The New Normal

According to Bill Gross, co-chief investment officer of the PIMCO money management firm, the U.S. economy is going to be sluggish for the next few years and investment returns muted. Therefore, investors should get used to it. Mr. Gross is one of the most highly respected investment managers on the planet. He is credited with coining the term “The New Normal” to describe an economic environment quite different than we have experienced during our lifetimes. The new normal will be characterized by a slower growth in economic activity, more government intervention and lingering high unemployment.

Although I’m not a big fan of forecasts, Mr. Gross is one of the few people who command my attention when he speaks. Moreover, his prediction is understandable given the events of the last few years. If he is correct, this scenario suggests disappointing investment returns ahead and a declining standard of living for many Americans.

Our current predicament was precipitated by reckless practices in both the public and the private sectors, which inflated and subsequently burst the housing and credit markets.   There are numerous places to lay blame, but I don’t want to rehash how we got into this mess.  I’m more interested in what is happening today and what is likely to happen going forward.

Government spending is out of control and clearly on an unsustainable path. The large and growing debt problem will act as a brake on future growth. People won’t have the income or willingness to spend and access to credit will be restricted. As a result, consumer spending, which drives the majority of the economy, is destined to remain slow. These are heavy problems that will require strong leadership and tough choices. I’m not sure either is coming anytime soon. However, I do think that things will improve eventually.

In the spring of 2009, I wrote about my pendulum philosophy to describe how things seem to move too far in one direction before they reverse course and head the other way - like a pendulum back and forth. This time it’s probably going to take awhile for the pendulum to return. Like a drug addict, we might have to hit rock-bottom before starting the path to recovery. I don’t know if our leaders have the political willpower to make the necessary course corrections. If we don’t make the needed adjustments ourselves, changes will eventually be forced upon us. The troubles in Greece and other European nations clearly illustrate that no country can defy the laws of economics.

The pendulum effect is the reason that I remain guardedly optimistic that the new normal will not last forever and that the old normal could return someday. Either way, investors can control their own destiny by making wise choices. Since we live in a global economy, there will always be growth opportunities. A well-diversified portfolio – which in the past was utilized mainly to reduce risk – could generate decent investment returns even if the U.S. struggles.

I don’t pretend to know with any clarity what lies ahead. Therefore, I hope for the best and plan for the worst. Good planning and disciplined investing are the keys to surviving and prospering in any economic environment. We may or may not experience a new normal, but I agree with Yogi Berra - the baseball great - that the future “ain't what it used to be.”