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Investment Outlook
Bill Gross | September 2009
On the “Course” to a New Normal
Analyzing
why people play golf is like exploring the intricacies of
string theory – there are so many permutations lacking
scientific
observation that physicists or golfers can pretty darn well say
anything they like and the explanation might
stick. When it comes to
whacking that little white ball, the possibilities are nearly endless:
People play to relax,
to be with friends, to get close to Mother
Nature, to enhance business connections, to compete and excel. Gosh, I
don’t
know, the Zen explanation for why we play golf could even
resemble the old saw about climbing a mountain: People golf because
it’s
there. Whatever the reason, it is the most frustrating, damnable
game ever conceived – alternately elevating and
depressing you within
the span of mere minutes. I love golf. No, I hate it.
Personally, the reason that golf draws
me to its intricate web of
psychological entrapment is epitomized by a simple six-inch trophy: a
chartreuse ball resting
on top of its ebony base, preening on a
bookshelf in the family room at our desert home. Its inscription
reads, “Hole
in one, March 15th, 1990, 14th hole Desert Course, 155
yards.” Well and good, I suppose – the ace of my life
– except it
wasn’t. It was the ace of my wife. Above the inscription rests the
name Sue – not Bill
– Gross. It was a great shot but it wasn’t my
shot, and I guess therein lies the explanation for why I continue
to
tee it up.
Actually, two years ago I did tee it up in the sweltering 105° June
heat of the Palm Springs desert.
No one, of course, was crazy enough
to be with me including my “ace” role model wife who was sipping a
cool
lemonade in the comfort of our air-conditioned home. Now, there
is an “unwritten” rule in golf that in order
to be official, a
hole-in-one has to be witnessed, and that you have to play a full 18
holes. Otherwise, I suppose,
you could stand on the tee with a bucket
of balls and hit hundreds or thousands until one of the little guys
went in
– whatever. The fact is, on this particular day, I was playing
only one ball, but I was alone, and – good God!
– it went in! The
trophy with ebony base and spanking white Titleist ball would read:
“Hole in one, June
7th, 2007, 17th hole, Mountain Course, 139 yards.”
Or was it? Does a falling tree make a sound in the middle of a
forest
if no one’s there? Is a hole-in-one a hole-in-one if no one else saw
it? I say emphatically – yes!
That damn ball went in and later that
day Sue agreed with me (although she had a funny look in her eye –
especially
since she didn’t know a thing about the rules of golf). No
one else though. No one else agrees with me. Not a soul.
I suspect
they’re jealous and, in fact, I’ve seen a few of them hitting buckets
of balls at dusk from that
very same tee when they think nobody’s
looking. I’m watching, though, which brings up a funny question. If
they
sunk one, would theirs be a hole-in-one because I was a witness?
Like I said – a damnable game.
“Is
a hole-in-one a hole-in-one” may not strike you as the most
critical question of the hour, and I would readily agree.
“Will we
have a New Normal global economy (and investment market)?” would
probably usurp it on even Tiger
Woods’s top ten list. This “new” vs.
“old” normal dichotomy was perhaps best contrasted by
Barton Biggs, as
I heard him on Bloomberg Radio in early 2009, when he said he was a
“child of the bull market.”
I thought that was a brilliant phrase, and
Barton is a brilliant phrase-maker. He went on to say though, that his
point
was that for as long as he’s been in the business – and that’s a
long time – it has paid to buy
the dips, because markets, economies,
profits, and assets always rebounded and went to higher levels. That
is not only
the way that he learned it, but that is the way,
basically, that capitalism is supposed to work. Economies grow,
profits
grow, just like children do. I think that’s why he said he was
a child of the bull market, not just because he had
experienced it for
so long, but also because economic growth and higher asset prices are
almost invariably a natural
evolution, much like the maturation of a
person. That’s how people grow, and so I think Barton was saying that
capitalism
just grows that way too.
Well, the surprise is that there’s been a significant break in that
growth pattern,
because of delevering, deglobalization, and
reregulation. All of those three in combination, to us at PIMCO, means
that
if you are a child of the bull market, it’s time to grow up and
become a chastened adult; it’s time to recognize
that things have
changed and that they will continue to change for the next – yes, the
next 10 years and maybe
even the next 20 years. We are heading into
what we call the New Normal, which is a period of time in which
economies
grow very slowly as opposed to growing like weeds, the way
children do; in which profits are relatively static; in which
the
government plays a significant role in terms of deficits and
reregulation and control of the economy; in which the
consumer stops
shopping until he drops and begins, as they do in Japan (to be a
little ghoulish), starts saving to the
grave.
