Welcome to the world of the “new normal.”

Well, not quite yet, as the global economy and financial markets have not returned to anything like normality so far.

But when they do, it will not be normality as we have known it in the prosperous, freewheeling years that led up to and created the preconditions for the global credit crisis and consequent worldwide recession that have since followed.

So argues giant US bond manager Pimco in its latest Secular Outlook projections for what lies ahead over the next few years.

The new normal is Pimco’s phrase du jour, by which it means that when markets and economies settle down after the current recession, it won’t be to the same sort of normal we have been used to in pre-credit crisis years, but something completely different.

A “timid new world,” it might be called.

It is not necessary to want to invest with Pimco or in international bonds for investors to find what the new normal could be like relevant to their own interests.

Sharemarket investors, for example, will find some thought-provoking ideas in PIMCO’s take on where we are headed once out of the current woods.

As Pimco sees it, a combination of forces is in the process of changing the economic and investment climate for years to come.

These forces are codified by the bond manager as DDR: a “self-reinforcing mix” of de-leveraging, de-globalisation, and re-regulation.

DDR marks the end of the previous type of financial markets climate that had become taken for granted as the inevitably convergent destiny of all countries worldwide and ushers in a much more diverse, uncertain, and potentially confusing atmosphere.

Under the new normal,

“The power of the convergence magnet – that mystical Anglo-Saxon model of liberalisation and de-regulation where a prosperous post-industrialisation phase relies on an ever-booming financial system – has weakened.”

“No other model is able to step in at this stage. Accordingly, the partial vacuum will translate into country differentiation relative to what has taken place in the recent past.”

As is implied in reference to the “mystical Anglo-Saxon model,” a far-reaching cultural and geopolitical shift is underway, undermining perhaps irreversibly the free market philosophy that previously prevailed as conventional wisdom about how the global economy could be expected to evolve.

“The result is a prolonged pause, or in some cases, a violent reversal in certain concepts that markets had taken for granted.”

“We referred to it as the demise of the ‘great age’ of private leverage, asset- and credit-based entitlements, self-regulation, policy moderation, and shrinking direct government involvement.”

Goodbye to all that, it seems.

According to the outlook’s analysis of what the new normal will look like,

“For the next 3–5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 [economies, namely the US, Eurozone, and Japan,] and toward the systemically important emerging economies, led by China.

“It is a world where the public sector overstays as a provider of goods that belong in the private sector. (As one of our speakers put it, we have transitioned from a world where the private sector provided public goods to one where the public sector provides private goods.)

“It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps.

“This is particularly consequential in countries, such as the UK and US, where many short-term policy imperatives materially conflict with medium-term ones."

Many commentators have warned that central banks are setting up a coming inflationary spiral, most notably with recent forays into quantitative easing (colloquially known as “printing money”) by the likes of the US Federal Reserve, the Bank of England, and the Bank of Japan.

The outlook indicates that inflation expectations are still far from clear.

“How does inflation behave in the new normal?

“For now, it is hard to project any imminent pickup in inflation given the severity of the collapse in global demand and the resulting large output gap.”

“Private components of global demand will not recover quickly and fully.

“Yet, one should not fixate just on demand when transitioning from a cyclical to a secular mindset. Supply also matters.

Economic growth is likely to remain stunted as productivity is hampered by the continuing unwind of past over-investment.

“In the next few years, the historical pace of growth in potential output will face many headwinds.

“Excessive regulation, higher taxation, and government intervention will be among the factors that will constrain the growth of potential (non-inflationary) output.

“With investment activity subdued for a while, the rate of depletion of the capital stock will rise.

“There is also the loss of endogenous credit factories that, especially in their overheated 2004–07 phases, fooled people into believing that the increase in leverage-based economic activities was sustainable.

For individual economies and economic regions, diverse projections are offered:

"We would look for financial rehabilitation in the US to occur in the context of low growth and an eventual inflationary bias down the road.

"The UK would also be stuck in a low growth world, but with greater vulnerability to domestic and/or external financial instability.

"Core Europe will also grow slowly, influenced by its historical inflation phobia and concerns for the integrity of the European Union.

"Japan will continue to face growth headwinds as its economy is too encumbered by fiscal and demographic issues.

"Emerging economies will bifurcate more clearly into two groups. Those with weak initial conditions will return to the old emerging market paradigm that alternates between austerity and financial instability; those with strong initial conditions will maintain their development breakout phase, albeit not at the torrid pace of recent years."

In other words, when economic rebound occurs, it will not likely take place with a hiss and a roar, but instead will be of the slow, crawling, incremental type characterised as an L-shaped recovery.

From the investment strategy perspective, the following suggestions are made that investors can apply across a wide variety of markets:

Exploiting periodic anomalies associated with clumsy internal and external handoffs

"Favouring credit spreads higher up in the economic and capital structure and, increasingly, on an even more international basis

"Remembering that premiums across risk factors and markets will reflect in a seemingly permanent fashion the bout of disruptions to the sanctity of contracts and the capital structure, as well to the autonomy of key economic institutions

"Positioning for the eventuality of renewed depreciation of the [US] dollar, keeping in mind that the magnitude of depreciation against other currencies could potentially be outpaced by that vis-à-vis real assets [eg., commodities]

"Recognising that the equity risk premium [in sharemarkets] will now reflect a permanently higher threat of subordination [to debt in company capital structure].”

On the Web: www.pimco.com