September 4, 2009
In his latest Investment Outlook, PIMCO’s Bill Gross calls on “children of the bull market” to grow up, and goes a bit deeper into the concept of the “new normal” that he’s discussed previously.
Gross says that there has been a significant break in the growth pattern that many investors have grown used to over the past several decades “because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next — yes, the next 10 years and maybe even the next 20 years.”
“We are heading into what we call the New Normal,” Gross continues, “which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.”
Gross says those factors will “lead to a number of broken business or economic models that may forever change the world we once knew”. Among them:
- American-style capitalism and the making of paper instead of things. The past 25 years has seen the U.S. consume, then print paper assets and debt in order to pay for it, Gross says, while developing countries made things and accepted America’s securities in return. That’s over now.
- Private vs. public-driven growth. “The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits.”
- Global economic leadership. China appears ready to overtake the U.S. as the economic leader in the 21st century, Gross says.
- United States housing and employment. “Housing cannot lead us out of this big R recession,” Gross says. “The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.”
Gross says it’s hard to tell what will happen in terms of investing in the “new normal”, but adds that PIMCO sees highest probabilities of the following:
- Global policy rates will remain low for extended periods of time.
- The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
- Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
- Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
- The dollar is vulnerable on a long-term basis.
Unless a whole bunch of petroleum geologists are wrong, the coming peak oil crisis will mess up the whole world economy. How can we possibly replace 38% of all energy used, including nearly all of the energy used for transportation? It is simple physics. Read the Hirsch Report or wiki peak oil.
Mr. PIMPCO has one message and that message is: Buy my bonds and my bond funds. He’s nothing but a glorified used car salesman and he does a huge disservice to the investment community trying to convince us that bonds will outperform equities. The only way he can do that is to forecast “the normal” where the economy is so bad that bonds are the only “safe” investment. The realist is that bonds are simply ballast and equities are the engine of the economy. The biggest reason Gross gets so much press play is that PIMPCO spends huge amounts of money on advertising and media schmoozing. If anyone needs to grow up it’s Mr. PIMPCO and the media who pander to him.