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Pimco's Bill Gross 28th May 2009 (apologies If Posted Already)

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Pimco's Gross: Boom Times Are Over

Sam Mamudi

MarketWatch CHICAGO -- Bill Gross, co-chief investment officer of bond mutual-fund giant Pimco, on Thursday offered investors a sobering market outlook in which he sees lower returns, decreased U.S. growth and the loss of the dollar's status as the world's reserve currency.

In a speech delivered to advisers and investment managers at the Morningstar Investment Conference, Gross outlined what Pimco colleague Mohamed El-Erian has termed the "New Normal."

In a world of more regulation, private-sector deleveraging and less consumption, "it's hard for [Pimco] to imagine" the Dow Jones Industrial Average ($INDU) climbing back to 14,000 or home prices returning to 2006 levels, Gross said.

"Growth will be stunted," he said. "It will be a different type of world and we have to get used to that."

The U.S. economy will grow at between 1% and 2% a year rather than 2% to 3% a year for the next three to five years at least, Gross said. "That will make a significant difference for corporate profit growth," he said.

Moreover, unemployment will hover around 7% to 8% rather than the recently typical 4% to 5%, he added, and the higher rate would be around "for a long time to come."

Gross added that inflation would also start to accelerate in about three to five years' time.

New questions

This new economic climate should prompt investors to question many previously held assumptions -- especially about whether stocks will outperform bonds, and what this means for their portfolios. Figures show that over certain time cycles, bonds have outperformed stocks.

Gross also said that corporate America will have to adapt to no longer being the focus of government policy. Wage earners will claim policy-makers' attentions, he said, and gave the looming resolution of General Motors Corp. in favor of its union as an example of the new environment.

"Whether or not you like it, whether or not you endorse it, get used to this," Gross told the audience.

In light of this new reality, investors should look for stable income from their investments, rather than reaching for returns.

"This is not a bond thing," he said. "Companies like Procter & Gamble (PG: 53.351, n.a., n.a.%) and Coca Cola Co. (KO: 49, n.a., n.a.%) are good, stable companies."

Gross also said, with certainty, that the dollar will lose its reserve status. "We simply have too much debt," he said.

To be ready for that day, investors should invest outside the U.S., in areas that will grow. In particular, he named Brazil, India and China, pointing out that consumption in China is 35% of GDP compared to 70% in the U.S.

"That shows it has huge growth potential," Gross said.

Edited by AvidFan

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