Lower Returns Ahead, says PIMCO's Gross

The perspectives shared by PIMCO Managing Director Bill Gross and his colleagues, such as Mohammed El-Erian and Paul McCulley, have earned them respect and a popular following before and during the financial crisis.

Their latest viewpoint: “Global financial market returns stand at the threshold of mediocrity,” wrote Gross in his July 2010 “Investment Outlook.”

This means that investors should expect lower returns. However, they can also take advantage of current conditions to buy some quality companies at low prices, says PIMCO portfolio manager Charles Lahr.

Overall, the leader of the bond giant calls for coordinated action on the part of policymakers worldwide: “It is this lack of global aggregate demand – resulting from too much debt in parts of the global economy and not enough in others – that is the essence of the problem, which only economists with names beginning in R seem to understand,” he said.

“With bonds priced not for recession but near depression, most major global bond indices now yield less than 3%, surely a forerunner of returns to come,” Gross explained. “Stocks, long the volatile vamp of investor optimism, have not yet adjusted to the ‘New Normal’ of half-size economic growth induced by deleveraging, reregulation, and deglobalization and have low single-digit prospects as well.”

With higher debt on all fronts and lower population growth is some developed economies, “Not only will it become more difficult to transfer high existing debt burdens onto the smaller shoulders of future generations, but the overlevered, aging “global boomers” themselves will demand a disproportionate piece of stunted future goods and services – without, it seems, the ability to pay for it,” Gross added.

As for the need today for improving demand worldwide, “Developed nation consumers are maxed out because of too much debt, and developing nations don’t trust themselves to stretch their necks for the delicious leaves of domestic consumption just above,” he explained.

“If policymakers could act in unison and smoothly transition maxed-out indebted consumer nations into future producers, while simultaneously convincing lightly indebted developing nations to consume more, then our predicament would be manageable,” Gross concluded. “They cannot. G-20 Toronto meetings aside, the world is caught up as it usually is in an “every nation for itself” mentality, with China taking its measured time to consume and the U.S. refusing to acknowledge its necessity to invest in goods for export.”

“We have arrived at a New Normal where, despite the introduction of 3 billion new consumers over the past several decades in ‘Chindia’ and beyond, there is a lack of global aggregate demand or perhaps an inability or unwillingness to finance it,” shared Gross.

“Slow growth in the developed world, insufficiently high levels of consumption in the emerging world, and seemingly inexplicable low total returns on investment portfolios – bonds and stocks – lie ahead,” he concluded.