Bill Gross of PIMCO recently released his February 2010 Outlook.  The following are some of his thoughts regarding the current financial and economic situation:

(1)  Despite the fact that some corporations are willing to start increasing investments and risk due to (a) steep yield curves and (b) repaired balance sheets resulting from government assistance, consumers are in the early stages of deleveraging.  At present, credit cards are maxed out, nearly 25% of homeowners owe more on their mortgages than the value of their homes; and this situation will remain as long as unemployment and underemployment remain between 10% to 20% worldwide.

(2) Gross believes, along with others at PIMCO, that the economy is in a new era of re-regulation and deleveraging where past financial and economic models may no longer be relevant.

(3) Gross highlights a few conclusions from the Carmen Reinhart and Kenneth Rogoff book This Time is Different: Eight Centuries of Financial Folly that he believes may create some understanding of the current environment.  These conclusions are as follows: (a) Historically, banking crises result in a near doubling of the public debt within in three years of the crises; (b) the average unemployment rate tends to increase nearly seven percentage points and remains elevated for five years; and (c) when a country’s public debt exceeds 90% of GDP its economic growth rate slows by 1%.

(4) Then he highlights some additional conclusions from the recently released Debt and Deleveraging study by McKinsey & Company, which reviews leverage (household, corporate and government debt) and its effects on the whole economy.  These highlighted conclusions are as follows: (a) deleveraging normally occurs two years after the beginning of the crisis and lingers for a period of six to seven years;  (b) 50% of the time the deleveraging results in a reduction of consumer expenditures and can significantly slow GDP growth; (c) a country’s initial gross levels of public and private debt are important to its ability to recover from crisis due to their impact on additional financing capacity (See PIMCO’s Chart 2); and (d) emerging economies usually have better futures than the developed economies.

(5) Considering the above factors, Gross makes the following general investment recommendations:  (a) risk/growth investments should be focused on Asian/developing countries that are less levered and less prone to bubbling, and thus less likely to experience the negative deleveraging aspects of bubble popping; (b) invest where the consumer sector remains in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses can generate additional reserves for years to come (see Household Debt Levels of BRICs & Additional Detail on China);  and (c) for fixed income investing in developed countries, he prefers Canada due to its conservative banks and conservative fiscal budgeting, but also believes Germany, which needs to be watched due to its exposure to the European Union, to be a close alternative.

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