As always, Gross hits the nail on the head. Low yields on bonds will require higher returns on stocks in order for pension funds and money managers to hit target returns. The result we are seeing in the short-term is an overallocation to emerging markets. Pension funds and money managers are being forced to chase higher returns, thereby chasing higher risks.
Unanticipated Consequences:
- Error: Funds are using assumptions that worked in the past, but appear to be way too rosy based on current (and expected future) fundamentals.
- Immediate Interests: Pensions were set up to take care of the then-current work force. They ignored the burden on the future work force's wallet. Additionally, realizing that they need higher returns to make up for the lost decade of 2001-2010, many funds have reach for yield recently by pouring money into higher risk investments like emerging market stocks. This may create an even larger bubble that will hurt even more than the real estate bubble when it bursts.
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