Bill Gross
SEVERE EDIT
Both real economy and financial markets then, were geared to and, in fact, mesmerized by this 5 percent . . . 'model.' "
A system based on 5 percent growth is clearly in shock when it confronts not only much lower growth but actual declines in economic activity.
Can government stimulus and a zero interest-rate policy from the Federal Reserve get us back to that 5 percent path? Gross doesn't see it, and the rising chorus of concern about unsustainable federal deficits supports his view that current stimulus efforts cannot be sustained.
Looked at this way, an outlook for sustained lower growth amounts to a death sentence for many companies and employees.
"If allowed to continue - and this is my critical point - a portion of the U.S. production capacity and labor market will have to be permanently laid off," Gross says.
"Nominal GDP has to grow close to 5 percent in order for the economy's long-term balance to be maintained.
Otherwise, employment levels become unsustainable, retail shopping centers unserviceable, automobile production facilities unprofitable,
and the economy itself heads towards a new normal where
unemployment averages 8 instead of 5 percent,
housing starts total 1.5 instead of 2 million,
and domestic auto sales 12, instead of 16 million annual units."
Gross sees a future path that looks much more like 3 percent annual growth than 5 percent -- small numbers with huge implications.
"A 3 percent nominal GDP [Gross Domestic Product] 'new normal' means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model," he writes.
In terms of specific types of investments, Gross does not see happy times.
"High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported," he writes.
"Stock P/Es [price-earnings ratios] will rest at lower historical norms, and higher stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope."
For many older people, a "prolonged" period of slower growth might just extend for the rest of their lives. Many if not most older folks don't need Bill Gross to tell them what might be in store. They have hunkered down for a long economic winter and have made what just may be permanent spending cuts in order to boost savings and extend the useful lives of their diminished retirement nest eggs. For retirees fortunate enough to have investment portfolios, the focus is on lower-risk holdings that offer at least some protection against a future bout of inflation that many see as unavoidable.
finance.yahoo.com
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