PIMCO's Bill Gross: Consumers Changed for a Generation

Bill Gross, bond king at PIMCO, has published his July investment outlook. It is somber reading for equity investors.

Gross opines that consumers are going through a generational change in spending and saving habits. If that is so, he is in effect writing off the Boomer Generation, some 70 million consumers, as much less of a factor in the U.S. economy. This has resulted due to the loss of trillions of dollars of personal wealth over the past two years. Gross states that greed will return, but it will not come from the present generation.

Gross compares those addicted to equity gains over the past twenty years to those with eating disorders. Both are powerless to change the behavior that controls them. Gross repeats what he has said before about stunted future economic growth (more like 2% per year as opposed to 3 1/2%). This will result from the change in consumers and the higher personal and corporate taxes that are coming. As a result, Gross sees more modest investment returns and says investors should not take on undue risk reaching for higher gains. Gross suggests that attempts to regain the "old normal" will fail as we are headed, like it or not, for a "new normal" that cannot be avoided.

Gross cautions against equities and junk bonds as too risky at this point. He advises moving to the relative safety of better quality bonds.

I would add one observation which Gross does not touch upon. The massive amount of stimulus money (debt) that the government is injecting to shock the patient back to life will require a higher growth rate (3% or more) to handle the higher levels of government debt. Gross does not see that level of growth in our near future. So, our national debt will remain high and will get higher as we fail to grow into our debt level. This will have consequences on the U.S. dollar.

Disclosure: No positions.

Comments

[Roger Knights:]

"So, our national debt will remain high and will get higher as we fail to grow into our debt level. This will have consequences on the U.S. dollar."

And Treasuries.

Jul 02 08:24 AM

[thecadean:]

Bill Gross gets it. We are going back to a more realistic economy, something that will take years if not decades to right. ie. Japan. The only weapon available to teh US government, and Corporate america is lower interest rate. With the race to Zero almost finished and the consumer tapped out, don't expect job growth or income growth for at least a generation. Bill Gross is right to think bonds are the future, they have been the right place to be in the past. In fact bonds have out perform stocks over the past 1, 5 10, 20, 30 and 40 years !! If you had bought a high quality bond fund 10 years ago you would have 4 times more today than someone who invested in stock. America is a debtor nation- Not a place for growth. If you seek long term growth see EEM

Jul 02 10:07 AM

[Ted Hurlbut:]

I usually find Mr. Gross' comments to be illuminating. While I don't anticipate 3% to 4% growth rates to return for the foreseeable future, I think it's a stretch to suggest that consumer habits have been "changed for a generation". Despite the headwinds and overhangs that we're facing, to suggest that this is a transformational moment in the proportion he suggests is to fundamentally ignore the dynamic, creative and entrepreneurial spirit that drives the American economy. This economy, and the vast array of technological innovation that drives it, does not stand still for long. It may be that this turns out to be a transformational moment in his business, but I take a far more optimistic long-term view of the economy as a whole.

Jul 02 03:15 PM

[Michael Clark:]

Optimism is cyclical. When the middle class believes they can all become millionaires (which is the story the Republicans generally sell), they join up and cast their fate to the wind. When the middle class -- due to cataclysm -- believes they can all become homeless, they hunker down, down-size, begin saving money for the apocalypse. That's when the Night-Cycle of contraction begins (contraction being a physical and a psychological/emotional response to stress). Once the contraction begins, it goes back to zero.

The white hole is the expansion phase. The white hole spits out matter. The contraction phase is the black hole. The black hole sucks in and destroys matter. We've just begun the contraction phase.


On Jul 02 03:15 PM Ted Hurlbut wrote:

> I usually find Mr. Gross' comments to be illuminating. While I don't
> anticipate 3% to 4% growth rates to return for the foreseeable future,
> I think it's a stretch to suggest that consumer habits have been
> "changed for a generation". Despite the headwinds and overhangs that
> we're facing, to suggest that this is a transformational moment in
> the proportion he suggests is to fundamentally ignore the dynamic,
> creative and entrepreneurial spirit that drives the American economy.
> This economy, and the vast array of technological innovation that
> drives it, does not stand still for long. It may be that this turns
> out to be a transformational moment in his business, but I take a
> far more optimistic long-term view of the economy as a whole.

Jul 03 03:13 AM

[doctordoctor:]

once the inflation phase starts, the consumer will find an overwhelming incentive to start spending and borrowing. witness end of ww2, vietnam, etc. so its not a generational issue, but an inflation issue. and the start of that phase will now be largely dictated by foreign currency markets, thanks to our love of free trade.

Jul 03 10:45 PM

[Chancer:]

It is actually a lot worse than all that.

Read Fortune: "We Owe What?", 6/22/09 pages 54-60.

Mentioned VAT in our future 10 times. CA has commission under direction of the Governator specifically looking at new "net receipts tax"- a form of a VAT. Could there be double VAT in CA (Fed and CA)? That should be "double VAT jeopardy."

Nice thing for politicians about VAT is that it is hidden in product cost. A 1% VAT imposed at 10 points of "value added" equals a 10% tax. If pols raise from 1% to 2%, it becomes 20% tax, and so on.

With never ending political thirst for more tax revenue, pols can just keep raising VAT, while consumers just scratch their heads wondering why TVs, cars, refrigerators, continue to drastically increase in price.

So, Americans get hit double with declining investment returns, and higher cost of living. Permanently higher unemployment to go along with it.

Welcome to the new: United States of Euro-America. Middle class in Europe rents their home and uses public transportation. Goodbye to home and auto ownership for average American.

Climate in CA will not be enough to stop the outflow of business, higher wage jobs, and the middle class- soon to become a state of low income illegal aliens.

Jul 04 06:28 PM

[Michael Clark:]

Inflation won't start until about 2019. We'll be deflating until then.


On Jul 03 10:45 PM doctordoctor wrote:

> once the inflation phase starts, the consumer will find an overwhelming
> incentive to start spending and borrowing. witness end of ww2, vietnam,
> etc. so its not a generational issue, but an inflation issue. and
> the start of that phase will now be largely dictated by foreign currency
> markets, thanks to our love of free trade.

Jul 06 03:53 AM