No "new normal" as stocks to bonds gain like the roaring ’90s

Pacific Investment Management Co.’s new normal, the prediction that global economic growth and investment returns would tumble, is proving half right.

Bill Gross and Mohamed El-Erian, the co-chief investment officers of the Newport Beach, California-based money management company that oversees $1.9 trillion, correctly foresaw that global expansion would remain sluggish. The world’s economy probably grew 2.2 percent last year, below the 3.2 percent average of the decade before the 2008 financial crisis, according to World Bank data compiled by Bloomberg.

Pimco’s outlook, announced in 2009, was less accurate for financial assets as unprecedented stimulus by central banks drove up demand for stocks and bonds. Fixed-income securities around the world returned more than the average of the past 16 years in 2012 and the value of global equities increased by $6.5 trillion as the MSCI All-Country World Index rose 13.4 percent.

“They’ve underestimated how big the policy response would be and what type of positive impact it would have on financial markets,” said Jay Schwister, a managing director and senior money manager in Milwaukee at Baird Advisors, which oversees $17 billion of bonds. “From the real economy standpoint, the new normal that Pimco forecast is pretty much playing out,” he said Jan. 3 in a telephone interview.

New Normal

Gross, 68, who manages the world’s biggest bond fund, and El-Erian, 54, the firm’s chief executive officer, captured the imagination of investors in an October 2009 report when they forecast a “new normal” for the global economy, where “the deleveraging, re-regulation and de-globalization that will weigh on growth is likely to be the new model in the foreseeable future.” They predicted returns on assets “half of what they were during the previous 10-20 years.”

What they didn’t foresee were the steps central banks would take. Policy makers from the Federal Reserve to the People’s Bank of China pumped more than $6 trillion into the global economy as they bought everything from Treasuries to gilts, boosting their balance sheet assets to $14.09 trillion as of June 2012 from $4.99 trillion in May 2006, according to Bianco Research LLC research cited by Pimco.

At the same time, the central banks kept global interest rates at about record lows, driving investors into riskier assets such as stocks, junk bonds and mortgages.

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