How the mighty have fallen. Is Bill Gross the next Bill Miller? Investors could be forgiven for asking after PIMCO Total Return experienced significant net outflows in 2011, the first year that's happened since 1993, as the well-respected bond king somehow missed the biggest bond rally in nine years.
And now Gross appears to be backing off his earlier "new normal" claim (or at least heavily modifying it). The new normal as PIMCO describes it is a world of muted Western growth, high unemployment and relatively orderly deleveraging.
"How many ways can you say ‘it’s different this time?’” Gross asks in his latest monthly commentary. “Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012.”
In typical Gross style, he writes that “we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.”
Gross (left) adds that most developed economies have not, in fact, deleveraged since 2008, as he originally predicted. Credit as a whole remains resilient or at least static because of quantitative easings in the United States, U.K. and Japan.
“So global economies and their credit markets instead of delevering and contracting, continue to mildly expand. To the extent that most sovereign debt is now viewed as ‘credit’ in addition to ‘interest rate’ risk, then its integration into private markets cannot be assured.”
As to the investment implications of this “new, new normal,” Gross surprises by quoting legendary money manager Sir John Templeton’s four most dangerous words in investing–“it’s different this time.”
“For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations,” Gross concludes. “Between 2% and 5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The new normal is 'Sub,' 'Ab,' 'Para' and then some. The financial markets and global economies are at great risk.”