DOW JONES NEWSWIRES
A part of the U.S. production capacity and labor market will
have to be permanently laid off if nominal gross domestic product
growth can't be kept around 5%, bond-fund king Bill Gross says.
The founder of giant bond-fund manager Pacific Investment
Management Co. said in his monthly newsletter that economic growth
including inflation must grow close to 5% in order for the
economy's balance to be maintained. Figures at the moment is not
only anywhere near that level.
If nominal GDP doesn't grow at 5%, Gross said, "Employment
levels become unsustainable, retail shopping centers unserviceable,
automobile production facilities unprofitable, and the economy
itself heads toward a new normal where unemployment averages 8%
instead of 5%, housing starts total 1.5 instead of 2 million, and
domestic auto sales 12 [million], instead of 16 million annual
units."
For investors, a lower 3% nominal GDP as part of Gross's "new
normal" would mean lower profit growth, permanently higher
unemployment growth and capped consumer-spending growth, as well as
increased involvement of the government, Gross said.
He added high-risk bonds, commercial real estate and
lower-quality municipal bonds could suffer more than just cyclical
defaults if they don't become government supported, but that kind
of government support would "substantially change the character of
the American capitalistic model."
Investors should remember a lower GDP means "haircuts for assets
on the upper end of the risk spectrum, as well as extremely
low-yielding returns for government and government-guaranteed
assets at the bottom end," Gross said.
Pimco is a unit of Munich-based Allianz SE (AZ).
-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353;
kerry.benn@dowjones.com