Tuesday, August 24, 2010

The Era of New Normal

It has been 6 years since Goldman sachs chief economist coined the term BRICs which refers the growing economic power houses Brazil,Russia,India and China.This term is still is widely popular and used by many when talking about export,GDP,stocks etc.More about BRIC definition

Off late the market is buzzed with new word "New Normal".

More than two years after the start of the financial crisis, markets and economies are showing signs of recovery, yet the many factors affecting them remain complex and the outlook is still uncertain. PIMCO calls this the New Normal,a world in which growth prospects may be lower and long-held assumptions about portfolio allocations are being challenged

They call this is as new normal then that means there should be a old normal also right.when did it start?
It was a period characterized by declining interest rates beginning around 1982, a transition to low inflation beginning in the late 70s, accelerated use of financial leverage, increasingly complex financial innovation and loose regulation.    

 So what are effects of it ?
All of this led to a period of reliable growth of around 6%–7% nominal GDP,this  growth led to appreciation of most assets: bonds, stocks, real estate and commodities. The key to this asset appreciation was, of course, financial leverage, but also operational leverage. In an environment of consistent growth companies can gear their plants, equipment and human resources to take advantage of that predictability in order to produce returns and return on equity. That was the old normal.
what is New Normal?

The new scenario has a number of implications for both growth and investment. For instance, we expect nominal GDP growth rates to trend lower in the New Normal, probably around 3%–4%. And because of the financial and operational deleveraging we are seeing, returns on assets will likely be half of what they were during the previous 10–20 years. And the deleveraging, re regulation and de-globalisation that will weigh on growth is likely to be the new model in the foreseeable future.

More can be found at this location:

Talks about housing bubble and its implications on economy as a whole'The New Normal' for business

The era of cheap credit, which was the fuel of the economic growth engine, is definitely behind us. The shadow banking system that helped sustain it has collapsed, and quite rightly regulators are looking at ways to shut that door for good.

Therefore investors should not view this world by comparing with the conditions in past and not to expect the similar kind of run in stocks,bonds,real estate etc ..

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