PIMCO’s Gross Sees A Bleak Future

This isn’t really news but Bill Gross set forth his expectations for the economy over the medium term. It’s pretty much the same pitch we’ve heard from PIMCO over the last month or so but still worth revisiting.

From Fox Business:

Bill Gross, co-chief investment officer of bond mutual-fund giant Pimco, on Thursday offered investors a sobering market outlook in which he sees lower returns, decreased U.S. growth and the loss of the dollar’s status as the world’s reserve currency.

In a speech delivered to advisers and investment managers at the Morningstar Investment Conference, Gross outlined what Pimco colleague Mohamed El-Erian has termed the “New Normal.”

In a world of more regulation, private-sector deleveraging and less consumption, “it’s hard for [Pimco] to imagine” the Dow Jones Industrial Average ($INDU) climbing back to 14,000 or home prices returning to 2006 levels, Gross said.

“Growth will be stunted,” he said. “It will be a different type of world and we have to get used to that.”

The U.S. economy will grow at between 1% and 2% a year rather than 2% to 3% a year for the next three to five years at least, Gross said. “That will make a significant difference for corporate profit growth,” he said.

Moreover, unemployment will hover around 7% to 8% rather than the recently typical 4% to 5%, he added, and the higher rate would be around “for a long time to come.”

Gross added that inflation would also start to accelerate in about three to five years’ time.

Gross also said that the dollar will lose its reserve status and that the government will focus more on middle class wage earners at the expense of business. He bases the latter statement on the preferences he detects in the Obama administration’s approach to the Chrysler and GM restructurings.

It’s a pretty stark assessment when you stop and think about it. If he’s right about growth as low as one or two percent, then I wonder exactly what currency he sees replacing the dollar. So long as the U.S. grows that slowly, the rest of the world, at least in the medium term, is not going to go racing away. Therefore, what economy is all of a sudden going to look to be such a great place to hold liquid funds? I buy into the argument that the dollar fades but not that it is supplanted.

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