Strawberry Fields Forever? Bill Gross founded PIMCO in 1971.

. PIMCO is the world's largest bond management company with $1.9 trillion in assets. Gross has 43 years of investing experience and understands bonds like few others. He also shares his investment insights publicly on his website and I generally try to keep up. I recently read his December 2012 investment outlook and thought I'd share some of his key points with you. His article is titled Strawberry Fields Forever? and starts by quoting John Lennon of the Beatles Living is easy with eyes closed Misunderstanding all you see I think I know I mean a yes But it's all wrong That is I think I disagree The article goes on to explain why things will be tough in the years ahead no more strawberry fields forever! In his write-up, Gross talks about the structural economic headwinds he sees ahead over the next four years and beyond. He starts out with Lennon's lament - it's getting hard to be someone but it all works out - and wonders why it's so hard these days to be someone who can pay for college, get a well-paying job and retire comfortably. Then Bill answers his own question that the real cause of slow economic growth is structural and hard to easily reverse, and not a cyclical thing that will naturally resolve itself in time. He cites these structural headwinds as: #1) Debt and De-Levering Developed global economies have way too much debt with unsustainable debt loads that simply have to be reduced. This process of whittling down debt will require sacrifices and cutbacks -austerity measures- like cutting down government spending - that will slow the economy and result in less job growth. With debts so high, Gross believes that a Brylcreem approach of a little dabll do ya just isn't going to work. He cites the Euroland and Japan as examples of nations that have done substantially little to rein in their debt and so continue to be mired in some form of recession or depression.

He also cites a paper titled Growth in a Time of Debt where the authors conclude that once a country exceeds a 90% debt-to-GDP ratio, economic growth slows by about 2% for an average period of 10 years. Wow! Here in the U.S., we are at a 100% debt/GDP ratio so its no surprise that our GDP growth is down. Gross believes that part of the solution out of this high debt position is for households to increase their savings and stabilize family balance sheets for the tough decade ahead and he acknowledges that this savings mindset, if it takes hold nationwide, will in itself slow our economy down as consumer spending declines. And he cites a Biblical metaphor of seven years of fat leading to seven years of lean that investors should buckle down for. # 2) Globalization While globalization has historically boosted growth for many developed countries including the U.S., there are now signs that growth in emerging economies might be slowing - and will cut into the caffeine boost theyve been giving to developed economies. Where the fall of the Iron Curtain in the late 1980s and the emergence of capitalistic China at about the same time were significant drivers of global economic growth sort of like adding two billion customers almost overnight a slowdown in emerging economies will cause our economies to slow down through fewer exports. So structural weakness in emerging market growth is causing weaker growth in developed economies like the U.S. # 3) Technology Technology has also been a sizable driver of economic growth and productivity in the last few decades. On the darker side, the developed world used machines and robotics to silently replace humans as a way to counter cheap Asian labor. This, of course, caused a sizable breakdown in employment, especially in many blue collar and some white collar sectors. It's what John Maynard Keynes, speaking about a 100 years back, called the new disease of technological unemployment where jobs are not replaced at the rate that they've been destroyed by technology and automation. In fact, a recent MIT study also confirmed that workers are losing the race against the machine. That old faithful of getting retrained so you can get a higher paying job - He thinks is still valid but perhaps not to the same extent as before. Because technology also lets someone in the Philippines with a computer and an Internet connection compete with his counterpart here in the US at much lower wages. The impact of all this is that while unemployment in the U.S. has been in the 4% range, many economists are quietly saying that there is a new normal of 7%. 3% points in unemployment translates into millions more being unemployed, dependent on handouts, straining our social fabric through even more inequality. # 4) Demographics As Gross puts it, demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. What he means is that when the average age in a society

creeps up, demand for goods and services, and economic growth in turn, slows down. The other reality is that once people stop working, theyre more dependent on their savings, pension and social security and often worry more about healthcare expenses and their budget. They tend to spend less and this structurally slows economic growth. In fact, Japan's been experiencing this demographic destiny for several decades now, down from their wild spending days in the 80s. His Picks and Pans Based on his not-so-rosy outlook, Gross is sticking with investments in commodities like oil and gold, U.S. inflation protected securities, high quality municipal bonds and non-dollar emerging market stocks and shunning long-term bonds issued by countries like the U.S., UK and Germany, high yield bonds and stocks of banks and insurance companies. He believes that the growth from emerging economies will continue to be higher than that of developed countries. Gross says investors should expect annualized bond returns of 3-4% at best and equity returns only a few percentage points higher-say about 5 to 8% percent (thats my estimate) and button down for low economic growth for a long time. I do think staying away from long-term bonds makes sense because interest rates will likely only go up in the years ahead and cause these bonds to lose substantial value. I am not as bearish on financial stocks simply because I think a lot of them are still very beaten down from the crisis in 2009 and many are now trading below book value leading me to conclude that there could be compelling opportunities to buy financial stocks right here in the U.S. Im not so sure I agree with his bullishness on oil or gold because their prices are very difficult to predict and I find it hard to make a case for higher oil prices or higher gold prices in the years ahead but I could be wrong. I think inflation-pegged bonds are a nice safe way of augmenting a well-diversified portfolio and think holding some fraction of your wealth in this asset class is always a good idea. To wrapup I love reading Grosss insights because they supplement my investing viewpoints, and while it is getting hard to be someone lets hope and believe that it all works out in the end, for us and for future generations!

Steve Pomeranz is a Managing Director for United Capital Financial Advisers, LLC, "United Capital", and owner of On The Money. On The Money is not affiliated with United Capital.