Pimco’s Gross: Structural Headwinds Slowing US Economy

Tuesday, 04 Dec 2012 12:32 PM

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Structural headwinds will slow U.S. growth over the long term as opposed to just shorter-term cyclical slowdowns typical of any economy, said Bill Gross, founder of Pimco, manager of the world’s largest bond fund.

Debt, changing demographics, technology’s impact on the labor market and the changing nature of the global economy will slow down growth rates for the world’s largest economy going forward.

Pimco coined the term “New Normal” to describe the present-day economic realities facing the U.S. economy, namely marked by slower growth and elevated unemployment rates.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Such factors weigh on an economy longer than do cyclical factors such as the rise and fall of business inventories.

“[T]he real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse. 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,” Gross wrote in his monthly investment outlook.

Since the downturn, the Federal Reserve has taken the lead to spur recovery, namely by cutting interest rates and jolting the economy with other tools such as quantitative easing rounds, which are asset purchases the Fed makes from banks the inject the economy with liquidity.

True fiscal reforms, however, must accompany monetary policy to tackle four structural problems: too much debt, constant exposure to slowdowns in other parts of the world, technology replacing humans in the labor market and an aging population.

“These structural headwinds cannot just be wished away as we move ‘forward’ whether it be to the right, the left or dead center,” Gross wrote.

Some positive changes to the U.S. economy will also take root along the way, including increasing reliance on cheaper, homegrown energy sources such as natural gas deposits and an improvement in the housing sector.

“In addition, unforeseen productivity breakthroughs may be just over the horizon. How many gloomsters could have forecast the Internet or any other technical breakthrough before it actually happened? Jules Verne we are not,” he said, referring to the pioneer of the science fiction genre.

That said, wise investors should expect mounting inflationary pressures as the economy recovers amid healthy liquidity levels.

Commodities such as oil and gold, U.S. inflation-protected bonds, high-quality municipal bonds and non-dollar emerging-market stocks will serve as sound investments, Gross said, while long-dated government debt issued by developed economies, high-yielding bonds and financial stocks might require further scrutiny.

Other noted market participants agree that despite uncertainty made worse by the U.S. fiscal cliff — a combination of tax hikes and deep spending cuts due to strike the economy at the same time early in 2013 — the United States. has room to ride an energy boom and can still tackle longer-term fiscal imbalances.

It’s not too late, said William Kristol, former chief of staff under Vice President Dan Quayle and founder of “The Weekly Standard,” a conservative news venue.

“I’m the last person to predict the economy or stock market, but it does seem there’s an awful lot of things in play at once. There are trillion dollar deficits, the Fed’s zero interest-rate policy, political uncertainty and unpredictability — you get all of these things mixed up and I don’t think the normal rules of the road are likely to apply,” Kristol told Newsmax TV in an exclusive interview.

“We’ve had huge energy development. What if we got a decent deal that made the markets somewhat confident that entitlements were being addressed finally? What if we got a tax code that encouraged a little more investment, a little more growth?” he added.

“There is still a potential, I think, for a pretty great upside in the U.S. economy. But there are also a lot of great cliffs ahead, not just this short-term government fiscal cliff.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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