Bill Gross Latest Monthly Outlook: "We May Need At Least A Decade For The Healing"

Tyler Durden's picture

Bill Gross' latest monthly missive begins with some political commentary on the latest presidential election, pointing out the obvious: after the euphoria comes the hangover, completely irrelevant of what happens to the Fiscal Cliff: 'whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably? That really was the economic question of the 2012 election towards which very few specifics were applied from either side. “There’s a better life out there for us,” Governor Romney bellowed to a crowd of thousands in Des Moines, Iowa just days before the election, but in truth he never told us how we were going to achieve it or, importantly, why we weren’t realizing it in the first place. The president’s political mantra of “Forward” was even more vague."

And while political campaigns were just that, the truth is that nobody has the trump card to a perfect quadrangle of problems which will mire the US economy for years to come, among which i) debt/deleveraging; ii) globalization, iii) technology, and iv) demographics. Gross' outlook is thus hardly as optimistic as all those sellside reports we have been drowned by in the past 2 weeks, hoping to stir the animal spirits one more time: 'We may need at least a decade for the healing.... it is getting harder to maintain the economic growth that investors have become accustomed to. 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." Sad: looks like it won't be different this time after all...

From PIMCO

Strawberry Fields – Forever?

You didn't build that ..........     332
I built that .......................      206

Well, I guess that settles it: you didn’t build that after all. Or maybe you did, but not all of it. Or maybe like the convoluted John Lennon above “you think you know a yes, but it’s all wrong. That is you think you disagree.” Whatever. Rather than an economic mandate, November’s election was more of social commentary on the Republicans’ habit of living with eyes closed. Their positions on what Conan O’Brien labeled “female body parts” – immigration, gay rights and student loans – proved to be big losers, and they will have to amend rather than defend those views if they expect to compete in 2016. I suspect they will. Political parties are living social organisms that mutate in order to survive. We will see straight talking Chris Christie or Hispanic flavored Marco Rubio leading the Republican charge four years from now versus a reenergized Hillary Clinton. It should be quite a show with a “No Country for Old (White) Men” caste to it.

But whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably? That really was the economic question of the 2012 election towards which very few specifics were applied from either side. “There’s a better life out there for us,” Governor Romney bellowed to a crowd of thousands in Des Moines, Iowa just days before the election, but in truth he never told us how we were going to achieve it or, importantly, why we weren’t realizing it in the first place. The president’s political mantra of “Forward” was even more vague.
 
Their words 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. 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 be to the right, the left or dead center. Last month in a major policy speech at the New York Economic Club, Fed Chairman Ben Bernanke concurred that the U.S. economy’s growth potential had been reduced “at least for a time.” He in effect confirmed PIMCO’s New Normal which has been in place for three years now, laying the blame in part on the financial crisis, diminished productivity gains, and investment uncertainty due to the near-term fiscal cliff. We do not disagree. However, there are numerous other structural headwinds that may reduce real growth even below the New Normal 2% rate that Bernanke has just confirmed, not only in the U.S. but in developed economies everywhere.
 
They are:
 
1) Debt/Delevering
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. There are those that believe in the “Brylcreem” approach to budget balancing – “a little dab‘ll do ya.” Just knock a few percentage points off the deficit/GDP ratio, they claim, and the private sector will miraculously reappear to fill the gap. No such luck after 2–3 years of austerity in Euroland, however. Most of those countries are mired in recession and/or depression. Political leaders there should have studied the historical evidence presented by Carmen Reinhart and Ken Rogoff in a critically important paper titled, “Growth in a Time of Debt.” They conclude that for the past 200 years, once a country exceeded a 90% debt/GDP ratio, economic growth slowed by nearly 2% for both developed and developing nations for an average duration of nearly a decade. Their work displayed below in Chart 1 shows the result in the United States from 1790–2009. The average annual U.S. GDP rate growth, while clearly influenced by the Great Depression, was -1.8% once the 90% barrier was exceeded. The U.S., by the way, is now at a 100% debt/GDP ratio on the basis of the authors’ standard measuring yardstick. (Note as well the 5½% average inflation rate during the same periods.)
 

In addition to sovereign debt levels which were the primary focus of the Reinhart/Rogoff studies, it is clear that financial institutions and households face similar growth headwinds. The former needs to raise equity via retained earnings and the latter to increase savings in order to stabilize family balance sheets. The combined need to increase our “net national savings rate” highlighted in last month’s Investment Outlook is a long-term solution to the debt crisis, but a near/intermediate-term growth inhibitor. The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making. We may need at least a decade for the healing.
 
2) 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. Is it any wonder that markets now move up or down as much on the basis of policy changes coming out of China as opposed to the U.S. or Euroland? If China and the accompanying benefits of globalization slow, so too may developed economy growth rates.
 
3) Technology
T
echnology 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. Almost a century ago, Keynes alerted the economic community to a “new disease,” what he called “technological unemployment” where jobs couldn’t be replaced as fast as they were being destroyed by automation. Recently, Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for “machines” are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren’t enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared “whisper” number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.
 