This focus on the DDRs – delevering, deglobalization, and reregulation
– may be conceptually
understandable, but nevertheless still a little
hard to get one’s arms around. Why would they necessarily lead to
a
new, slower growth normal? A little easier to grasp might be the
following approach, which feeds off the same concept,
but which
extends it a little further by suggesting that DD and R lead to a
number of broken business or economic models
that may forever change
the world we once knew and make even Barton Biggs a chastened adult.
They are as follows:
1. American-style capitalism and the making of paper instead of
things. Inherent in the “great moderation”
of the past 25 years was
the acceptance of a sort of reverse mercantilism. America would
consume, then print paper assets
and debt in order to pay for it.
Developing (and many developed) countries would make things, and
accept America’s
securities in return. This game is over, and unless
developing countries (China, Brazil) step up and generate a consumer
ethic
of their own, the world will grow at a slower pace.
2. Private vs. public-driven growth. The invisible hand of free
enterprise
is being replaced by the visible fist of government, a
temporarily necessary, but (if permanent) damnable condition itself
in
terms of future growth and profits. The once successful “shadow
banking system” is being regulated and
delevered. Perhaps a fabled
“110-pound weakling” may be an exaggeration of where our financial
system is
headed, but rest assured it will not be looking like Charles
Atlas anytime soon. Prepare to have sand kicked in your face,
if you
believe you are a “child of the bull market!”
3. Global economic leadership. It’s premature
to award the 21st
century to the Chinese as opposed to the United States, but if the
last six months have been any example,
China is sort of lookin’ like
Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you
big
ugly bear!” Not only has China spent three times the amount of
money (relative to GDP) to revive its economy, but
it has managed to
grow at a “near normal” 8% pace vs. our “big R” recessionary numbers.
Its
equity market, while volatile and lightly regulated, has almost
doubled in twelve months, making ours look like that ugly
bear instead
of a raging bull.
4. United States housing and employment. Old normal housing models
in the U.S.
encouraged home ownership, eventually peaking at 69% of
households as shown in Chart 1. Subsidized and tax-deductible mortgage
interest
rates as well as a “see no evil – speak no evil” regulatory
response to government Agencies FNMA and
FHLMC promoted a long-term
housing boom and now a significant housing bust. Housing cannot lead
us out of this big R
recession no matter what the recent Case-Shiller
home price numbers may suggest. The model has been broken if only
because
homeownership is declining, not rising, sinking to perhaps a
New Normal level of 65% as opposed to 69% of American households.
Similarly, the financialization of assets via the shadow banking
system led to an American era of consumerism
because debt was
available, interest rates were low, and the livin’ became easy.
Savings rates plunged from 10%
to -1%, as many (if not most) assumed
there was no reason to save – the second mortgage would pay for
everything.
Now things have perhaps irreversibly changed. Savings
rates are headed up, consumer spending growth rates moving down.
Get
ready for the New Normal.
I could go on, reintroducing the negatives of an aging boomer society
not just
in the U.S., but worldwide. Increased health care may be GDP
positive, but it’s only a plus from a “broken
window” point of view.
Far better to have a younger, healthier society than to spend
trillions fixing up an aging,
increasingly overweight and diabetic
one. Same thing goes for energy. Far easier and more profitable to
pump oil out
of the Yates Field in Texas or even Prudhoe Bay than to
spend trillions on a new “green” society. Our world,
and the world’s
world, is changing significantly, leading to slower growth accompanied
by a redefined public/private
partnership.
The investment implications of this New Normal evolution cannot easily
be modeled econometrically,
quantitatively, or statistically. The
applicable word in New Normal is, of course, “new.” The successful
investor
during this transition will be one with common sense and
importantly the powers of intuition, observation, and the willingness
to
accept uncertain outcomes. As of now, PIMCO observes that the
highest probabilities favor the following strategic conclusions:
1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative
easing, term financing
and fiscal stimulation efforts are keys to future investment returns
across a multitude of asset
categories, both domestically and
globally.
3. Investors should continue to anticipate and, if necessary, shake
hands
with government policies, utilizing leverage and/or guarantees
to their benefit.
4. Asia and Asian-connected
economies (Australia, Brazil) will
dominate future global growth.
5. The dollar is vulnerable on a long-term
basis.
Like playing in an Open Championship, future golfers/investors need to
play conservatively and avoid critical
mistakes. An “even par”
scorecard (plus some hard earned alpha) may be enough to hoist the
trophy in a New
Normal world. Holes-in-one? Maybe if you’re lucky. But
make sure someone’s watching, and that their eyes are
focused on the
New Normal. As for golf, even Sue, my only supporter, has asked me to
move my ball, on its own ebony
base, away from her more authentic and
perhaps the still solitary ace made by Gross family golfers. What a
damnable
condition.
William H. Gross
Managing Director
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