By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) — Big money managers are warning investors. They’re now citing the Bible: “Seven lean years.” No recovery till 2016. That was Jeremy Grantham back a few years ago. His GMO firm manages $104 billion.
Now Bill Gross and Mohamed El-Erian, the co-CEOs at the $2 trillion Pimco money managers, are citing the same biblical warning to jar investors awake and prepare for the coming lean years of slow, low growth and austerity. Except in Pimco’s new warning, the future just got much, much darker for investors — no recovery until 2022.
Norbert Schiller/World Economic Forum
Pimco’s Mohamed A. El-Erian,
Earlier in the summer — back when most investors were totally distracted by campaign drama and betting heavily on a new president, anticipating a post-election bull market — many were expecting Corporate America would unleash trillions in hoarded reserves, stimulate a recovery and new bull. Back then, Reuters, Forbes, CNBC, Bloomberg, the Wall Street Journal and rest of the obsessed media simply yawned at Gross and El-Erian’s warning that equities hit a “dead end in terms of significant appreciation.”
“Dead end?” No recovery till after the 2020 elections? Yes, one angry headline even said Gross was “faithless” with stocks. Why? Conventional wisdom tells us markets run in cycles. So investors believe it’s now time for a new bull. Gross and El-Erian disagree.
Warren Buffett and Jack Bogle first mentioned a “new normal” with slow, low growth back in 2002. It fell on deaf ears. Since the 2008 meltdown the same warnings are coming from gurus like Grantham, Gross, El-Erian and others. Ignore their warnings at your peril.
America’s economy, markets downshifting to long, low, slow-growth
Perhaps the single best description of America’s historic shift comes from Time magazine’s economics editor, Rana Foroohar, in “Why Stocks Are Dead (And Bonds Are Deader).” That column’s a must-read to help America’s 95 million investors understand the American economy and markets — from the Reagan/Bush generation … to the bank meltdown in 2008 … to the dark forecasts about the coming decade.
Here’s a summary of 10 points Foroohar picked up from meetings with El-Erian and Gross.
1. America fell in love with a Goldilocks economy
As early as 2005 Pimco warned that investors, voters and politicians had fallen in love with “a Goldilocks economy, the notion that markets were in a long period of growth and stability, neither too hot nor too cold.” El-Erian “never believed the bull” about wise “world’s central bankers and the seemingly endless growth of emerging markets.”
2. Economists predicting 3% to 4% growth are misleading America
Pimco was “quick to see, post-2008, the passing of an era,” says Foroohar. The unthinkable was happening: “The U.S. flirting with default, unlimited central-bank money dumps were suddenly happening.” Worse, today “while most experts (including those within the Obama administration) were plotting how to move from recession back to the trend growth rate of 3% or 4%,” Pimco concluded that a low 2% growth will probably be the New Normal “not for a couple of years but for decades.”
3. Warning: Too many investors, banks, politicians still in denial
Many investors are still disappointed with their nest eggs, in denial, ignoring Pimco’s message, trapped in wishful thinking, hoping for a return of the short-term bull-bear cycles common in recent decades, unwilling to face the harsh reality of the New Normal with slow growth everywhere: consumer spending, jobs, government revenues, corporate earnings, stocks, bonds, commodities, even America’s role in the world.
4. Investing is like surfing and the money wave may soon crash
Surfing is a popular Gross metaphor: Imagine waves of investor opinions moving stock prices. Whether surfing or investing, you “ride the wave,” sense the crest, always knowing that “ultimately a good surfer has to kick out.” Or get wiped out “when the wave crashes. And the money wave, says Gross, may be ready to crash.”
5. The stock market is a Ponzi scheme … get out now
In fact “Gross recently stunned the markets by calling equities a Ponzi scheme,” says Foroohar, “warning investors they will never see 6% real returns again and would be lucky to get 3%.” Worse, investors are going to pay a stiff price for the Fed’s cheap money today: Inflation, stagnating growth, skyrocketing costs of borrowing, real estate and stock prices, consumer spending … all dropping. Foroohar says two of “the world’s best surfers are saying, ‘Get out of the water.’” Now.
6. Bernanke’s cheap money is killing our long-term recovery
“Since the 1980s, central bankers worldwide have begun to use low interest rates and large cash infusions to ease, smooth and stretch those cycles.” Then, politicians made things worse, providing “voters with a cushy ride.” So the public added record “amounts of debt to buy stocks and houses, hoping their value would keep rising so we could buy more of everything else,” says Foroohar.
7. Bernanke can’t prop up our economic bubble much longer
Pimco warns that America’s been “riding the crest” of a money wave from three rounds of quantitative easing, “one reason the stock market took off earlier this year.” Gross and El-Erian took advantage of the Fed’s cheap money: Their “flagship Total Return Fund has outperformed its category for the past five years, returning 9.7% this year, nearly 3 percentage points better than the category.”
8. Politicians are clueless economists making our slow growth slower
Inept politicians are a big problem: Pimco adds “neither party really seems to understand that credit as a fuel for capitalism is basically exhausted.” Foroohar calls this a “chicken-and-egg cycle: the financial crisis demanded that the Fed pump even more money into the system to avoid a depression. But Washington, which should have then helped remedy the situation with growth-enhancing programs … has remained gridlocked.”
9. Congressional Budget Office warning: 2.4% GDP growth as far as 2022
Washington gridlock has shaped their biblical warning: It’s “a seven-years-feast-and-seven-years-famine-type situation,’ says Gross. ‘And we’ve been feasting for 20 or 30 years.’ The nonpartisan Congressional Budget Office, which predicts 2.4% yearly growth as far ahead as 2022, seems to agree.” Growth under 3% “limits our national wealth and well-being in the long term,” El-Erian told Foroohar. “This is the first generation that’s seriously at risk of doing less well than their parents.”
10. Defensive investing: some tips for bad-news markets
How to invest in a recession that could become a depression? Gross and El-Erian passed on to Foroohar the best of strategies that have helped Pimco build its $2 trillion portfolio. First, remember: “Almost anything that we do in the future won’t be as high-returning as what you are used to,” says Gross. Double-digit returns are dead. Soon the Fed’s zero interest rates will be gone.
So where’s Pimco making bets? Next, remember, “the stock market as a whole may be a Ponzi scheme,” but “blue chips have become the new bonds. Plus multinationals Coca-Cola, Procter & Gamble, and IBM can spread risk globally “while delivering a 3% inflation-beating dividend.” Also “well-capitalized, growing firms that are undervalued because they are in beleaguered markets,” like Spain’s Santander Bank are opportunities.
Avoid long bonds of nations with big political risks. But consider “higher-yielding debt of countries like Mexico and Brazil.” Gross and El-Erian favor “housing and anything housing-related,” like contractors and lumber companies. Their stock picks include: commodities, investment protected bond, high-grade munis and non-dollar denominated emerging countries. Their pans are banks and financial stocks, high-yield bonds and long bonds in big developed countries like the U.S., U.K. and Germany.
Finally, safety is key to Pimco’s strategies. Foroohar says, Pimco’s leaders will “continue to plot and plan and invest in the New Normal, watching the horizon for the crest of that money wave, hoping to keep riding it for a while longer … before it finally crashes to shore.”