Sleep Tight!

From CNN Money:

The manager of the world’s biggest bond mutual fund predicts the Dow Jones industrial average could fall another 40 percent to 5,000 because the stock market remains stubbornly expensive despite a more than two-year decline.

Bill Gross, who manages the $6.2 billion Pimco Total Return fund, expects stocks to keep falling until the stock market’s yield rises enough to make shares attractive relative to bonds.

As someone who is in the bond market, let me tell you — it sucks, too. Yields are terrible. Better than the stock market? Well, it’s certainly safer. But a good stock pick is still a hell of a lot better than what you’ll get on Treasury notes or (recently non-existent) muni bonds.

So what would Dow 5,000 mean with today’s lousy bond market returns?

A serious bout of deflation, kids. And that’s scary. When companies can’t raise money and investors can’t make money and everyone is too scared to move, then you have a downward spirl like the one Japan has been caught in for a decade.