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Next Year Will Get Even Uglier for US Investors

Robert Holmes|Senior Writer
Wednesday, 2 Nov 2011 | 12:25 PM ET

A "relatively toxic political environment" next year will "get uglier," said Liz Ann Sonders, chief investment strategist at Charles Schwab, during the Schwab Impact 2011 investment advisor conference in San Francisco late Tuesday. "Maybe it'll get prettier. But the first hurdle is the 'super committee.' "

The so-called super committee is the bipartisan congressional group whose goal is to find $1.2 trillion in budget cuts by Thanksgiving Day. The committee was formed in August following the debt-ceiling debate that eventually led to Standard & Poor's cutting the coveted triple-A rating on U.S. debt.

If the super committee doesn't come to an agreement and vote before the Thanksgiving holiday, $1.2 trillion in automatic reductions will be triggered.

"We have to start hearing some semblance of a plan by the first week of November so the Congressional Budget Office can score it in order for a vote to happen on the 23rd," Sonders said. "I continue to think, not because of some inside scoop I have, there is a decent chance for something bigger than $1.2 billion."

Sonders argues that the bipartisan committee would have an easier time coming to an agreement if it attempts to go big rather than tinker around the fringes.

"That's where the infighting starts," she said. "Both sides have come to the table ... understanding that you can't just tackle on the spending side and the math doesn't work purely on the tax side. You need growth but you need these other pillars as well. And yes, you have to address entitlements at some point."

Bill Gross, the founder and co-chief investment officer at Pimco, shared the stage Tuesday with Sonders. He wasn't optimistic that the committee would meaningfully address entitlements.

"I think both parties are clueless in terms of how to get out of this," Gross said. "Entitlements are a long-term problem. Jobs are the near-term problem and we can't pay for entitlements until we put the country back to work again."

Gross argued that both Republicans and Democrats have avoided the critical question of how to create jobs in the U.S. He cites the Obama administration's "ginger policy advancements" and Republicans' continued efforts to balance the budget immediately.

"You don't have to be a Republican or a Democrat," Gross said. "You can create jobs through the private sector with incentives. You can create jobs in the public sector through an infrastructure bank."

Gross said the U.S. needs to work again "not producing paper but producing things," a reference to the notion that financial engineering has replaced manufacturing.

"Both parties are dancing around that, perhaps even clueless, in terms of what needs to be done," he added. "They have very little ideas to get out of this. I think both parties have to take an entirely different approach going forward."

For investors, the super committee is only the first hurdle in the political year ahead.

In January, the primary elections begin for Republican presidential hopefuls, leading up to the presidential election in November.

Sonders argues that through the next year, the outlook for the economy is the new normal, an idea coined by Gross that investors will face a slow growth amid deleveraging.

"I think we're hard-pressed to get much more than about 2 percent growth," Sonders said. "Historically, that has not been a disaster for the equity markets, particularly if it is accompanied by relatively low inflation ."

While that's not quite a Goldilocks scenario, such slow growth may keep inflation in check.

"We've had decent low double-digit returns for equities in the past in that kind of environment," Sonders said.

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