They were mum "if only because the real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse," he says. "While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move 'forward' whether it [is] to the right, the left or dead center."
Noting that in a major policy speech last month, Fed Chairman Ben Bernanke in effect confirmed PIMCO's "New Normal" thesis, he notes "there are numerous other structural headwinds that may reduce real growth even below the new normal 2% rate, not only in the U.S. but in developed economies everywhere."
According to Gross they are:
- Debt/Deleveraging: "Developed global economies have too much debt–pure and simple–and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come.
- Globalization: "Globalization has been an historical growth stimulant, but if it slows, then the caffeine may wear off. The fall of the Iron Curtain in the late 1980s and the emergence of capitalistic China at nearly the same time was a locomotive of significant proportions. Adding two billion consumers to the menu made for a prosperous restaurant, increasing profits and growth in developed economies despite the negative internal effects on employment and wages. Now, however, these tailwinds are diminishing, producing an airspeed which inexorably slows relative to the standards of prior decades."
- Technology: "Technology has been a boon to productivity and therefore real economic growth, but it has its shady side. In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor."
- Demographics: "Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average 'age' then demand slows. Typically the dynamic cohort of an economy is its 20 to 55-year-old age group."
So what to do?
"If a 2% or lower real growth forecast holds for most of the developed world over the foreseeable future, then it is clear that there will be investment consequences," Gross writes. "Shown below, as recently published in a Time magazine article by Rana Foroohar, is a PIMCO list of future Picks and Pans based upon these ongoing structural changes."
Picks
- Commodities like Oil and Gold
- U.S. Inflation-Protected Bonds
- High-Quality Municipal Bonds
- Non-Dollar Emerging-Market Stocks
Pans
- Long-Dated Developed-Country Bonds in the U.S., U.K. and Germany
- High-Yield Bonds
- Financial Stocks of Banks and Insurance Companies
"As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to," Gross concludes. "The New Normal, like Strawberry Fields will 'take you down' and lower your expectation of future asset returns. It may not last 'forever' but it will be with us for a long, long time."
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