It is month-end, and bond magnate Bill Gross of PIMCO is out with a new round of predictions.  The bond guru’s August Investment Outlook often has quirky ways of explaining things, and he’s using ‘auto-flush toilets’ to describe The New Normal.   We’ll skip over the fecal disposal systems… Gross notes that The New Normal is predicated upon de-leveraging, re-regulation and de-globalization… This culminates with slower economic growth and lower inflation in developed economies.  There is almost a Warren Buffet antithesis here if you spend time contemplating the future.

Gross also notes that this effort substantially bypasses emerging market countries that have more favorable initial conditions.  A condition that Gross also highlights is a slowing of population growth.  On U.S. terms, Gross notes that with consumption at 70% of GDP and a household sector deeply in debt, there was nowhere to go but down.  De-leveraging is being attempted into the headwinds of a structural demographic down wave as opposed to a decade of substantial population growth.

We noted earlier in our argument against deflation that a shrinking population would be one of the few factors that could contribute to deflation.  A slowing of the population growth rates would probably not count.

Gross concludes, “PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base.”

Bill Gross does not really give a great outlook for the bulls on how long this low growth will last in The New Normal.  He noted that aging trends over the next 5–10 years will slow economic growth more than otherwise.

You probably do not need a reminder that Bill Gross is the largest bond-ax in the market, but you might not want to forget that Gross talks his own book as well.

FULL PIMCO AUG-2010 OUTLOOK

Warren Buffett still uses historical economic growth trends to say that America’s best days are ahead of it and that historic growth patterns can come back.  That’s easy for an 80-year-old to think.  For the rest of us, that logic looks more and more each day like hogwash.

I have personally not stated this before in public writing about the path forward, but I have believed it during the entire time that the path of The New Normal has been unfolding.  “The New Normal just sucks.”

JON C. OGG

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