It is time to realise there is no miracle policy cure to avoid the US and other developed economies enduring sluggish growth for the foreseeable future, says PIMCO’s Bill Gross.
The bond star, who runs the world’s biggest mutual fund the $260 billion PIMCO Total Return fund, says 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.
‘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.’
To deal with this environment he has revealed his list of future assets to hold and avoid based upon these ongoing structural changes:
- Commodities like Oil and Gold
- US Inflation-Protected Bonds
- High-Quality Municipal Bonds
- Non-Dollar Emerging Market Stocks
- Long-Dated Developed Country Bonds in the US, UK and Germany
- High-Yield Bonds
- Financial Stocks of Banks and Insurance Companies
The list 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 2.5% 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.’
For Gross, there are four main structural headwinds that are likely to cause a 2% or lower growth over the coming years.
‘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.’
‘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.’
‘Globalization has been an historical growth stimulant, but if it slows, then the caffeine may wear off.’
‘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 US or Euroland?’
‘If China and the accompanying benefits of globalization slow, so too may developed economy growth rates.’
Technology has been a boon to productivity and therefore real economic growth, says Gross, but it has its shady side.
'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.'
'Technology may be leading to slower, not faster economic growth despite its productive benefits.'
Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer, says Gross.
'Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows.'
'Now, however, almost all developed economies, including the US, are gradually ageing and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark.'
'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.'
The full Bill Gross Investment Outlook can be read here.