4) 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. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs. Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced consumption. Those approaching their seventh decade need fewer cars and new homes as shown in Chart 2. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years.

 

Investment Conclusions

I’m fond of reminding PIMCO’s Investment Committee that you can’t buy GDP futures – at least not yet. Hypotheses about real growth rates, no matter how accurate, must be translated into investment decisions in order to justify the discussion. Before doing so, let me acknowledge that these structural headwinds can and will likely be somewhat countered by positive thrusts. Cheaper natural gas and the possibility of reversing or even containing the 40-year upward trend of energy costs may be a boon to productivity and therefore growth. There is talk of the U.S. being energy independent within a decade’s time. Housing as well may be experiencing a multiyear revival. 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.

But 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. 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

The list to a considerable extent reflects the view that emerging economy growth will continue to be higher than that of developed countries. Their debt on average will remain much lower, and their demographic age much younger. In addition, the inevitable policy response of developed economies to slower growth will be to reflate in order to minimize the impact of the aforementioned structural headwinds. If successful, reflationary policies will gradually move 10 to 30-year yields higher over the next several years. The 30-year Treasury hit its secular low of 2.50% in July and such a yield may seem ludicrous a decade hence. Investors should expect future annualized bond returns of 3–4% at best and equity returns only a few percentage points higher.

As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to. 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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GetZeeGold's picture

 

 

Nice to see at least someone is feeling optimistic this morning.

 

I can do 10 years standing on my head.

Dr Benway's picture

It's the first ten years that are the hardest. After hope dies it becomes easier. 

ParkAveFlasher's picture

So, blame Yoko Ono.  I'm fine with that.

JPM Hater001's picture

How did Yoko get her nime?

First time john say her naked - Yoko - Oh no!

Fredo Corleone's picture

"Their position on...student loans..."

What of them ?

What would you have the Republicans do, Gross ? Offer up a forgiveness program which saddles the American taxpayer with Muffy's Seven Sisters' tuition, room and board tab ?

Hobbleknee's picture

Is he referring to the traditional decade of 10 years or the 20-year decade, like Japan's lost "decade"?

rocker's picture

Our Decline started in 2000. I believe in is going for 2020 at least. Japan did more like 30 years.

Except for Commodities which they don't really control. The "Bankster Cartel" have that all wrapped up. 

TPTB will always figure out how to drain the sheeple. Even Bush has gone to the Cayman Islands now. 

CPL's picture

10 years?  No the recovery will be much quicker than that after the mob hang who they percieve to be at fault with their families.

 

I personally expect a witch hunt and the proper scracifies at the altar, the guility and the innnocent.  Like how it always happens in social resets.

SheepDog-One's picture

WHOA wait a second, for 3 years we've been talking about 'Whoever is next president (Obama) will have to inform the country it is over'...now they're kicking the can to the NEXT president 'then things get bad'....WTF this is all horseshit.

CPL's picture

No worries bud, they can't outrun the math anymore and the can has density and mass now.

 

There isn't a society or a world strong enough to kick it anymore.  Picture a line up of leaders from the world over lining up to kick the can only to break their foot on it.

jvetter713's picture

I fail to see how packing 10 layers of band-aids on an infected wound implies healing will occur.

Tirpitz's picture

Who wants to heal? The system is designed to protect the cancer.

Panafrican Funktron Robot's picture

http://www.usdebtclock.org/

Assets:  87.4 trillion USD

Liabilities:  121.7 trillion USD

=

Bankrupt.  It's interesting to see it laid so bare and obvious.  The hole is 34.3 trillion USD, and is widening continuously.  Ergo, the "why" in divesting from countries like the U.S. (and "assets" backing the value of those countries) that are insolvent.

youngman's picture

In 4 years the 47% will have grown to 56%...and its over..because they will vote for the biggest gift giver...not for work....

JPM Hater001's picture

Work is all pansy and stuff.

rocker's picture

The problem is the financial crisis that happened under the Phil Graham Bush error of No Regulations requried.

Financial Crises always take 20 to 30 years for recovery. They do more damage to the economies than any other.

We Are Worse than Japan Now.  This is the "Bush Legacy".  All others fall behind in a row until.

Seasmoke's picture

So things will get better in Obamas 4th term .. I knew he would fix it.

GetZeeGold's picture

 

 

Give us some mo....part deux.

Tirpitz's picture

"in Obamas 4th term"

Better let's see how long his 2nd reign will last...

Samsonov's picture

"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."

Just wait until the machines replace cheap labor.  In three quarters of the world, cheap labor is all they’ve got, and when they haven’t got that—look out.  Presently they’re perfecting a machine that can sew.  When that gizmo is ready to go, clothing will be made in factories that won’t even be recognizable as such, bland brick structures in a suburban office park, no smokestack, almost no workers, just trucks going in and out.  Simultaneously on the other side of the world, an entire village in India will suddenly have no work and no means of survival.  More to come…

ghengis86's picture

they will call this machine that can sew, a sewing machine.  It will be the savior of textile mills. It will be built so small that even a child's hand could operate the simple controls!  It will make me rich, I tell you, rich!!  Bawahaahahahahaha!!!

