PIMCO is the leading bond firm in the world as far as we know. Conservative and well managed. When Bill Gross or the CEO speaks everyone seems to listen. Here is their take in the New Normal. This is the world graduates will be entering, it will not be the go go 1990s.
PIMCO’s Secular Outlook: A “New Normal” PIMCO believes that secular economic, social and political trends exert the most powerful and sustained influences on bond markets. We define “secular” as the next three to five years. The key assumption of our Secular Outlook is that following the severe shocks to the global economy in the second half of 2008, the world embarked upon a journey of change not likely to be reversed over the next few years. This journey, which is expected to be characterized by starts, stops and volatility, will end at a destination that can be described as a “New Normal.” Some of its features are outlined below: Slow Growth in Developed Economies – Growth rates in developed economies are likely to be lower over the next three to five years Politics Matter – Another reason for muted growth will be a dampening of productivity as the public sector overstays as a provider of goods that belong in the private sector. More regulation and higher taxes will restrain the growth of output. Short-Term Deflation, Long-Term Inflation – Deflation risks should predominate in the near term given the severity of the collapse in global demand and the large gap in actual versus potential output. Inflation risks will arise later in PIMCO’s secular horizon. Potential output could be more constrained due to supply destruction while policymakers struggle to withdraw massive levels of monetary and fiscal stimulus that have recently been introduced. U.S. Dollar Risk – In the U.S., inflation risk and currency risk are linked. Should U.S. policymakers lack the commitment or the skill to drain the system of emergency liquidity at the appropriate time, confidence in the U.S. dollar as the world’s reserve currency could erode. Banking and Finance to Shrink – The financial sector’s formerly commanding presence in the economy will be curtailed. With regulation more expansive, the sector will be de-risked, de-levered and possibly subject to greater burden sharing imposed by politicians. Consolidation will spread beyond banks to non-bank financial institutions and the investment management industry. PIMCO’s Cyclical Outlook: A W-Shaped Recovery Monetary and fiscal stimulus, along with a rebuilding of inventories will be tailwinds for the U.S. economy for the rest of 2009. These positive effects will begin to fade in 2010 at the same time as consumer spending is constrained by high debt levels. A W-shaped recovery will set in, consistent with the muted growth rates PIMCO expects for developed economies over a secular time frame. Federal Reserve tightening is unlikely before the summer of 2010 given this forecast. ................................................. |
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