Financial advisors are considered an optimistic, if cranky, lot in the aggregate, but that sentiment was put to the test this week by bond guru William Gross, the keynote speaker at the annual Morningstar Investment Conference in Chicago this week. A record 1,650 registrants turned out for the annual event, and not all were happy with what they heard during his talk on Wednesday. “I want to go home and hide under the covers,” one advisor joked after Gross’ remarks. The sentiment was echoed to some degree in conversations in elevators and over lunch during the three-day conference, which wraps up Friday.

Gross made headlines earlier this year by sharply scaling back on U.S. Treasuries and moving into cash, pointing to burgeoning national debt and unfunded liabilities in federal health programs. He reviewed his rationales for this move at the conference: there is a “staggering” difference between nominal interest rates that were brought down by the Fed’s policy of quantitative easing and real interest rates, adjusted for inflation. Real rates now run about negative 0.5 percent, he said, which hammers dollar investors.

But it also raises larger questions about the health of the American economy, Gross told advisors. There’s only about 80 to 90 bps of difference between government bond yields in Japan, which has struggled with deflation and recession over the past 20 years, and those of the United States, with the largest economy on earth. Job creation in the nation is unimpressive. Growing the economy via lower interest rates won’t work anymore, Gross said; what are needed are improvements in productivity, education, and other fundamentals. “The asset-based economy basically is over and done for. There’s no way to pump it anymore,” he said.

Afterwards advisors said they hadn’t heard anything new in Gross’ speech and weren’t surprised at his views. But hearing the bad news at the start of the conference brought some people down. “It was a depressing speech,” said Jana Basden, a portfolio manager at Rosenbaum Financial in Portland, Ore. “But there’s a lot of very depressing stuff out there, too,” she added. The easiest way for the country to bring down federal debt is by inflating its way out of it, which has consequences for savers and investors, she said. But she doesn’t see inflation as a problem until wages start to rise, not a likely scenario in the short run.

The implications for advisors’ clients are sobering, given that some $600 billion has moved into bonds in recent years by investors who were traumatized by the financial collapse. “That’s pretty scary, given Bill Gross’ outlook for bonds,” said Kevin Berner of Bard Associates, an RIA. “People have been going into bonds at exactly the wrong time.” He says the only government bonds he recommends are inflation-protected securities in the U.S. and Canada; Berner is also bearish on the dollar.

“I think I’m getting to the acceptance stage…It’s going to be a very long slog,” said Georgia Bruggeman of Meridian Financial Advisors , an RIA in North Eastham, Mass. “We’re backed against the wall. There’s this housing hangover, interest on the (federal) debt. Can we afford that?...Bill Gross is saying this is a 15-year project. That’s scary, because it’s beginning to affect other things.”

She’s looking at corporate bonds and municipal bonds as an alternative to Treasuries: “Five and a quarter percent is starting to look better and better to me.” She’s also thinking of trading individual equities in her clients’ retirement accounts.

Bruggeman is not pushing the panic button on the nation’s future, however. “We’re having a temporary slowdown right now. I do believe it will be temporary.”

William Koldus of Koldus Contrarian Investments in Indianapolis said he wasn’t depressed by Gross’ views, but he understood why others would be. “People want to be optimistic in this business, but we’ve come off a tough 10 years in market returns,” he said. “There’s a lot of excess that needs to be wrung out of the system. There’s no easy way to do it.”

The good news, Koldus says, is that volatility in the market creates investment opportunities.

Phil Amos of PJ Amos & Associates, an IBD in Cleveland, said Gross’ views reinforce the value of working with a financial advisor. “It’s more clear that people can’t do it on their own,” he said. “Markets aren’t going to give us double-digit returns, but managers can.” One thing he has been doing is adding more alternatives to his portfolios.

As skeptical as he is about government debt, Gross told advisors he still sees investment opportunities. “You must get outside the United States,” he said, urging advisors to think in terms of non-dollar currencies. Although Brazil has currency risk and a history of defaulting on debt, it also has real interest rates of 6 to 7 percent. Canada, with a cleaner balance sheet, also offers better real interest rates, he added. He also praised dividend-paying stocks of such companies as Johnson & Johnson and Coca-Cola. Such companies offer real returns of 3 to 4 percent, “with perhaps a smidgen of growth,” Gross said.