Arguments For And Against This Concept Of A New Normal
The rather popular concept of a "new normal" that sees government deficits hindering aggressive growth prospects in the years to come is something that quite a few influential investors have grabbed on to.
And why not, the "new normal" term has been coined by one of the most successful investment fund companies in the world, PIMCO.
The merits for this new normal concept are quite simply sound and reasonable, however there are some clear indications that slower growth need not translate into lower returns, particularly on stocks.
Arguments That Support One of the biggest reasons why this notion of a "new normal" makes absolute sense is that government deficits and deep-pocket borrowing will indeed put greater strain on the system.
And in many ways, this type of government borrowing to stimulate the economy will not work because consumers, a large driver of the domestic economy, will be (or should be) worried about the sustenance of such growth.
As well, when you really look at what led to the crisis we have created, a lot of it stemmed from the fact that people borrowed more than they could reasonably afford (sort of like what the government is doing now).
In order for salaries and people's expectations to adjust to the "new normal" of proper leverage and affordability, it is believed that it will take time...
lots of time, in fact.
Arguments Against Although it can be reasonably expected that a full recovery will take time (history has shown us that recessions and slowdowns that result from financial crises in fact take considerably longer than "regular" recessions), the idea that there is little opportunity for growth in stocks is false.
In fact, emerging markets have continued to show large growth and many domestic equities like Qualcomm, Boeing, Intel, etc.
, derive a large percentage of their sales from these hot emerging markets.
For these reasons, such companies are enjoying considerably more growth than their pure-domestic counterparts.
As for the fact that interest rates are so low that volatility in bond prices has waned to the point where some managers cannot profit on volatility, also false.
Once volatility returns, it will be on the bearish side.
All investment managers need to do is take a short position with a higher beta.
While this increases risk, many of these investments are founded on higher risk.
Ultimately, the concept of a "new normal" has some merit, but mostly for specific types of investors (e.
g.
long bond investors).
The rest of the investment world like short investors and growth-oriented investors can expect to enjoy continued returns provided the right investments are part of their portfolio.
And why not, the "new normal" term has been coined by one of the most successful investment fund companies in the world, PIMCO.
The merits for this new normal concept are quite simply sound and reasonable, however there are some clear indications that slower growth need not translate into lower returns, particularly on stocks.
Arguments That Support One of the biggest reasons why this notion of a "new normal" makes absolute sense is that government deficits and deep-pocket borrowing will indeed put greater strain on the system.
And in many ways, this type of government borrowing to stimulate the economy will not work because consumers, a large driver of the domestic economy, will be (or should be) worried about the sustenance of such growth.
As well, when you really look at what led to the crisis we have created, a lot of it stemmed from the fact that people borrowed more than they could reasonably afford (sort of like what the government is doing now).
In order for salaries and people's expectations to adjust to the "new normal" of proper leverage and affordability, it is believed that it will take time...
lots of time, in fact.
Arguments Against Although it can be reasonably expected that a full recovery will take time (history has shown us that recessions and slowdowns that result from financial crises in fact take considerably longer than "regular" recessions), the idea that there is little opportunity for growth in stocks is false.
In fact, emerging markets have continued to show large growth and many domestic equities like Qualcomm, Boeing, Intel, etc.
, derive a large percentage of their sales from these hot emerging markets.
For these reasons, such companies are enjoying considerably more growth than their pure-domestic counterparts.
As for the fact that interest rates are so low that volatility in bond prices has waned to the point where some managers cannot profit on volatility, also false.
Once volatility returns, it will be on the bearish side.
All investment managers need to do is take a short position with a higher beta.
While this increases risk, many of these investments are founded on higher risk.
Ultimately, the concept of a "new normal" has some merit, but mostly for specific types of investors (e.
g.
long bond investors).
The rest of the investment world like short investors and growth-oriented investors can expect to enjoy continued returns provided the right investments are part of their portfolio.
Source...