Nearly a half-century of global economic prosperity has ended, and investors must gird themselves for muted returns from the capital markets, according to Bill Gross, a Managing Director at PIMCO. Gross shared his outlook at the Morningstar Investor Conference, and his complete remarks can be found on the PIMCO web site.
Framing the history of the current crisis with an extended biblical analogy, Gross traced the “Genesis” of the global boom to the fall of the gold standard in 1971, which ushered in an era of central banks printing money, a shift that in turn sparked financial innovation. “The combination of easy check-writing for central bankers and securitization made money cheap to the public,” he said.
The central phase of the boom began in 1980 with the Great Moderation, a period of relatively low volatility and high returns in the capital markets, while inflation was well-controlled. But financial innovation took over, and as the Shadow Banking System evolved it exposed weaknesses in the markets. Leverage ballooned and consumption grew until it was exaggerated to extreme proportions, eventually leading to the “expulsion from the Garden of Eden” – and the end of the Great Moderation.
Regulators have been piecing together a Noah’s Ark of solutions, Gross said, including the TARP, TALF, PPIP, stimulus spending, and quantitative easing. These programs, however, will not avert what Gross called the “New Normal” – slow economic growth, high unemployment, and accelerating inflation.
“The New Normal will be an inherent part of our economy for years to come,” he said.
Gross offered specific forecasts – economic growth of 1-2%, unemployment of 7-8%, and inflation kicking in over the next three to five years.
The New Normal replaces the previous paradigm, which Gross described as the “Child of the Bull Market.” Under that paradigm, investors could rely on historically generous rates of return, and whenever returns lagged they would reliably revert to the mean. Barton Biggs, who Gross called the poet laureate of the investment industry, encapsulated this line of thinking when he said that markets were good “because whenever they and the economy have gone down, they’ve gone back up to higher levels.”
