ECONOMY

Strawberry Fields – Forever?

Bill Gross

The next four years will likely see frustrating economic headwinds for America; the cause of slower economic growth lies hidden in a number of structural as opposed to cyclical obstacles that may be hard to reverse.

While there could be solutions that ease the pain, there are no miracle policy “drugs” 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 US 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.

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 US but also in developed economies everywhere.

Gross discusses debt and delivering; globalization; technology; and demographics.

His concludes 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 bond 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.

source: pimco.com