The 'New' Normal

The 'old' normal is the way things were before the financial markets fell apart. In the 'old' normal view - still preached by politicians of both parties and amplified by a compliant media and a greedy financial industry - you should back to doing what you were doing before.

Have a short memory. Buy stocks because they "always" go up, buy houses because they "always" go up, and spend like mad because there are "always" plentiful jobs available.

However, there are some key problems with the 'old' normal. These problems were exposed in the last two years. But they are being swept under the proverbial rug of rising stock prices since March. These problems include too much household debt, unaffordable home prices, and an entire economy geared to consumption over production.

But that is all changing according to Bill Gross of PIMCO. PIMCO is THE company when it comes to bonds and bond mutual funds. And Bill Gross is perhaps the best bond mutual fund manager ever.

Mr. Gross says that we have entered a world of slower economic growth, a world defined by deleveraging (paying off debts) and re-regulation. It's a world he calls the 'new' normal. He wrote the following in a recent note to PIMCO clients:

"If you are a child of the bull market, it's time to grow up and become a chastened adult; it's time to recognize that things have changed and they will continue to change for the next - yes, the next 10 years and maybe even the next 20 years."

What Mr. Gross said makes sense. Bear markets do NOT end quickly - the last bear market lingered for 14 years. And bear markets do not end with stocks still trading at well above their historical norms, currently at nearly 20 times earnings. And at 20 times still declining earnings, I might add. Bear markets also do not end when investor optimism is high. They end when investors are disillusioned and disappointed.

Mr. Gross went on in his missive to PIMCO clients and spoke about five "strategic conclusions" which he reached. They are:

1) Global interest rates will remain very low for an extended period of time.

2) The extent and duration of quantitative easing (printing money out of thin air), term financing and fiscal stimulation efforts are the keys to future investment returns across most asset categories.

3) Investors should continue to anticipate and, if necessary, "shake hands" with government policies,using government guarantees to their benefit.

4) Asia and Asian-connected economies (Brazil, Australia,etc.) will dominate future global economic growth.

5) The US Dollar is very vulnerable (down) on a long-term basis.

I agree with most of the conclusions made by Mr. Gross. I believe we will see near-zero interest rates in the United States for a VERY long time due to the weakness of the US economy brought on by an excess of debt at all levels.

I also agree with Mr. Gross that the US Dollar will decline in value substantially (it's already down 40%+ this decade) in the coming years, which will in turn raise the price of most commodities (which are priced in US dollars).

Finally, I agree with Mr. Gross that most future economic (and stock market) growth will occur in Asia and other areas of the so-called emerging world.