I am rather proud of that title. How often do you get to riff on Bill Gross (“the new normal”) and Michael Lewis (The New New Thing) at the same time? As a bonus, I think it actually reflects what we’re seeing as the economy and markets evolve.
The New New Thing, for those too young to remember, is a book about Jim Clark and his role in the new Internet economy. It’s a great read and recalls a time when everything seemed possible, when we were entering a new economy and it really was different this time. Freed from the constraints of geography (and profitability), Internet companies were going to change the world.
The funny thing is he was right. Not in the sense that everyone thought—but see that link to Amazon above? That’s where many people now buy everything. News is on the web. People spend more time in cyberspace than anyone would have thought back around 2000, even if the world hasn’t really changed.
The new normal, as proposed by Gross and Mohamed El-Erian, is marked by slower growth and higher inflation going forward, as well as continued high deficits combined with low interest rates. That, too, has largely proved to be correct. Growth has been slower than in any other postwar recovery. Inflation has shown up in asset prices, food, and energy, even though it hasn’t really made a mark on the indices. Deficits remain high and interest rates low.
It’s interesting to look at how the basically correct predictions of Gross and El-Erian are evolving as policy changes and to consider how they can be right over time, even as the results look very different from what everyone expected. As with the Internet, which is now a part of everyone’s life, people and markets are incorporating the new normal.
One way this is happening is that the workforce participation rate is declining. Older workers, in particular, are looking at the markets, realizing that the old normal isn’t coming back, and deciding to leave the workforce. Younger people are staying in school rather than joining the labor force. As a result, the unemployment rate is coming down faster than expected. Lower interest rates imposed by the Fed have prompted a search for yield, with corporate financing at record low levels, resulting in record profit margins for companies and record stock market levels. Housing prices have declined in unprecedented ways, forcing millions from their homes; private equity funds and investors are buying and renting many of those homes, clearing the market and letting house prices start to rise again.
My point is that the new normal is real, but, as the economy incorporates and adapts to it, the effects aren’t proving as revolutionary as expected. With the Internet, our lives changed in many ways—mostly for the better—but we are still the same people. The new normal has also changed our lives in many ways—mostly for the worse—but we remain the same people. Tomorrow, I’ll discuss specific examples of what I mean by this.