ETF Expert

Newsweek coined and canned the term, ”New Economy,” back in 1995. The phase lasted about 5 years, after which supply-n-demand reality grounded dotcom euphoria.

What was the ”New Economy?” It was a short-lived span where investors offered ridiculous prices for overvalued shares of unprofitable corporations. Internet start-ups supposedly represented a new paradigm for the future — a digital dawning of an age where ”Coca Colas” and “WalMarts” no longer commanded attention.

Of course, the “New Economy” merely justified the unjustifiable. Investors paid huge premiums for the notion that ideas mattered more than implementation… that promises mattered more than profits.

Fast forward to the “New Normal.” Whether you dissect the words of the PIMCO leaders who ushered in the terminology (i.e., Mohammed EL-Arian, Bill Gross), or whether you accept CNBC’s “cheat sheet” version, the investing implications are straight-forward; more specifically, all asset classes will yield undersized returns as investors grapple with unique changes in the world economic power structure.

El-Arian postulated that the “New Normal” will last for about 5 years. And this is where you have to credit a guru for recognizing limitations in a human being’s power of foresight.

Unfortunately, the financial media has hijacked the ”New Normal” to describe a fundamental shift in the future of investing. Under-sized returns are here from this point forward, they’d have you believe.

In other words, you should forget the historical evidence that stocks provide excess gains over bonds during every 20-year rolling period. You should dismiss 30-year rolling return averages for stocks that have never been lower than 8.5% annually. You should ignore the average annualized gains of 9.5% for 30-year periods, including 10.2% that happened to include the Great Depression’s period between 1925-1955.

Didn’t investors learn anything from following the herd during the so-called New Economy? What about the follow-up, get-rich scheme… the can’t miss world of real estate?

Apparently, investors have learned to be fearful instead of greedy. Instead, they should have learned to dismiss the permanency of catchy concepts like the “New Normal.”

This may sound like I completely disagree with El-Arian and Bill Gross. Actually, El-Arian limited his time horizon to 5 years. (And some quotes have Gross/El-Arian offering up 3 to 5 years.) My disagreement is with buying-n-holding any particular asset based on a “New Economy” or a “New Normal” since there’s no conceivable way to determine the length of a “phase.”

In fact, my strongest conviction is that the herd has erroneously bought into an idea that things are gonna stink… forever! Indeed, the herd is usually late to arrive at the party and late to leave it.

It follows that we are probably in the latter stages of the bond buying frenzy. If you weren’t a part of the masses that contributed $185 billion into bond funds during the first 7 months of 2010 — a legitimate record — do you really think you’re going to come out ahead now? With intermediate, 10-year treasury bond yields at 2.6%… near the lowest levels in their history?

Here’s a final bit of evidence that I might offer. Bill Gross himself has trimmed his treasury bond holdings by roughly 15% in his flagship Pimco Total Return Fund (PTTDX). Moreover, the king of bond funds, PIMCO, has been leveraging its namesake… not to open up more bond funds… to open up more stock funds! (They’d be wise to to focus on overseas stock assets, but my guess is… that’s the plan already.)

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