Bill Gross: New Normal is here to stayDecember 4, 2012: 12:25 PM ET
The fiscal cliff may be the biggest short-term threat for the market, but there are even scarier problems to worry about, according to Pimco chief investment strategist Bill Gross.
In his latest letter to investors, posted online Tuesday, Gross outlines the long-term challenges facing the U.S economy and lists his "picks and pans" for investors operating in the so-called New Normal.
The New Normal, a term made famous by Pimco CEO Mohamed El-Erian in the wake of the financial crisis, is characterized by sluggish economic growth of about 2% in the United States.
Gross warns that things could get even worse if policymakers cannot resolve the "structural headwinds" facing the U.S. economy.
They include some familiar concerns, such as America's unsustainable debts and the nation's aging population. But there are other things that keep the Bond King awake at night, including the waning benefits of globalization and the detrimental effects of technology.
Related: What to expect for the economy in 2013
Globalization, which helped drive the global economy by unlocking consumer demand in China and other emerging markets, may have run its course, according to Gross.
"Is it any wonder that markets now move up or down as much on the basis of policy changes coming out of China as opposed to the U.S. or Euroland?" he writes. "If China and the accompanying benefits of globalization slow, so too may developed economy growth rates."
Meanwhile, the explosion of new technology in recent years has also helped power the global economy, but Gross warns that "it has its shady side."
"In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor," writes Gross.
As evidence, Gross cites a recent MIT study that he says "affirmed that workers are losing the race against the machine."
In this brave new world, Gross sees unemployment remaining stubbornly high as workers displaced by "the machine" struggle to reenter the workforce.
"Technology may be leading to slower, not faster economic growth despite its productive benefits," he writes.
Gross acknowledges that these trends may be offset by "positive thrusts," including the possibility of America becoming energy independent, thanks to cheap natural gas, and a burgeoning rebound in the housing market.
Given the structural challenges facing the U.S. economy, Gross recommends investments that will benefit in an environment of slow growth and efforts by central banks to stimulate activity.
Gross's list of "picks and pans":
Commodities like oil and gold
U.S. inflation-protected bonds
High-quality municipal bonds
Non-dollar emerging market stocks
Long-dated developed-country bonds in the U.S., U.K. and Germany
Financial stocks of banks and insurance companies