A Gross Exagerration of Future Deflation

Pimco’s Bill Gross on Wednesday released yet another self-serving, but intelligently
written diatribe that suggests personal consumption may be constrained for a generation,
and all asset classes other than bonds and dividend-paying stocks will remain risky.

The managing director of one of the world’s largest and best-known fixed income management houses somewhat predictably railed against giddy consumer excesses of the past. But in an argument that went beyond hyperbole, he explained why the hangover could last for a generation, at minimum.

“Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labeled the Great Recession,” Gross said in his July investment outlook.
 
Greed as the American consumer and investor have come to appreciate will remain hampered by the antithesis of the trickle-down wealth effect. In an argument based on horse sense rather than an econometric model, Gross argues that higher savings, lower consumption and slow economic growth are here to stay.
 
Gross asserts that in the long term, economic growth correlates to profit growth. And it’s hard to believe in the future of corporate profits with  unemployment approaching 10 percent in the U.S, and the ranks of the under-employed rising to as many as 30 million. He sees a “new normal” where profit margins are narrower, growth is slower, and asset returns smaller than in past decades.
 
Interest rates likely will be kept low for a long period, Gross says, in an effort to stimulate a sluggish economy.
 
If there’s any criticism, it’s that Gross focuses his brief tome on the long-term, conveniently ignoring that a combination of low rates and unprecedented economic stimulus have helped to reflate the market since March, leading to gains among gold and other commodity classes that are typically signals of inflation.
 
By doing so, he avoids having to provide a timetable for when inflation ends, and when doomsday deflation begins.

Mike Tarsala