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.”