Transitioning into the “New Normal”

Paul McCulley, a managing director at PIMCO, coined the economic slogan “New Normal”. This term signifies a “changing of the guard” for consumers and businesses alike. From 1982 to 2007, the U.S. economy grew at an impressive 6-7% annual clip. This growth was aided by declining and low interest rates. low inflation, financial leverage, and loose government regulation. Consumers also spent beyond their means which produced a negative savings rate that in turn fueled an unsustainable consumption rate. This needed to stop! Many of the investment vehicles that were engineered over this time frame took advantage of the “Old Normal” environment. These are the same financial instruments that were prominent in creating the recent housing and credit bubbles that brought the global markets to a halt roughly one year ago.

As individuals, businesses, and the U.S. government delverage their portfolios and clean up their balance sheets, economic growth will likely be much lower than the previous 25 years. In addition to the banking system not lending as in the past and credit card companies clamping down on credit, the U.S. government will create more regulation in many different industries. This will also aid in this, “New Normal”, slower growth assumption. This deleveraging and reregulation will take some time, and you need to have the right expectations for the future. Gone are the days of 10% plus annualized returns in the stock market. In are the days of increased savings, tougher government regulation, and moderate investment returns. The “New Normal” is here to stay, whether we want it or not. Are you ready?