In a rare public speech last week, Bill Gross reiterated the conventional wisdom at Newport Beach bond fund manager Pacific Investment Management Co.: The U.S. economy and investors are in for a recovery marked by slower growth than in prior comebacks.
A humble, jovial and soft-spoken Gross talked about a familiar theme for Pimco—what company executives call the “new normal” for the recovering economy.
In April, Pimco Chief Executive Mohamed El-Erian also spoke about the new normal during an Irvine luncheon honoring him as the Business Journal’s 2008 businessperson of the year.
Pimco describes the new normal as an era of more government involvement, slower growth, less risk taking by financiers and lower consumer expectations.
Past U.S. economic growth of 3% to 4% annually may likely be halved in the next decade, Gross said.
Investors in stocks and bonds who are used to earning 8% to 9% a year may now be looking at annual returns of 4% to 5%, he said.
“Assets don’t grow faster than the economy over the long run,” Gross said. “The only reason we grew so fast in the past was because of leverage.”
Gross is co-chief investment officer for Pimco, overseeing some $840 billion in bonds and other investments.
He spoke before the Irvine-based Women Investing in Security and Education at an event moderated by business journalist Consuelo Mack of public television’s “Wealthtrack.” https://ocbj.www.clients.ellingtoncms.com/admin/news/story/add/#
Mack is an adviser and board member of the women’s investing group.
Gross’s wife, Sue, also was in attendance at the Hilton Orange County/Costa Mesa hotel.
During the boom this decade, economic growth was driven by debt drawn by companies and banks taking advantage of deregulation started under President Reagan, Gross said.
What’s changed is that prices for companies, buildings and other investments have been driven lower by banks and companies deleveraging, or selling off assets to cut debt, he said.
“The world got caught up in a levered frenzy,” Gross said.
The fallout has created a new era of reregulation as the federal government attempts to clamp down on the riskiest business practices.
Free Trade
A backlash against global free trade also is part of the new normal, with signs of trade restrictions among countries and an exclusive pact between China and Brazil, Gross said.
“A number of models have been broken and won’t come back,” he said.
Housing, the auto industry, investment banking and overall employment all have undergone drastic changes, according to Gross.
Complex investments that contributed to the 2008 financial meltdown—including bonds based on mortgages and other assets or credit default swaps—are being rethought, he said.
“Paper can’t produce prosperity,” he said.
Gross told the crowd he’s personally
bought shares of AT&T Inc. and Verizon Communications Inc. for their stability and dividends.
“Sue’s going to hate me for this,” he said before revealing the couple’s stock picks.
In a recent CNBC interview, Gross said investors should be selling stocks and other riskier investments such as junk bonds.
Caveat
Gross cautioned his advice hasn’t always been spot on. He joked he had to stay away from a Corona del Mar doughnut shop for a while after giving its Vietnamese-American owners a bad prediction.
At Pimco, Gross said he’s been buying long-term Treasury bonds as a bet against deflation, or falling prices for goods and services.
It’s a contrarian move, with many economists and investors more worried about the prospect of inflation with an economic recovery and heavy government spending.
Pimco also has been cashing out of discounted mortgages it bought into last year.
Gross said he sees emerging markets such as China and Brazil as bullish investments.
His bond-focused Total Return Fund is the largest mutual fund of any kind at $186 billion in assets under management. In August it took in $5.5 billion, its best monthly intake ever.
Gross also weighed in on California and its recently enacted budget, which he called, “really just a sham” since it took money from local governments to cover a $26 billion deficit.
Pimco “took a pass” on a recent bond offering from California, pointing out it had the lowest credit rating among the states.
But he said bond offerings from some counties, cities and local development projects in the state are more attractive.
