Bloomberg tells us that “Bill Gross was right after all.” Pimco’s celebrated bond fund manager anticipated a lengthy run of sluggish growth in the wake of the Great Recession, an idea that many dismissed:
Former White House economic adviser Lawrence Summers and Christina Romer, the former chairman of the U.S. Council of Economic Advisers, were among critics who challenged a view promoted by Gross’s Pacific Investment Management Co. that the U.S. economy may be headed for a long period of below-average growth and high unemployment, a scenario known as “new normal.” Money manager Kenneth Fisher called the concept “idiotic.”
Now Gross and co-chief investment officer Mohamed El-Erian, who coined the term more than two years ago, have been vindicated by the U.S. Federal Reserve, which said yesterday that the economic recovery is “considerably slower” than anticipated, following the biggest stock market loss since December 2008. BlackRock Inc. (BLK) co-founder Laurence D. Fink, who in January said he didn’t believe in the “new normal,” is forecasting growth of 1 percent to 2 percent for much of the decade.
“A lot of the new normal characteristics have played out,” El-Erian, chief executive officer of Newport Beach, California-based Pimco, said in an interview. “Some people confused new normal with fatalism, but the intention was the opposite. There was the hope that policy makers would recognize that there are structural responses they needed to embark on.”
Fair enough. Major financial crises have a history of dispatching new normals. History tells us as much, as Reinhart and Rogoff remind. But if Gross recognized that history was set to repeat, didn’t he realize that bonds—Treasuries in particular—would benefit? Perhaps not. As the Bloomberg article explains:
Gross hasn’t always been right about market calls. Earlier this year, he dumped U.S. Treasuries from his $245 billion Pimco Total Return Fund (PTTRX), only to miss a rally as investors fled to safer assets amid market volatility and the sovereign debt crisis in Europe. His fund has advanced 3.6 percent this year, lagging behind 66 percent of peers, Bloomberg data show.
Making macro calls is one thing. Following through is something else. Or did Gross and company think that the new normal was ending and acted accordingly earlier this year?