Bill Gross, Janus Capital fixed-income manager, zooms in on economic growth in his April investment outlook (after sharing a series of brainteasing questions about everything from love, longevity and cellphones).
President Donald Trump has promised to boost growth as a means of generating more jobs and wealth. But can he?
That is “the investment question of the hour/day/decade,” Gross says, and its conclusion “will determine the level of asset prices across the investment spectrum.”
This growth leads to “a levered rate of corporate revenue/profit increases and a significantly higher P/E ratio,” the fund manager points out, when all else remains equal.
It also “sends a green light/all clear signal” to high-yield bonds as well as other risk assets, which are leveraged and growth dependent, Gross explains. (“It may also, although not necessarily, lead to higher real interest rates and a future bond bear market,” he added.)
The Old Normal
The issue today is that economic growth depends on rising productivity, “and the experts are in a tizzy trying to explain why productivity in the last five years has averaged only 0.5% versus a prior pre-Lehman ‘old normal’ of 2%-plus,” said Gross.
Federal Reserve Chairwoman Janet Yellen recently admitted that no one really has an answer to this productivity question. According to Gross, that’s her way of saying “that the past five years’ experience has been three standard deviations outside of the Fed’s model.”
As Gross describes, Northwestern University economist Robert Gordon argues that today’s lower productivity could be caused by labor and capital having developed the “low-hanging fruit,” like electrification and the benefits of information and other technology.
There’s also the issue of the private sector’s low level of investment in recent years.
While optimists point to future benefits from smartphones and medical technology, a group of IMF economists argue today’s trend “is an offspring of the financial crisis.”
As Gross explains, weak business investments and trade have gone hand in hand with low to negative interest rates. This has led capital being misallocated to low-risk projects and a slowdown in the formation of small businesses.
In addition, trends like the aging population have a significant influence on the economy, “since older consumers consume less of almost everything except health care,” he says.
The IMF study suggests that without great technological breakthroughs, productivity growth is not poised to return to the higher rates of the 1990s in the advanced economics or the early 2000s in the emerging economics.
“In other words, [this] warning speaks to a global productivity slowdown, not just a U.S.-based phenomena,” said Gross.
The bank warns that higher tariffs and immigration restrictions could exacerbate the slowdown, adding that growth in the U.S. and elsewhere is likely to be lower than average.
“High rates of growth and the productivity that drives it, are likely distant memories from a bygone era,” the Janus fund manager explained.
How to Invest
Of course, there are no right or wrong answers, he says.
In his mind, though today’s stock markets are “priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model-driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman.”
What should investors do?
They can pick up their cellphones and call their advisors.
After that, they should keep in mind the “only real way to have one more year of extended life is to feast on blueberries instead of Oreo cookies,” Gross says, “and to exercise daily instead of heading for your couch and widescreen.”
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