The "new normal" means saying goodbye to double-digit returns, as leverage and deregulation are "fading from the horizon and their polar opposites are in the ascendant," Bill Gross, managing director at Pimco, wrote Wednesday in his October investment outlook.
On Tuesday, Gross told CNBC that he expects the Fed to begin another round of easing soon, which he called "a last gasp."
In his investment outlook, Gross wrote that future investment returns will be "far lower" than the historical averages and a less levered hedge fund community, faced with lower yielding assets, will likely resign itself to "a high single-digit future."
"Some characterize it in biblical terms – seven fat years to be followed by seven years of lean," he wrote.
In the "old normal," prosperity was driven by rapidly rising asset prices, which in turn were driven by debt and were correlated to interest rates, but now with the world deleveraging, a new foundation for prosperity is needed, he wrote.
The best foundation would be "good old-fashioned investment in production," but this would take a long time and an increase in political courage, according to Gross.
More likely, policymakers will resort to more quantitative easing and "near double-digit deficits as a percentage of GDP from Washington," he wrote.
The hope is that the private sector will spend the money that is printed faster than required to generate investment and consumption. But financial markets are now doubting that recipe, in a situation reminiscent to Japan's lost decades, he wrote.
The Last Gasp: Absolutely. Let's look at some of the things Uncle Sam has rolled out so far:
1) Funding GM, AIG, and banks.
2) Cash for clunkers.
3) Buying treasury obligations.
4) Tax Credits to buy real estate.
5) Universal Healthcare.
6) Low rates and printing more money.
The White House and Federal Reserve have done a great deal to get the economy moving forward and the best result is a floor under the economy protecting us for now from the all out financial collapse that could have happened.
None of the above, even collectively is working to stimulate the economy. That's because we are in a deleveraging environment. Less leverage means less velocity, and less velocity in part is taking the bite out of stimulus efforts. With less leverage there is less money to support demand for homes, cars, boats, and every other thing we already have 3 of at home. This is a clear sign the government has very little impact going forward.
That translates into the last gasp. What ever Uncle Sam continues to do that doesn't work will further erode global confidence in the ability of the White House and the Federal Reserve to resolve this economic recession. If so, then a further erosion in asset prices across the board could be around the corner.
More Quantitative Easing: Absolutely. The government knows no other path. We should expect more easing and soon. Main Street is still in a tough bind with no signs of viable improvement. Jobs growth is dead and real estate post tax credits has slowed. If consumer spending takes a hit, look out.
Expect to see Bernanke and crew step in with their plan to buy bonds and force yields lower, which will lower interest rates on mortgage and consumer loans. They believe lower interest rates will create consumer activity. However, what they fail to realize is we already have super low rates and it's doing very little if anything because people either don't want more debt because they are concerned about their economic future or they do not qualify for more debt.
Lower rates in a deleveraging environment does not work. It's simply not the normal recession and things that worked in the past will fail and the Federal Reserve struggles with that concept.
I feel Bill's comments are on the money. We should expect lower returns on investments. We should also expect more insane government stimulus and QE efforts.
Hope all is well.
J.D. Rosendahl, Rosey