SPECIAL ANALYSIS: Economic Concerns Analyzed by Investment Strategists and Economists


Integrity Research has noticed a growing number of news articles citing economy-related concerns ranging from deflation possibilities to sagging employment numbers. We wanted to hear the opinions of people who focus on these topics for a living, so we selected a group of five investment strategists and economists from our database of over 3,600 research providers. We asked these experts questions about the US economic and inflation outlook. Their interesting answers will be presented in this space in three groups.

Today we display the analysts’ opinions on the possibility of double-dip recession. Tomorrow, we will present their opinions on the possibility of deflation and on possible regulatory actions. The last group will include their answers on employment and risks that investors might be overlooking.

The five analysts who participated in our discussion on these issues are:  Jason DeSena Trennert, managing partner and chief investment strategist at Strategas; Keith McCullough, CEO at Hedgeye Risk Management; Connie Everson, partner at Capital Markets Outlook Group. Mike Englund, principal director and chief economist at Action Economics; and Conrad Dequadros, founding partner and senior economist at RDQ Economics. Additional information on the respondents can be found at the bottom of this article.

What probability do you attribute to a double-dip recession will occur in the U.S. in the next 12 months?

Jason DeSena Trennert (Strategas): We think the odds are rather low, perhaps about 20%.  There are good reasons to fear a double-dip, but in our view not enough good reasons to make it the “base case.”  Generally speaking, double dips are caused by policy errors (Japan 1997) or deliberate policy choices (US 1982).  I doubt we’re going to choose to “clear the decks” to restructure the economy – the U.S. really doesn’t “do” austerity these days.  Of course, the chances of a policy error (say a VAT tax next year) are not zero but again not likely.

Keith McCullough (Hedgeye Risk Management): On July 1st, as part of a recent report we published, we cut both our Q310 and full year 2011 GDP estimates for the US to 1.7%. At the time, these US economic growth estimates were about ½ the Bloomberg consensus estimate. Now we’re starting to see both the sell-side and the Fed gradually cut their estimates, but not by enough.

A “double-dip”, by our definition, isn’t what our estimates currently imply. That said, the current bias in our estimates remains to the downside and we’d handicap the probability of our going there (calling for 2 consecutive quarters of negative US GDP growth) at 33% in the next 12 months. The probability of seeing at least 1 quarter of negative GDP growth in 2011 is closer to 66%.

In other words, if US Housing prices “double dip” and drop 15-20% from here we’d say the probability of US GDP growth going negative for 2 consecutive quarters will go up from 33% – and quickly.

Connie Everson (Capital Markets Outlook Group): There is a low probability of a double dip.  Economic activity is reverting to a sluggish pace, but this is not the start of a double dip recession.  It’s still a positive growth rate and, prior to  June, the economy was measuring an extremely healthy growth rate.  There are also bright spots in the picture, the manufacturing sector would be one, and euro zone core exporters are another.  They are benefiting from a weaker euro.

Mike Englund (Action Economics):  We see the probability for a double dip recession as being 25%. Inventories reversed course rapidly over the last four quarters from a remarkably deep auto bankruptcy-induced $162 billion real liquidation rate in Q2 of last year to a $76 billion accumulation rate in Q2 of this year.  And, inventory-to-sales (I/S) ratios have bounced in May and June, as the sharp inventory reversal has now left production modestly outpacing sales, and with inventory levels that are actually high relative to the historic secular down-trend in I/S ratios.  Because inventory growth may stall in Q3 and Q4 by enough to potentially push one of these GDP growth rates back into negative territory, given the lean 1.1%-1.3% growth rate for real final sales over the last two quarters, we see at least some risk that the markets will deep the growth path a “W” shaped expansion, or a “double dip.”

Conrad DeQuadros (RDQ Economics): Although there are some signs that the pace of the recovery may have slowed, we believe the risk of a double-dip recession is small.  Recent softer manufacturing data likely reflect a reduction in the impetus from inventories but now capital spending appears to be leading the recovery.  Trends in consumer incomes, business profits and balance sheets, and global growth are inconsistent with a double-dip.  Indeed, domestic final demand was stronger in the second quarter than in any quarter since 2006 Q1, so the recovery has momentum.  We expect that we will continue to see moderate economic growth.

Additional Information About the Respondents (please contact Integrity for more information on any of the providers mentioned below)

Jason DeSena Trennert is a managing partner and chief investment strategist at Strategas. With offices in New York, Washington and Geneva, Strategas Research Partners, LLC is an investment strategy, macro-economic and policy research firm. Strategas’ principals were formerly senior members of ISI’s research team. Strategas’ primary product is geared toward offering investment strategies to buy-side clients. In this regard the strategists interface with the economics and policy groups to project corporate profits, valuations, and style trends. In addition, the firm provides custom research to clients.

Keith McCullough is the CEO at Hedgeye Risk Management. Hedgeye Risk Management LLC (formerly Research Edge) maintains a hedge fund perspective in its research outlook. McCullough who was previously a portfolio manager at Magnetar Capital and Carlyle-Blue Wave, provides daily macro-oriented commentary in a blog format. The firm does not maintain a specific coverage list, focusing on sector coverage instead. McCullough screens from the top down, and has his analysts work on names that fall within their sphere of coverage. The firm has a restricted client business model for “white glove” analyst access, although distribution of research commentary is not restricted.
Keith McCullough runs his research product like an investment portfolio, putting out over a dozen macro “trades” on a typical day. Supported by junior analysts, he posts commentary and recommended transactions (long and short) on a variety of markets and asset classes, including equities, currencies, commodities and credit markets.

Connie Everson is a partner at Capital Markets Outlook Group.  Capital Market Outlook Group is an independent economic strategy firm that specializes in finding leading macro indicators for turning points in the stock and bond markets. The firm caters to clients at investment companies, mutual funds, pension funds, endowments, foundations, insurance companies, and corporate management across North America and Europe. Principals at the firm welcome client contact. CMOG is a two partner strategy firm. CMOG also predicted the start and end of the 2000 stock market peak and 2007 credit crises.

Mike Englund is the principal director and chief economist at Action Economics.  Action Economics, LLC provides independent and objective commentary and analysis of the global economy and central bank developments to support trading decisions in the global fixed income and currency markets.  The partners of Action Economics spearheaded the early innovations of real-time market commentary with the development of MMS International, the industry leader of its time. After managing its award-winning content for over two decades, this team of seasoned economists and analysts has taken real-time market analysis to a new level.  The company’s product contains highly actionable commentary and insights that have raised the standards for the real-time information industry.

Conrad DeQuadros is a founding partner and senior economist at RDQ Economics.  RDQ Economics is an independent global macroeconomic research firm focused on U.S. economic fundamentals and monetary policy. RDQ’s research method takes a classical economic approach and uses monetary principles. This method is used to anticipate changes in the stance of monetary policy and of movements in economic growth and inflation. John Ryding and Conrad DeQuadros are the founders of RDQ Economics, and together have 26 years of experience on Wall Street and 12 years of experience in central banking at the Federal Reserve and the Bank of England.

For more information on any of the respondents or how to contact them, please contact Nathan Bragg at Nathan.bragg@integrity-research.com or (646)786-6854.


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