Bill Gross of PIMCO is one of the nation's sages. His monthly Investment Outlooks marry wit, wisdom, and market insights to great effect.
His August Outlook, Investment Potions, looks at the implication of the "new normal" GDP outlook on jobs, income growth, and return on assets.
His core point is that the current economy is premised on 5% GDP growth - ie factories, retail stores, job levels, asset allocations, forecast pension returns...all presume that the economy will continue to grow at 5% year after year. We geared our companies and economy to a fixed level of expected economic growth.
Now, we are in the Great Recession and facing high unemployment, lower consumer spending, etc., accordingly, PIMCO forecasts GDP growth closer to 3% than 5%. The implication is that we have massive overcapacity built into the system and we will simply not need all the retail space, cars, jobs, houses, etc that we have built when it appeared all but a certainty that GDP growth was a fixed variable set at 5%. Moreover, pension funds, endowments, and private investors will need to readjust their return on capital expectations to match the long-term reduction in GDP growth.
He writes:
A 3% nominal GDP “new normal” means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model. High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported. Stock P/Es will rest at lower historical norms, and higher stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope. An investor should remember that a journey to 3% nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.
While the stock market continues to perform, analysts like Gross and structural deficits make a recovery back to the 1990's "normal" hard to imagine. Rather, the economy will need to restructure and shed capacity in order to arrive at a new equilibrium.
Rather than build out our economy to support growth - think of the wave CSCO rode in the 1990s - we may see people unwinding capacity. Spending related to growth - networks, factories, private infrastructure - will need to slow/decline.
Technology - a bell weather of growth - will be a challenged market place.
Perhaps the best play will be to buy assets as the market sheds them....ie, there may well value found in buying hard assets at firesale prices rather than investing in high-growth models that are predicated on new market development and spending.
Not a bullish view, I know, but one that may prove to be the reality.
Rather than build out our economy to support growth - think of the wave CSCO rode in the 1990s - we may see people unwinding capacity. Spending related to growth - networks, factories, private infrastructure - will need to slow/decline.
Technology - a bell weather of growth - will be a challenged market place.
Perhaps the best play will be to buy assets as the market sheds them....ie, there may well value found in buying hard assets at firesale prices rather than investing in high-growth models that are predicated on new market development and spending.
Not a bullish view, I know, but one that may prove to be the reality.
