(Bloomberg) -- Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., said private credit-market debt is too high and the age of credit expansion that led to "double-digit" returns is over.

Instead, investors face an "age of inflation, which typically provides a headwind, not a tailwind, to securities prices -- both stocks and bonds," Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based company's website today.

"Those days are over," Gross said later during an interview on Bloomberg Television's "Lunch Money" with Stephanie Ruhle. "Pension funds and individuals and investors that expect 10 percent consistent returns to pay those bills are going to be disappointed."

Gross's outlook follows his commentary last month, which sparked debate among investors and analysts after he declared that the "cult of equity" was dying. In his August comments, he compared long-term returns from equities to a "Ponzi scheme" and said returns of 6.6 percent above inflation, known as the Siegel Constant, won't be seen again. Since offering equity funds in 2010, Pimco has attracted about $3.2 billion to its four main funds as of the start of last month, less than 1 percent of the firm's $1.8 trillion in assets.

"Our credit-based financial system is burdened by excessive fat and interest rates that are too low," Gross wrote. "Central banks are agog in disbelief that the endless stream of" liquidity pumped into the banking sector has not stimulated lending, Gross wrote.

Zero Rates

Structured impediments such as regulator capital risk standards for banks and fear of losing money among household investors has prevented so-called zero bound interest rates from sparking the economic recovery that central bankers anticipated through the policies, Gross wrote.

"Too much debt leads to forced diets and deleveraging, a process that has been going on since Lehman in 2008," Gross wrote, referring to the bankruptcy of Lehman Brothers Holdings Inc. in September of that year. "Not only households, but financial institutions as well as many countries have reduced their caloric intake which in turn has promoted slow growth and in some countries near recession and/or depression."

Individuals should balance assets according to age, with a greater emphasis on stocks for younger investors and bonds for those closer to his age, the 68-year-old Gross wrote.

'Dying Cult'

"It's really a diminished or dying cult of both bonds and stocks, from the standpoint of a belief that they can get 10 percent types of returns to pay their bills, to pay for education, to pay for retirement," Gross said in the interview.

Gross expects bonds to return 2 percent to 3 percent, while forecasting stocks will return 4 percent to 5 percent, he said in the interview. "It's going to be difficult to stimulate the real economy in the U.S. at a faster rate than 2 percent and perhaps even less if we have that fiscal cliff in December or January 2013."

U.S. economic growth slowed to an annualized rate of 1.7 percent in the second quarter from 2 percent in the first, according to the Commerce Department on Aug. 30. The so-called fiscal cliff refers to an event in which taxes are set to rise and spending cut by $1.2 trillion if Congress fails to agree by Dec. 31 on ways to reduce the deficit.

Reflationary Bets

"If central banks are successful in terms of reflating, if Bernanke is successful in terms of a new QE, then an investor should be focused on reflationary assets," Gross said. "That would be real assets such as commodities and gold -- to the extent that they reflect future inflation. On the bond side that would be inflation-protected securities, such as TIPS or even floating rate securities that don't have a fixed coupon, and stocks as well."

Pimco's founder and co-chief investment officer reiterated in his commentary that institutional investors will continue to find the highest returns in countries with faster growth rates and warned that nations such as the U.S., where he has favored Treasury debt, offer risk in the long term.

Gross cut the proportion of U.S. government and Treasury debt in his $270 billion Total Return Fund to 33 percent of assets in August from 35 percent the prior month, according to the latest data on Pimco's website. Mortgages were at 51 percent, down from 52 percent in July.

The Total Return Fund gained 8.1 percent during the past year, beating 97 percent of its peers, according to data compiled by Bloomberg. The fund gained 0.65 percent in the past month, topping 86 percent of comparable funds.

Inflation Expectations

Treasuries due in 30 years, the securities most sensitive to increases in inflation, yield 2.70 percent after touching 2.44 percent on July 26, the lowest ever. That compares with an average of 3.9 percent in 2011 and 4.43 percent in the last decade.

A measure of price-increase predictions used by the Federal Reserve to set policy, the five-year, five-year forward break- even rate, has averaged 2.54 percent this year. That's the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022.

U.S. government bonds have gained 2.5 percent this year, according to Bank of America Merrill Lynch index data. That compares with 3.7 percent for German bunds and 4 percent for U.K. gilts. Australian securities have gained 5.6 percent.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access