Bill Gross' December Letter: Strawberry Fields Forever « Market Montage

Gross' latest letter sounds like a litany of items we've been discussing for the past 5 years!   A quite thorough discussion of the structural issues facing this country under the PIMCO "new normal" label.  Chief amongst them are the big 4:  (1) Debt/Delevering – which eventually has a half life,  (2) Globalization – no putting the genie back into the bottle, (3) Technology – see globalization, and (4) Demographics.  U.S. leadership is not even asking the questions yet, so there is no way to even apply any solutions (if there are any for some of the tectonic shifts) when everyone just points to 1984 or 1998 and says "it will just go back to that" in vague terms.   But this is no surprise as everything in the country has shifted to short term thinking – take care of the fire on the couch, and don't worry about the house around it.

But whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably? That really was the economic question of the 2012 election towards which very few specifics were applied from either side.

Their words were mum if only because the real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse. While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move “forward” whether it be to the right, the left or dead center.


I want to focus on the technology point he wrote about as it gets far less time in the press than globalization… he makes a similar point to the ethos of "just get more education and your problems go away".  There are only so many jobs for the "more educated".  Just as there are only so many jobs that have been displaced by technology.  (or globalization)  This is the problem we've seen in this recovery which has been mostly low wage service jobs in retail, or bars, or home healthcare.   These are the major issues of our times – the jobs tens of millions domestically (and many more in Europe) used to do are offshore or gone.

Technology has been a boon to productivity and therefore real economic growth, but it has its shady side. In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor. Almost a century ago, Keynes alerted the economic community to a “new disease,” what he called “technological unemployment” where jobs couldn’t be replaced as fast as they were being destroyed by automation.
Recently, Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for “machines” are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren’t enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared “whisper” number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.

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