SPECIAL ANALYSIS II: Economic Concerns Analyzed by Investment Strategists and Economists


This is the second part of a three-part special analysis on a variety of economy-related concerns. Integrity Research selected a group of five investment strategists and economists from our database of over 3,600 research providers and asked them their opinions on these topics. Information about the respondents can be found at the end of this article.

Today we display the analysts’ opinions on the possibility deflation and on possible regulatory actions. Our next posting will present their opinions on employment and risks that investors might be overlooking.

In a recent WSJ article, some big name investors stated their fears over the possibility of deflation.  What probability do you think there is that deflation will occur in the U.S. in the next 12 months?

Jason DeSena Trennert (Strategas): In the great inflation/deflation debate, we are decidedly on the side of inflation over the long-term, let’s say the next 5 years.  This is simply derivative of our view that inflation is the most politically expedient (and perhaps even the most wise) choice for the policymaker faced with only the stark alternatives of inflation and deflation.  In the next 12 months, our best guess is that disinflation will continue to be the dominant economic force.  There is of course a growing unease at the slow pace of the recovery which may prompt policymakers to do something, anything, to revive the economy.

Keith McCullough (Hedgeye Risk Management): It’s critical to first define “deflation” before we mistake it for disinflation. We look at inflation and deflation both sequentially (month-over-month) and on a year-over-year basis. If prices are up year-over-year, we call that inflation. If prices are down year-over-year, we call that deflation. Seeing disinflation, or a sequential slowdown in year-over-year inflation, is not deflation.

It’s also important to understand that all inflation, like politics, is local. With Fiat Republics mimicking the US fiat currency model around the world, we are going to see long term global inflation perpetuated by the debasement of local currencies. If we send you a chart of long term inflation (going back to the year 1500 in the Reinhart & Rogoff data), the breakout in the median inflation rate for all countries (using a 5-year moving average) is crystal clear.

Altogether, the upshot of our view on “deflation” is that it’s a very newsy and fear-mongering word that insulates the monetarist view of why risk-free rates of return should be ZERO percent. Japanese style deflation is a reality, but it’s been perpetuated by both quantitative easing and local real-estate pricing that needed 15 years to disinflate. US deflation, if it occurs in 2011, will be born out of the bubble in prices that still needs to disinflate.

Connie Everson (Capital Markets Outlook Group): Also a low probability, since we are in the midst of a recovery.

Mike Englund (Action Economics): We believe the probability of real deflation occurring in the US is quite low, say 25%.

Conrad DeQuadros (RDQ Economics): We believe that the risk of deflation is very low.  There has been one episode of deflation in the U.S. in the last 80 years and it was caused by a Fed-engineered, massive contraction in bank reserves.  The Fed currently has monetary policy on a highly accommodative setting and will in all likelihood maintain this policy for a long time (given past performance, probably too long).  Deflation in Japan was allowed to set in as the central bank tightened policy after the bursting of the Nikkei and real estate bubbles, took many years to ease policy, and almost a decade to begin quantitative easing.  The Fed (and other central banks) responded entirely differently to the 2008 financial crisis and the monetary environment is not conducive to deflation.  We believe the parallels with Japan suggested by some commentators are misguided.

What do you believe the likely course of action will be in the coming months for the US central bank and/or the government as a whole?

Jason DeSena Trennert (Strategas): There must be a certain sense in which the Fed must feel as if it’s already given “at the office.”  After all, they have tripled the size of their balance sheet since Bear Stearns failed.  There has been some talk in recent weeks of additional quantitative easing but one wonders about the wisdom of adding gas to the tank when the spark (bank lending) is a mile away.  The Fed was certainly creative in their path toward easing and one might expect them to be more creative in the months to come in their efforts to revive money growth – perhaps raising the Fed Funds rate and increasing the size of the balance sheet at the same time to provide some disincentive for banks to hold excess reserves.  I’d like to see the Administration come up with some supply-side efforts to provide the basis for capital formation – perhaps a tax holiday on repatriated profits – but it doesn’t seem as if the White House is philosophically predisposed to such policy measures. Calls for more fiscal stimulus might be the default for the President but that may be getting more difficult to pull off politically.

Keith McCullough (Hedgeye Risk Management): The most likely course of action in the coming months, in terms of both fiscal and monetary policy, will be CYA in nature. Professional politicians chase polls – and the polls are calling for less of what hasn’t worked – debt and spending.

On the fiscal side, we think the polling momentum will continue to side with the antithesis of “government spending is good.” In the latest WSJ/NBC poll, the only issue that frightens Americans more than terrorism is the deficit. As complex a mathematical issue as the deficit may be, Americans have proven to be proficient in chaos theory. They get the deep simplicity that’s driving this issue. Keynesian style spending needs to be slowed.

In terms of monetary policy, we think that Bernanke will continue to deliver on the promise of his tenure. He is paid to pander to the political winds in Washington and scare the living daylights out of Americans that the alternative to any reasonable rate of return on US savings accounts needs to be prioritized in order to avoid his historical studies of “great depressions.” The only depression we see is in his fiat policy of debauching the US Dollar.

Connie Everson (Capital Markets Outlook Group): We believe short rates will remain low for longer than any of us can imagine.

Mike Englund (Action Economics): Both fiscal and monetary policymakers want to appear fully committed to maximum stimulus for the economy given the magnitude of the downturn, yet both groups are loath to do more beyond the massive stimulus already in the pipeline.  For fiscal policy, the electoral climate has shifted dramatically over the past year with regard to tolerance for further government spending that is not funded by equal-and-offsetting cut-backs in the existing stimulus legislation, leaving Democrats hesitant to do more, and Republican’s comfortable focusing on excessive spending already in the pipeline.  For monetary policymakers, hawks are already concerned about the long-term inflation implications of a highly accommodative policy that will be difficult to fully unwind quickly, and doves would like to avoid split votes on the FOMC, leaving “open mouth policy” as the best route for accommodation over the near term.

Conrad DeQuadros (RDQ Economics): The Fed will most likely keep monetary policy unchanged, and thus very accommodative, until at least the second half of 2011.  We are hopeful that the November elections bring about reform of Federal government spending and taxation, most importantly preventing (or at least delaying) the increase in taxes that will result from letting the 2001 and 2003 tax cuts sunset.

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 atNathan.bragg@integrity-research.com or (646)786-6854.


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