Newsweek coined and canned the term, "New Economy," back in 1995. The phase lasted about 5 years, after which supply-n-demand reality grounded dotcom euphoria.

What was the "New Economy?" It was a short-lived span where investors offered ridiculous prices for overvalued shares of unprofitable corporations. Internet start-ups supposedly represented a new paradigm for the future - a digital dawning of an age where "Coca Colas" and "WalMarts" no longer commanded attention.

Of course, the "New Economy" merely justified the unjustifiable. Investors paid huge premiums for the notion that ideas mattered more than implementation… that promises mattered more than profits.

Fast forward to the "New Normal." Whether you dissect the words of the PIMCO leaders who ushered in the terminology (i.e., Mohamed El-Erian, Bill Gross), or whether you accept CNBC's "cheat sheet" version, the investing implications are straight-forward; more specifically, all asset classes will yield undersized returns as investors grapple with unique changes in the world economic power structure.

El-Erian postulated that the "New Normal" will last for about 5 years. And this is where you have to credit a guru for recognizing limitations in a human being's power of foresight.

Unfortunately, the financial media has hijacked the "New Normal" to describe a fundamental shift in the future of investing. Under-sized returns are here from this point forward, they'd have you believe.

In other words, you should forget the historical evidence that stocks provide excess gains over bonds during every 20-year rolling period. You should dismiss 30-year rolling return averages for stocks that have never been lower than 8.5% annually. You should ignore the average annualized gains of 9.5% for 30-year periods, including 10.2% that happened to include the Great Depression's period between 1925-1955.

Didn't investors learn anything from following the herd during the so-called New Economy? What about the follow-up, get-rich scheme… the can't miss world of real estate?

David Fuller's view Needless to say, I agree, having commented at some length on this subject recently. All market feeding frenzies surprise with their persistent strength and this move has yet to lose its momentum. However we should recall that stars which burn brightest also burnout quickest.

Here is a related article from Bloomberg: Morgan Stanley Says Government Defaults Inevitable. Note particularly this comment:


"Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view," the report said. "But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take."

Mares didn't identify which nations may default. He once worked at the U.K.'s Debt Management Office and is a former senior vice-president at credit-rating company Moody's Investors Service.

"Note that a double-dip recession would not invalidate this conclusion," Mares' report said. "It would cause yet further damage to the governments' power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually."

The question for many western investors today, not least those in the USA: Would you rather have 'safe' US 10-year Treasuries yielding 2.5% or a comparatively safe share such as AT&T which yields 6.3%? Yes, there are high-yielding junk bonds but they are inevitably more risky in a weak economy. The only bond fund I would consider today would be the New Capital Wealthy Nations Bond Fund, mentioned by Tim Price in my posting on Monday. However I still prefer high-yielding equities.