The New Normal – October 2009
The ‘old’ normal is the way things were before the financial markets fell apart. In the ‘old’ normal view – still preached by politicians of both parties and amplified by the media and a greedy financial industry – you should stay with what you were doing before.
Have a short memory. Buy/keep stocks because they “always” go up, buy houses because they “always” go up, and spend like mad because there are “always” plentiful jobs available.
However, there are some key problems with the ‘old’ normal. These problems were exposed in the last two years. But they are being swept under the proverbial rug of rising stock prices since March of this year. These problems include continued rising unemployment, too much household debt, unaffordable home prices, and an entire economy geared to consumption over production.
But that is all changing according to Bill Gross of PIMCO. PIMCO is THE company when it comes to bonds and bond mutual funds. And Bill Gross is perhaps the best bond mutual fund manager ever.
Mr. Gross says that we have entered a world of slower economic growth, a world defined by de-leveraging (paying off debts) and re-regulation. It’s a world he calls the ‘new’ normal. He wrote the following in a recent note to PIMCO clients:
“If you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years.”
What Mr. Gross says makes sense. Bear markets do NOT end quickly – the last bear market lingered for 14 years. And bear markets do not end with stocks still trading at well above their historical norms, currently at nearly 20 times earnings. And at 20 times still declining earnings, I might add. Bear markets also do not end when investor optimism is high. They end when investors are disillusioned and disappointed.
Mr Gross has suggested that investors would need to question many long-held beliefs as they adjust to this new normal. Among them is the idea that risky assets such as stocks are always better for the long run. In the subdued economic climate ahead, risk-taking is simply not going to be as rewarding…
“The world is traveling on a bumpy road to a new normal”… Mohamed El-Erian (PIMCO CEO).
What about you? Are you ready to navigate the new normal? Are you ready to define ROI as Reliability of Income in the new normal? Are you prepared for 27 years of income, beyond age 65? (For a 65yr old couple there is a 40% probability that at least one spouse you will live to age 92) Are your savings and assets positioned so that you will never lose money and never run out of money in retirement? Are your savings and assets protected from inflation risk, so that you will maintain a desirable standard of living as long as you live? Or, do you need help to create reliable, predictable income to guarantee you never run out of money in retirement?
Protected Growth planning takes the complexity and guesswork out of retirement and income planning.
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