Bill Gross, the influential investor who runs top bond fund Pimco, said on Wednesday that greed will eventually become the norm again for consumers and investors, but fear continues to rule for now -- a mindset that will result in subdued U.S. economic growth for some time.
Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum, said Gross, the co-chief investment officer of Pacific Investment Management Co.
The evaporation of at least $15 trillion in wealth suffered by American consumers since early 2007 and a U.S. unemployment rate now approaching 10 percent will have an impact on consumption patterns, Gross said in his monthly newsletter to clients, posted on www.pimco.com.
When potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that assumes higher savings and lower consumption.
Under this scenario, Gross, who manages the Pimco Total Return Fund, which has $159 billion in assets, sees a new normal for U.S. economic growth rate closer to 2 percent as opposed to the recent average of 3.5 percent.
There's no magic in that number, and no model to back it up, just a lot of common sense that says this is how people and economic societies behave when stressed and stretched to a near breaking point, he said.
But Gross, whose letters to investors are as famous for their quirky asides and analogies as for their economic and market analysis, said greed isn't just good for the economy but also essential.
He divined upon John Maynard Keynes' famous observation during the Depression -- that much of individual economic behavior is due to animal spirits rather than long-term rational calculations so beloved by economic theorists.
Keynes defined animal spirits as a spontaneous urge to action rather than inaction and a spontaneous optimism and argued that long-term rational calculation could not account for such economic decisions as opening a small business or innovating new software.
In an email response to Reuters expanding on his thoughts on animal spirits, Gross said: But when irrationally exuberant, they can be destructive as opposed to constructive.
In his July newsletter, Gross addressed the destructive events that led to the global financial crisis.
The supersizing of financial leverage and consumer spending in concert with the politicizing of deregulation describes in 15 words our most recent brush with irrational behavior and inefficient markets, he said.
Against the current climate of caution ruling consumers, Gross said the Federal Reserve's short-term policy rates will be kept low for longer than cyclical norms. He said he sees the outlook for stocks, high-yield junk bonds, and commercial and residential real estate as still involving risk.
Investors should favor secure income offered by bonds and stable dividend-paying equities, said Gross, who has said he sees tremendous value in high-quality municipal bonds.
Wednesday, in fact, Pimco launched the Pimco MuniGO Fund, the firm's first mutual fund to offer a portfolio of intermediate maturity general obligation bonds from top-rated municipal issuers, as well as pre-refunded municipal bonds backed by U.S. Treasury and Agency securities.
Pimco oversees roughly $800 billion.
(Editing by Leslie Adler)