-boomer population and Social Security and healthcare obligations are changing the direction of the financial markets.

Gross enters as evidence the U.S. government’s current outstanding debt of approximately $16.0 trillion, or close to 100% gross domestic product (GDP). Toss in the present value of Medicaid ($35.0 trillion), Medicare ($23.0 trillion), and Social Security ($8.0 trillion) promised under the existing program and you get $66.0 trillion—or another 400% of GDP.

America is essentially broke and doesn’t even know it.

And the country’s financial troubles are going to get a lot worse. The rate of retirees to workers (the dependency ratio) soars from 25 retirees for every worker to 35 retirees over the next 10 years.

With the average American expected to live until their late 70s, those who can actually afford to retire at 60 can look forward to spending 19 years, or roughly 24% of their life, in retirement.

The increasing liabilities (on the government and private sector level) due to an aging population short on young workers could result in higher wages, an increase in inflation, and reverse interest rates.

Investing Ideas for a Changing America

What’s his solution? Out-of-whack demographics will dominate financial markets over the coming decades and developed nations like the United States should increase their exposure to emerging markets over the long-term.

Given the demographic factors, Bill Gross also thinks Americans should buy 10-year inflation-protected Treasuries.

While Gross doesn’t touch on it, investors might want to consider looking at the healthcare sector. It might be a no-brainer, but with changing demographics, pharmaceuticals, biotechnology, and medical devices are only going to become more of a necessity in the coming years. As a plus, it’s also a sector that isn’t as sensitive to rising interest rates and a stronger U.S. dollar, as other sectors.

Admittedly, there is no one-size-fits-all take on the U.S. and global economy or investing. That said, demographics will play a dominant role in investing markets and returns over the next few decades. That’s because 10,000 baby boomers retire each day and will continue to do so for the next 20 years.