Pimco co-CEO Bill Gross says the "new normal" — meaning just about everything to do with money following the financial crisis — includes saying goodbye to double-digit returns.
“The new normal has a new set of rules,” Gross writes in his monthly note to investors. “What once pumped asset prices and favored the production of paper, as opposed to things, is now in retrograde.”
"Some characterize it in biblical terms – seven fat years to be followed by seven years of lean."
The reality of the “old normal” “is that prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated,” Gross notes.
“If a levered Druckenmiller, Soros, or Griffin could deliver double-digit returns in the past, then a less levered hedge fund community with a lower yielding menu will likely resign themselves to a high single-digit future,” Gross says.
“If a 'stocks for the long run' Jeremy Siegel grew used to historically 'validated' 9 to 10 percent returns from stocks prior to writing his best-seller in the late 1990s, then the experience of the last decade should at least temper his confidence that the 'market' will deliver any sort of magical high single-digit return over the long-term future.
“And, if bond investors believe that the resplendent and abundant capital gains of the past 25 years will be duplicated from yield levels of 2 to 3 percent — well, they just haven’t been to Japan, have they?”
Now, leverage and deregulation are "fading from the horizon and their polar opposites are in the ascendant,” Gross says, leaving investors with 2.5 percent yielding bonds and stocks staring straight into new normal real growth rates of 2 percent or less.
“There is no 8 percent there for pension funds,” Gross observes. “There are no stocks for the long run at 12 returns,” and bond yields are anemic because of low expectations for gross domestic product growth and inflation in developed economies.
"Even the wildest bulls on Wall Street and worldwide bourses would be hard-pressed to manufacture 12 percent equity returns from nominal GDP growth of 2 to 3 percent," Gross says.
Gross says a new foundation for prosperity is needed. “The best route to prosperity … is good old-fashioned investment in production, he says, and the best way is to use technology and elbow grease to make products that the rest of the world wants to buy, feats Gross believes “would take a long time and an increase in political courage not seen since Ronald Reagan or FDR.”
Unfortunately, Gross says it’s more likely that policymakers will resort to more quantitative easing and "near double-digit deficits as a percentage of GDP from Washington.”
Reuters reports that the yield curve for U.S. Treasuries moved to its flattest since early September after a drop in a consumer confidence gauge raised bets the Federal Reserve will roll out more stimulus to aid a faltering economy.
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