November 8, 2011
Following the financial crisis of 2008, PIMCO articulated its “new normal” forecast of slow growth and mediocre capital market returns. Appending the even drearier modifier “minus” to that outlook, Bill Gross said that expectations now appear worse than even he previously feared. Gross was pessimistic in both the near and long terms, and he startled the audience with his premonition that “capitalism is at risk.”
Gross, PIMCO’s founder and co-chief investment officer spoke last week at the opening session of Schwab’s IMPACT conference in San Francisco. He shared the stage with Liz Ann Sonders, the chief investment strategist for Schwab, who was much more optimistic about investor outcomes.
Bill Gross and Liz Ann Sonders
“We are in a 2%-minus type of real growth world,” Gross said, “in which structural headwinds as opposed to cyclical headwinds become dominant.”
Gross cited demographics – an aging population in the US and other important countries – as a fundamental reality that will act to dampen growth over a long period of time, spanning many of the business cycles economies have traditionally relied upon to provide a respite from more transitory economic hardship. Slower-than-expected growth in China, in emerging markets and in Europe are also drive Gross’ forecast, which he said is now consistent with that of the Fed.
The core characteristics of the new normal included a delevering global economy, policymakers continuing to re-regulate, and both the financial and non-financial sectors of the U.S. economy facing increasing political and economic pressure to de-globalize. According to PIMCO, those factors would combine to produce “painfully slow” economic growth.
Gross admitted that he did foresee how rapidly certain developments would unfold, such as Europe’s sovereign debt crisis and the debt-ceiling impasse in the US, and those events have slowed growth even further – hence, the new normal “minus.”
“We expected the new normal and we got something less,” Gross said.
I’ll look at Gross’ and Sonders’ views on the economy and the markets, and conclude with Gross’ dourer long-term outlook.
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