Bill Gross’ Total Return Fund reduced its holdings of mortgage debt to the lowest levels in two years, but still has a 47% of assets in the securities.
This lines up pretty well with his relatively bearish August Outlook where makes the case for a more risk-averse posture, arguing that the US is in for lower growth over the next few years, dropping from a 5% nominal GDP growth rate down to a 3% rate.
August Outlook: A country’s GDP or Gross Domestic Product is really just an annual total of the goods and services that have been produced by its existing stock of investment (capital in the form of plant, equipment, software and certain intangibles) and labour (people working). Over the last 15 years or so in the U.S. that annual production (GDP) has increased in nominal (real growth and inflation) terms of 5-7% as shown in Chart 1. Not every year, certainly not in boom or recessionary years, but pretty steadily over longer timeframes, and consistently enough to signal to capitalists that 5% was the number they could count on to justify employment hiring, investment spending plans, and which would serve as well as a close proxy for the return on capital that they should expect. Nominal GDP is in fact a decent proxy for a national economy’s return on capital. If each and every year we grew by 5%, then that would be sort of like a stock whose earnings grew by the same amount. Companies and investors then would be able to estimate the present value of those cash flows, and price investment and related assets accordingly – a capital asset pricing model or CAPM based on nominal GDP expectations.
As reflexive delevering has unveiled the ugly stepsister of the “great 5% moderation,” nominal GDP has not only sunk below 5%, but turned at least temporarily negative. If allowed to continue – and this is my critical point – a portion of the U.S. production capacity and labour market will have to be permanently laid off. Read the whole thing >
He’s doesn’t argue that the good old days are gone forever, but he is reiterating the view that the US could be at sub-par growth for a few years, as business models are broken for large parts of the economy such as autos, real estate, and finance, and it will take time to fill the gap.
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