Published December 04, 2012
NEW YORK – PIMCO's Bill Gross, in his final investment letter of the year, reiterated his sober outlook, saying "there may be no miracle policy drugs" for structural impediments to recovery in the U.S. and global economies.
"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," Gross said in his December investment outlook released on Tuesday.
The co-founder of Pacific Investment Management Co and manager of the world's largest bond fund said the diminished economic growth outlook will mean reduced returns from stocks and bonds, something Gross knows better than most.
Gross, whose firm had $1.92 trillion in assets as of September 30, said future annualized bond returns will likely be in the range of 3 to 4 percent "at best," while equities would earn returns "only a few percentage points higher."
In a commentary entitled "Strawberry Fields - Forever?" Gross reached to the Beatles for inspiration and the song's unsettled depiction of everyday life.
"As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to."
Gross cited the difficulty of paying for college, retiring comfortably and maintaining a good standard of living.
"The New Normal, like Strawberry Fields will 'take you down' and lower your expectation of future asset returns. It may not last 'forever' but it will be with us for a long, long time," he wrote.
Gross cited high debt-to-GDP ratios, the economic slowdown in China, technology's replacement of jobs and the aging workforce as "structural headwinds" that could reduce economic growth to less than two percent in developed economies worldwide.
"We may need at least a decade in the healing," Gross wrote in reference to the developed world's need to reduce its debt. He added that households should focus on increasing savings while financial institutions should expand their capital base.
Gross, whose flagship PIMCO Total Return Fund has over $281 billion in assets, also made reference to Federal Reserve Chairman Ben Bernanke's confirmation, during a speech on November 20, of PIMCO's "New Normal" view of just 2 percent U.S. economic growth.
In recent outlooks, Gross has said that the Fed's bond-buying programs have failed to revive the U.S. economy and that looming inflation could weaken returns on both stocks and bonds.
Gross said cheaper natural gas stands out as a "boon" to economic growth and recommended investing in assets such as gold and oil, non-dollar emerging market stocks and high-quality municipal bonds while avoiding high-yield bonds, bank and insurance stocks and long-dated bonds in developed countries.
(Reporting Sam Forgione; Editing by W Simon, Matthew Goldstein and Dan Grebler)