Bill Gross July 09 Investment Outlook: New Normal Equals Slower Growth, Narrower Profit Margin & Lower Return on Asset

Here are some notes from Bill Gross's July 09 Investment Outlook.

• Umpire John McSherry died during a baseball game because he couldn't stop eating.
• Franz Kafka wrote a story 100 years earlier of a man who starve himself to the point of extinction because he "couldn't find the food" he liked.
• The two individuals mentioned are not about food but life itself. The stories tell us human we need to change the way we think, act, or we will end up like John McSherry or the Hunger Artist.
• In the past, U.S. and many global consumers gorged themselves too much financed with credit, which cannot be sustained. A new normal will set in in future.
• The "new normal" means growth will be slower, profit margins narrower, and return on assets smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the "gorging" of goods and services that consumers grew used to in decades past.
• Forecasts based on econometric models miss these secular/structural breaks in historical patterns because it is impossible to quantify human behavior. Human beings do not make decisions by chance or independently of each other, but in many cases in reaction to one another, for which charts nor forecasts can help to predict.
• The supersizing of financial leverage and consumer spending in concert with the politicizing of deregulation describes our most recent brush with irrational behavior and inefficient markets.
• Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum.
• Fact is American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Result is potential spenders feel less rich by that much, the only model one can use to forecast the future is to logically predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3.5%.
• High unemployment will not lead to a return to the "old normal."
• Many unemployed are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you'll understand the implications quicker than any economist using an econometric model.
• Profit will likely settle at half of the absolute peak profit levels of 2007 and grow slower because of the rise of saving rates from 0 to 8% or higher.
• Investor are likely to see less share of the pie (profit) because of the huge deficits, the recent reinitiation of PAYGO government programs and the health care program, which are likely to lead to higher tax rates. Therefore, new normal will not be friendly to investors.
• Short-term policy rates will be kept low for longer than cyclical norms, and risk assets - stocks, high yield bonds, and commercial and residential real estate will involve just that - risk.
• Investors should stress secure income offered by bonds and stable dividend-paying equities.
• Over consumption is a relic of the past.

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