Bill Gross: Start shouting “New Normal”

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Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Alphabet Soup”, therefore always makes for thought-provoking reading.

Here are the first and last paragraphs:

“Global financial market returns stand at the threshold of mediocrity. With bonds priced not for recession but near depression, most major global bond indices now yield less than 3%, surely a forerunner of returns to come. Stocks, long the volatile vamp of investor optimism, have not yet adjusted to the New Normal of half-size economic growth induced by deleveraging, reregulation, and deglobalization and have low single digit prospects as well. Yet, what has seemed obvious to those of us collectively at PIMCO for several years now is less than standard fare in the trading rooms of institutional money managers. While the phrase “New Normal” has been welcomed into the lexicon of reporters and commentators alike, the willingness of investors to accept its realities is fog-ridden and whispered, or perhaps softly whistled, much like midnight passersby at a graveyard. Our “New Normal” two-word duality seems to resonate more on the “normal” than the “new” to economists whose last names aren’t Roubini, Reinhart, Rogoff, or Rosenberg. It’s as if “R” has been eliminated from the financial alphabet, and “new” from investors’ dictionaries worldwide.

“Consumption when brought forward must be financed, and that financing is a two-way bargain between borrower and creditor. When debt levels become too high, lenders balk and even lenders of last resort – the sovereigns, the central banks, the supranational agencies – approach limits beyond which private enterprise’s productivity itself is threatened. We have arrived at a New Normal where, despite the introduction of 3 billion new consumers over the past several decades in “Chindia” and beyond, there is a lack of global aggregate demand or perhaps an inability or unwillingness to finance it. Slow growth in the developed world, insufficiently high levels of consumption in the emerging world, and seemingly inexplicable low total returns on investment portfolios – bonds and stocks – lie ahead. Stop whispering (and start shouting) the words “New Normal” or perhaps begin to pronounce your last name with an RRRRRRRRRRRR. Our global economy, our use of debt, and our financial markets have changed – not our alphabet or dictionary.”

Bill also explained his thinking yesterday in the following CNBC interview:

Sources: Bill Gross, PIMCO – Investment Outlook, June 2010 and CNBC, June 30, 2010.

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4 comments to Bill Gross: Start shouting “New Normal”

  • I agree with you. American bubble economy is deflating again and it’s not going to be pretty. The only thing I disagree is “low return on stocks”. I think the only way to get any return on stocks is to short them.

  • Paul Hanly

    With the fall in 10 year US Treasury yields to under 3%, the fall in the S&P 500 and the recovery of earnings, using the data from Robert Shillers spreadsheet the inverse of the TNX yield is now half the earnings yield of the S&P 500.

    If, in the face of austerity, bond yields remain low (as they have in Japan – under 4% for 15 years now)then there may be room for substantial capital gain in risk assets. Or bond yields could go back up, or demand, employment and earnings fall with increased austerity.

    For more see my post with charts on Seeking Alpha:

  • Yeah, the double digits returns is the thing of past. But everyone still points to the history. So until history changes…

    I was and still am worried about inflation. But with large part of US population turning against deficit, inflation might not be a problem. Could Obama and democrats pass another stimulus? If not, than dollar seems to be safe for now.

  • Sherman McCoy

    Is this the same Gross that touted GM bonds a few years back? Thanks for the loss, Bill! His track record appears to be inversely correlated with his fame, and his recommendations are typically in direct opposition to his positions.

    The last call he made a few months back was that the bond bull market is over. I hope nobody was foolish enough to follow that one.

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