The New Normal

Pimco's Bill Gross has posted his July Outlook and it's compulsive reading for us. An investment thought leader who manages to viscerally tie the image of an overweight baseball umpire (John McSherry) collapsing from a heart attack to the outlook for the consumer economy has quite a refreshing view of the world.

Pimco's view of the "new normal" means lower growth, lower profit margins, and lower returns for asset classes driven by the delevering of the shadow banking system and its satellites, as well as a re-regulating of the global economy. The gloomy news, and we hope they're wrong, is that these conditions will "persist for a generation at a minimum."

Economists who look through the lens of the "permanent income" hypothesis of Milton Friedman notice that consumers have lost about $15 trillion in wealth since 2007. The loss has been in relatively illiquid forms of wealth like homes right through to liquid forms like stocks and bonds. The theory says that with a significant downward shift in their permanent income, which is related to wealth, consumption plans will also ratchet down, and not just for a month or two.

A friend of mine who is very active in the rail car market made me choke over my pancakes at breakfast the other day with this telling statistic. We all know about rail car loadings and their utility as a current indicator of economic performance. What I didn't know is that about 500,000 rail cars are currently parked in sidings or sheds. My friend said that this represents about one-third of the total rolling stock of rail cars. Now these cars carry things like coal, lumber, roofing and building materials, auto parts, grain, high fructose corn syrup, and industrial chemicals. He said that one-third of the fleet being idled is a percentage never seen before in other recessions. The outlook of some of the lessors was that they may not be redeploying some of these cars for "a couple of years!" This, to me, is a sentiment indicator and an outlook for the future. Never mind what this may portend for some of the leasing companies in the shorter run.

Pimco's investment thesis-- and I recognize that they are a bond house--is that investors should stay high up the capital structure, and prefer secure income from bonds and dividend-paying securities to riskier assets, like growth stocks.