 

wait, what's this? 

http://en.wikipedia.org/wiki/Sewing_machine

Dr Benway's picture

It is the trading machine that we should throw our sabots at

ParkAveFlasher's picture

I'm looking forward to the legal logic reader software that understands syntax and parses meaning from litigation documents, rulings, responses, etc.  The jeopardy robot was a first step.

imapopulistnow's picture

Software that makes attorneys obsolete?  Makes my leg tingle.

SanOvaBeach's picture

Another fucking self-appointed English teacher.  Is that the best you can do, asshole?  This is a financial blog not a fucking hyper-critical english grammer fuck machine.  Go blow yourself................ 

Samsonov's picture

Okay, ghengis, I left myself open for that.  I meant robots that can sew.

ghengis86's picture

Yeah, you left it hanging over the plate and I couldn't resist. I'm sure someone will return the favor and I expect it. Keeps ya sharp.

Now, the self-aware sewing robots...that's when we know we're truly fucked.

Col_Sanders's picture

At least then I won't have to listen to the incessant whining of never-ending new crops of over-privileged college students as they prattle about with their protest signs demanding that Nike or Polo stop exploiting a bunch of brown people in a country they've never seen firsthand, can't locate on a globe, and whose name they probably can't even spell.

Until the sewing machines become self-aware I guess... 

Oh regional Indian's picture

No work and no means of survival?

There is this thing called farming that is rather well understood in Indian villages, TYVM. DItto for the rest of the third world villages/ers.

Growing food, almost as old as the needle and the thread...FTW!

ori

Tirpitz's picture

The idea [of farming] is good, but how to grow crops with no land and the poison seeds controlled by Monsanto?

francis_sawyer's picture

Better start [yesterday]... You harvest & heirloom your own seeds... What? Do you think yu get them at Wal Mart of Home Depot?...

Samsonov's picture

The sewing robot was just one example.  Farming robots aren't far behind.

ParkAveFlasher's picture

When do we get robot Congressmen?

StychoKiller's picture

If elected, I shall not serve!  So bite my splintery, wooden @ss!

LawsofPhysics's picture

Are you totally stupid?  The cotton gin was a farming robot for christ sake.

toomanyfakeconservatives's picture

If not a farming or harvesting robot, it certainly was a processing robot. The minute the GPS satellites or the petroluem supply chain goes down, mechanized harvesters go down, and millions, if not billions quickly starve.

SanOvaBeach's picture

The Sabo's are going to kill you...............................................

Imminent Crucible's picture

What worries me is if they develop robots to do the consumption. Then all of us are useless.

Tirpitz's picture

"wait until the machines replace cheap labor"

As long as it runs on contaminated drinking water, instead of precious petrol, it may become a real danger...

Shizzmoney's picture

"wait until the machines replace cheap labor"

And by "machines" he means the Chinese.

BandGap's picture

Uh, they'll replace the trucks going in and out, too.

WillyGroper's picture

They've perfected a machine that actually fuses the fabric. No sewing required.

fonzannoon's picture

"There is talk of the U.S. being energy independent within a decade’s time. Housing as well may be experiencing a multiyear revival"

UMMMM BG loves him some CNBS

Tirpitz's picture

"the U.S. being energy independent within a decade’s time"

The miracles of a decade of depression...

TruthBeforeAll's picture

Who or what is it that defines when we are "healed". And, what of those who are not healed at the appropriate time? Oh wait, maybe he meant heel as in what a dog does when his master calls.

jumped_ship_and_swam's picture

Ten years won't do it.  It will take at least one generation to get over the attitudes instilled by public shools, universities, mainstream media and political discourse.  Things cannot improve until most people (1) can and (2) will work at jobs that produce value in the economy.  Making things and providing essential services, not shuffling paper, not makework jobs.  

Commentator is 100% wrong about people having children in their 7th decade.  Those of us with the courage to do it probably have the resources to make it work, the faith that things will eventually work out, a work ethic to pass on, and some real knowledge acquired in the schools of yesteryear or over the course of life.  The young are not having children.  Maybe they feel unfit.  If nobody does, then our culture perforce dies out.  Give the older worker a chance!

LawsofPhysics's picture

"Things cannot improve until most people (1) can and (2) will work at jobs that produce value in the economy.  Making things and providing essential services, not shuffling paper, not makework jobs."

---------------------------------------------------------------------------

In order actually do anything, you need energy.  It is no suprise that computation "work" and paper-shuffling has become so popular. This doesn't require any serious energy expenditure.

Wake the fuck up and go talk to someone who has been in energy production.  The global production of energy has flatlined.  Ask yourself, has the human population stopped increasing?

That which cannot be sustained won't be.  Hedge accordingly.

If history is any guide, nothing will change until essential supply lines are broken and people realize that no matter how much money you have, it doesn't mean shit if there is no physical inventory in your area.  The soviets know this all too well, soon americans will as well.