The “New Normal”
In 2009, Mohamed El-Erian, CEO of PIMCO– the world's biggest bond fund manager – coined the term "new normal" to describe the period of economic malaise the U.S. would experience in the wake of the biggest recession of a generation. The "new normal" was characterized by below trend growth, high unemployment, and ultra-low interest rates as the U.S. suffered the economic consequences of the crisis. El-Erian says you can profit in any investment environment but that it’s much trickier than usual nowadays. “We think that the global economy and markets are on a bumpy journey to a new destination, the vehicle is being driven primarily by policymakers, and they have already used the spare tire.” The gloom thickens as El-Erian goes on: “Unemployment is not only high, but it will remain high for a number of years. Policy outcomes have consistently fallen short of expectations. This is not a classic recession. You have to deal with the debt overhang and the housing inventory.” Despite all the uncertainties, El-Erian argues, “most people are still overexposed to risky assets.” To navigate the new normal, the U.S. needs to provide further economic stimulus aimed at creating jobs and restructuring the economy for the 21st century, he says. The U.S. should “increase its productivity and enhance its ability to grow and create jobs.” But it also needs comprehensive budget reform to ensure that the federal deficit declines to a sustainable level in the coming years. To invest in the new normal, El-Erian and two co-managers launched Pimco Global Multi-Asset D (symbol PGMDX) in October 2008. The fund is designed as a new-normal substitute for a traditional balanced fund, which contains 60% stocks and 40% bonds. From the fund’s inception through October 15, it returned an annualized 15.0%, compared with 15.4% for Standard & Poor’s 500-stock index. More important, El-Erian says, the fund has produced those returns with much less volatility than the S&P 500. The...
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