Bill Gross: No magic potion for investors

BY JORDAN MELNICK–MEDILL NEWS SERVICE

PIMCO’s managing director Bill Gross, called the nation’s most prominent bond investor, made a grim forecast for the U.S. economy Wednesday. In “Investment Potions” he says that nominal GDP is on track to stabilize at 3 percent, down from 5 to 7 percent over the last 15 years.

The consequence of this “new normal,” says Gross, who also calls it, “the ugly stepsister of the ‘great 5% moderation,’” may be a permanent reduction in the capital and labor market.

Gross uses nominal GDP rather than the more commonly cited “real,” or inflation-adjusted GDP, because he says it’s a good proxy for the nation’s return on capital.

In a nutshell, he said:

Nominal GDP has to grow close to 5% in order for the economy’s long-term balance to be maintained. Otherwise, employment levels become unsustainable, retail shopping centers unserviceable, automobile production facilities unprofitable, and the economy itself heads towards a new normal where unemployment averages 8 instead of 5%, housing starts total 1.5 instead of 2 million, and domestic auto sales 12, instead of 16 million annual units.

In short, “A virtuous circle of expansion turns into a vicious cycle of recession or low-growth stagnation.”

Gross says flatly that the government “reflating” GDP is “not likely,” in part because of a general call for limiting fiscal and monetary expansion in light of the towering national debt.

“Where is the political will or wallet now to grant corporate tax breaks for private sector job creation or to even hire new government workers, aside from a minor positive push with military enlistment?”

Riffing on The Clovers’ “Love Potion #9,” featuring the elixir-dispensing Madame Rue, Gross advised:

There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields, as well as selectively chosen emerging market commitments where nominal GDP growth prospects are tilted upward as opposed to gravitating to new lower norms. Madame Rue has met her match.

In other words, be careful.

Tags: Bill Gross, GDP, Labor Market, Love Potion #9, Pimco, The Clovers, unemployment