The global economy risks lapsing into
recession, with the pace of growth falling below the “new normal” level that the firm has predicted since 2009, according to Bill Gross, manager of Pimco's Total Return Fund, the world's biggest bond fund.
“Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” he wrote in a monthly investment outlook posted on Pacific Investment Management Co. LLC's website last week.
“If global policymakers could focus on structural, as opposed to cyclical, financial solutions, new-normal growth, as opposed to
recession, might be possible. Long-term profits cannot ultimately grow unless they are partnered with near-equal benefits for labor,” wrote Mr. Gross, Pimco's co-chief investment officer.
Pimco outlined the new-normal scenario in May 2009 at which it set investment guidelines for the firm for the next three to five years. The forecast predicted that in the wake of the 2008 market crash, the U.S. economy would grow at a below-average pace for the next several years as growth in the developed markets slowed, unemployment remained elevated and the markets staggered under the “heavy hand of government.”
“Until recently, economic recovery has been relatively robust if one were a deployer of capital, as opposed to the laborer who made that deployment possible,” Mr. Gross wrote.
“Near-zero-percent interest rates have allowed profit margins to widen even in the face of anemic end demand,” he wrote. “There are no double-digit investment returns anywhere in sight for owners of financial assets.”
TREASURY RALLY
After eliminating Treasuries from his $245 billion Total Return Fund in February because they were too expensive, Mr. Gross increased his holdings in U.S. government securities to 16% as the debt posted the highest quarterly returns in almost three years. Treasuries gained 6.4% in the third quarter as investors sought refuge amid slowing growth and Europe's sovereign-debt crisis,
Bank of America Merrill Lynch indexes show.
Bonds, stocks and real estate are overvalued because of interest rates near 0% and a Western growth rate closer to 0% than the 3% to 4% historical averages, Mr. Gross said.
The Total Return Fund has returned 0.96% in the past year, beating 18% of its peers, Bloomberg data show. In the past five years, the fund has returned 7.8% on average.
