Finally Growing into “The New Normal”

A few years ago, while deeply entrenched in the financial crisis, the very smart folks at Pimco coined the phrase “The New Normal”. It essentially meant that over a 3-5 year time frame the developed world economies were in for a subpar period of growth due to the inevitable increase in financial regulation, an end to the shadow banking system (aka “financial innovation”), a projected increase in the savings rate, private sector deleveraging, and the prospects for higher taxes and inflation. The phrase became an instant buzz word on Wall Street, and seemed to imply that investors should be very cautious in their investment approach, even though the horse had arguably already left the barn.

I can remember the theory taking hold back in 2009, and at the time I was concerned that investors were taking a sound long-term theory (which I think it is) and using it incorrectly given the cyclical backdrop at the time ("Don’t Mistake the Secular for the Cyclical," and "Is the New Normal a Repeat of Decoupling?"). A few years later, after a giant stock market rally off the bottom, the phrase seems to have fizzled and is rarely uttered on the same financial TV programs that saturated the airwaves with the slogan back in 2009.

But despite the very healthy rally in financial markets and less mention of secular issues that have been masked by the magnitude of the rally, I would contend that the New Normal is just kicking in. You can see it if you look at the jobs market, which is still ailing several years into an expansion. You can see it as maxed out government debt loads are beginning to affect behavior and fiscal policies are becoming more hostile for financial markets. You can see it in some of the regulatory reform that is starting to bite certain financial institutions (ask Goldman Sachs how they feel these days), and lastly you can see it in the enormous reserves that are still trapped in the banking system rather than being turned into new lending and multiplying through the economy. While the buzz of Pimco’s catchy phrase has gone silent recently, I believe that investors should be on the lookout more than ever these days for the New Normal’s impact on the economy and financial markets.