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


This is the final 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 some of these topics. Information about the respondents can be found at the end of this article.

Today we display the analysts’ opinions on payrolls levels and on risks that investors might be overlooking.

How long do you think it will take for non-farm payrolls to return to pre-recession levels?

Jason DeSena Trennert (Strategas): Unfortunately, we think it’s rather unrealistic for nonfarm payrolls to return to pre-recession levels (about 138 million workers) anytime soon.  It is likely that our consumption binge over the past several decades means that the structural level of unemployment could stay above 8% for quite some time.  That’s the bad news.  The good news is that profits as a percentage of GDP are so high that U.S. companies are probably at a point at which they have to start replacing some of the workers they laid off during the recession.  The bottom line is that we would suspect the unemployment rate to be lower a year from now but it is unlikely to reach pre-recession lows until the American economy fundamentally restructures.

Keith McCullough (Hedgeye Risk Management): When it comes to forecasting the unemployment rate, the only leading indicators that matter in our macro models are weekly consumer sentiment and jobless claims data. Mostly everything else is a concurrent to lagging indicators, at best.

The output of the Fiat Republic’s core marketing message of keeping rates of return on hard earned savings at ZERO percent for “an extended and exceptional” period of time is that there will be many unintended consequences associated with that never proven strategy.

One of the core outputs has been structural unemployment. Currently, over 45% of the unemployed have been looking for a job for 27 weeks or more. This is almost double the percentage of the prior top (early 1980’s)! In order to get unemployment to drop below 9% we’d need to see weekly jobless claims drop, sustainably, into the 370,000-395,000 range for at least 3-6 months.

Connie Everson (Capital Markets Outlook Group): Payroll employment can take years to recover, to our frustration, especially in a sluggish growth environment.   At least there has been some private job growth, and a majority of industry groups are reporting at least some gains, although it is a weak number.  Private sector nonfarm payrolls grew by just 71,000 in July, and a downwardly revised 31,000 in June.

Mike Englund (Action Economics): We see mid-2013 as the likely date that payrolls rise back above the 137,951,000 peak from December of 2007.

Conrad DeQuadros (RDQ Economics): On reasonable estimates of economic growth, nonfarm payrolls are unlikely to return to pre-recession levels for three to four years.

What is the biggest unexpected risk which investors might be overlooking?

Jason DeSena Trennert (Strategas): Frankly, after meeting with our institutional clients around the world, it’s hard to believe there are many risks about which people are not considering – the financial crisis and a 24-hour news cycle has investors worried about the widest range of potential risks than at any time in my 20-year career and perhaps since 1945.  It’s not often that investors would see the odds of both inflation and deflation, for instance, as roughly equal. Having said that, I am watching the recent increases in agricultural commodity prices carefully.  In retrospect, the doubling of rice prices in 2008 and the subsequent food riots in Egypt and Vietnam were important warning signs that China was likely to slow their growth.  At this point, it appears as if the increase in agricultural prices is simply a relative shift in inflation, but if it continues it could present a risk to the global recovery.

Keith McCullough (Hedgeye Risk Management): The biggest bubble that remains across all asset classes globally is that in which professional politicians in Washington live – US Treasuries. Every day that short term US Treasury yields hit record lows is another day closer to the US crossing the proverbial Rubicon of abused privilege.

From here, US Treasury yields either approach those of Japanese Government Bonds or they put in a long term bottom and blast every yield chaser to smithereens. This time the unexpected shouldn’t be unexpected.

Connie Everson (Capital Markets Outlook Group): Austerity measures.  The shift towards austerity will weigh on economic growth.  That’s the opposite of the way bears talk about sovereign debt, a perception that debt is a problem that requires immediate action.  That is our major risk.

Mike Englund (Action Economics): War in the Middle East remains the greatest potential risk to the global economy, given the likely sensitivity of oil prices to any conflict that might close the Persian Gulf, alongside the broader set of risks associated with continued large gains in commodity prices through this cycle led by ongoing rapid growth in the Pacific Basin.  Surging commodity prices remain a sizable drain on U.S. and European household purchasing power, and deteriorating government finances in the face of stalling growth in aggregate demand would provide a bad combination for the global market’s sovereign debt solvency concerns.  In short, it would be difficult for U.S. and European policymakers to steer a successful policy course over the coming years if debt-to-GDP ratios were rising while aggregate demand was suffering from surging commodity prices, whether those price gains are due to a conflict around the Persian Gulf or rising global demand overall.

Conrad DeQuadros (RDQ Economics): Investors are too sanguine about the current stance of monetary policy.  Massive excessive bank reserves may do little harm while the credit multiplier is impaired, but the financial system is healing and we are skeptical that the Fed will reduce monetary accommodation in a timely manner.  Overly accommodative policy fueled the financial crisis of 2008 and we are concerned that monetary policy risks creating another significant imbalance.

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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