Back to normal again? ...Yes and no

Bill Gross is probably one of the most widely respected investment voices out there. Recently, at the 2009 Morningstar Investment Conference he shared his views about the future for financial markets and investment expectations. In his address he warned investors not to think that everything will simply return to the way it was before the crisis. We will have to get used to a different environment with perhaps lower return expectations.

Arijit Dutta of Morningstar reports:

Bill Gross of PIMCO gave a sobering assessment of market prospects during his luncheon keynote address at the 2009 Morningstar Investment Conference on Thursday. Gross effectively discredited the idea that this brutal bear market will give way to a new decade of prosperity for risky assets, a notion that some notable speakers this year have cautiously entertained. Instead, Gross foresees a new investing landscape in which we will have to get used to a permanently downgraded economy and much lower returns on all manner of risk-taking.

Gross is a founder and co-chief investment officer of PIMCO, and his stellar, multi-decade record at the $150 billion PIMCO Total Return fund makes him one of the biggest rainmakers among all money managers in history. His ideas carry a lot of weight indeed, which doesn't make it any easier for most people wedded to the notion of a secular bull market interrupted by periodic setbacks (whom Gross called "children of the bull market") to digest this sketch of a new, lesser-return normal.

In a conversational speech, Gross outlined how we got here and what makes this bear market different. He pointed out the rise of active central banking since the end of the gold standard (as administered within the Bretton Woods system) as the key impetus behind the golden age of financial capitalism and the "great moderation" of macroeconomic risk that we enjoyed for more than two decades.

We got used to the comforts of that era to our own peril, and it directly or indirectly led to massive global imbalances such as the indebtedness of the U.S. consumer and the Western financial system on one side and the bulging foreign exchange coffers of China on the other.

Now, as we go on a long, hard journey to repair our collective balance sheets, Gross sees no quick return to the days of low unemployment, low inflation, and solid economic growth.

Gross suggested that investors would need to question many long-held beliefs as they adjust to this new normal. Among them is the idea that risky assets such as stocks are always better for the long run. In the subdued economic climate ahead, risk-taking is simply not going to be as rewarding, so investors may want to switch down to a more sedate asset allocation mix with more bonds and stable blue chip stocks.

Another key piece of advice from Gross is to raise investments outside the U.S because the dollar is likely to lose its status as the world's reserve currency amid massive levels of government debt.

Finally, Gross predicts a saner, more stewardship-minded money management industry characterized by greater aversion to loss and lower fees.