market folly

We're continuing our 'market-strategist-Monday' here on Market Folly and next up is PIMCO's Bill Gross. It's been a few months since we last covered his thoughts so we thought we'd check-in on the bond king. Last time we noted how he favored quality credit over duration extension. This time around, Gross is talking less about particular markets and more about the macro big picture and how it associates to PIMCO's 'new normal' thesis. Earlier in our morning market strategy coverage, we highlighted the commentary from GMO's Jeremy Grantham where we found he favored high quality US stocks.

Gross begins his missive on the topic of toilets but bear with him as he has an actual message behind that. And, it has to do with PIMCO's thesis of 'new normal.' Gross argues that not only growth, but capitalism as well, are dependent on a growing population (at least in part). He then writes that, "the danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth." He then cites Japan as a modern-day example of this.

Gross also writes, "PIMCO's continuing New Normal thesis of deleveraging, reregulation, and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing populatio nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base."

In short, the PIMCO bond vigilante feels that current deficit spending is not the way to go and is akin to flushing money down the toilet (now you get the toilet reference he made earlier). Instead, Gross favors industrial policies aimed at strengthening infrastructure, clean energy, education, and healthcare. Gross is not alone in his stance as Oaktree Capital's Howard Marks has also voiced frustration with the government as well.

Embedded below is the August 2010 investment outlook from PIMCO's Bill Gross:



You can download a .pdf copy here.

Continuing our 'market-strategist-Monday', make sure to also check out Jeremy Grantham's latest commentary from GMO. And for some of Bill Gross' past commentary, you can view his thoughts on how he favors quality credit over duration extension.