Bill Gross hammers home the point PIMCO has been making for the last couple of months: The “new normal” will look very little like the world everyone got used to over the past two decades.
Specifically, the economy will likely grow at 2% per year instead of 3.5%, and long-term profit growth will be similarly walloped.
To this we would add: As stock investors finally come to appreciate this new reality, P/E multiples will likely compress to below-average levels (right now, unfortunately, they’re higher than average).
Why is Gross so negative? Several factors:
- U.S. consumers are $15 trillion poorer than they were two years ago.
- The savings rate has jumped from 0% to 5% and will likely go higher–and any growth in savings will come right out of consumer spending.
- Taxes are going up–on both corporations and individuals.
- 30 million people are “under-employed.” (And counting)
Here’s the bond king himself:
Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum.
The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%. There’s no magic in that number, and no model to back it up, just a lot of commonsense that says this is how people and economic societies behave when stressed and stretched to a near breaking point…
As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model.
What this all means to you as an investor is near obvious as well. Unsurprisingly, what still can be modelled is the direct correlation of real profit growth to real economic growth, assuming a constant division of the “pie” between profits, labour and government. If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher.
But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.
Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets – stocks, high yield bonds, and commercial and residential real estate will involve just that – risk. Investors should stress secure income offered by bonds and stable dividend-paying equities.
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