Sun, Mar 14, 2010 page9

• Diviners divided: economists clash

  Mixed economic signals have left the experts divided, sowing confusion about the state of the economy

  • By Bernard Condon / AP
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  If you’re confused about the outlook for the US economy and stocks one year after the market hit bottom, then you’ve got good company — the Wall Street economists and strategists who are supposed to have this all figured out.

  Rarely have the experts seemed so divided about the future.

  We’re either beginning the type of robust recovery that typically follows a deep recession, or we’re on the cusp of another contraction, the dreaded double dip. Prices could climb fast as they did in the US during the 1970s, or fall to devastating effect as they did in Japan during the 1990s.

  

  Stocks? We’re on the verge of a long bull market a la the 1980s.

  Then again, maybe not. To hear some tell it, the present is more like the 1930s, when stocks were viewed less as vehicles to riches and more as a boring source of dividends.

  The collapse we feared last March 9 when the major stock indices fell to their lowest levels since 1997 never did come to pass. But what replaced it is still unnerving — bewilderment.

  The Dow Jones industrial average returned 61 percent during the past year, up 4,019 points to 10,566.20. The Standard & Poor’s 500 returned 68 percent. The NASDAQ did even better, surging 81 percent. Those gains were largely a payoff on a correct bet that corporate profits would surge from their recession lows.

  This year the Dow and S&P 500 have lost momentum, rising 1 percent or less. And the Dow is still 25 percent off its all time high of 14,164.53 set in October 2007.

  Part of the problem in predicting the future lately is that the economic signals that drive the market have been so mixed.

  The US GDP grew at a 5.9 percent annual rate in last year’s final quarter, its best showing in six years. But it’s expected to expand at a slower rate this year.

  Consumer confidence plunged unexpectedly last month. But last Thursday retailers posted their biggest sales increase in more than two years. The so-called fear index, the VIX, which measures expectations of future stock market volatility, is hovering at a one-and-a-half-year low, suggesting calm seas ahead. But new home sales have fallen to their lowest level in nearly five decades.

  The experts can’t even agree on what to make of a single number.

  Pessimists see bad news in good news and optimists vice versa.

  Encouraged by the US Commerce Department report on March 1st showing a surprising surge in consumer spending in January? Not so fast, says David Rosenberg, chief economist at money manager Gluskin Sheff in Toronto.

  He notes in a report that some items bought in great quantities — books, up 2.1 percent and sewing items, up 1.6 percent — suggest a “frugal stay-at-home” or “do-it-yourself” mood among Americans.

  The end is nigh.

  Or you can listen to James Paulsen, the chief strategist at Wells Capital Management in Minneapolis.

  Not even high unemployment can get this man down. His interpretation of the near double-digit unemployment rate: All the more reason to buy shares.

  In a report looking back over the past half century he notes that periods of high unemployment rates — greater than 6.6 percent — have been great for stocks, which have generated average annual returns of 20 percent. One reason, he says, is that high unemployment often presages big recoveries, and investors drive the market up in anticipation of the recovery.

  Of course, you can find Wall Street soothsayers staking out extreme positions in any era. But the hunt is perhaps never so easy as in the aftermath of a deep recession.

  One reason is the shock of the downturn feeds fears that the natural corrective forces of the economy won’t kick in. Barclays Capital economist Dean Maki calls it the “This Time Is Different” school of thought. He says such worries were rife after the two recessions of the early 1980s. Indeed, old-timers may recall some investors expected a “triple dip,” sidelining them during the start of one of the greatest bull markets in history.

  Maki is not mincing words about his view on the recovery today.

  The title of one of his reports: “This Time Is Not Different.” He predicts the US economy will grow by 3.6 percent this year, a percentage point higher than the average estimate.

  Seth Glickenhaus, who worked on Wall Street as a trader in the Great Depression, calls the optimist-pessimist divide now the “big gulf.” For his part, the 95-year-old Glickenhaus, who still oversees US$1 billion in assets, is siding with the pessimists. He thinks the Dow Jones industrial average will flat-line, trading no higher than 11,000 for at least another 5 years.

  One reason he’s so glum: The unemployment picture is actually a lot worse than the widely cited headline number suggests because many people have stopped looking for work and aren’t counted. Last Friday, the Labor Department reported unemployment held at 9.7 percent in February. A broader measure that includes frustrated part-timers and other discouraged workers was 16.8 percent.

  Glickenhaus likens Wall Street optimists to the guys he used to beat in bridge games as a student at Harvard in the early 1930s.

  “They were great scholars but not necessarily bright,” he says.

  His winnings “paid all my tuition, though it wasn’t much back then.” The professional bulls today, he says, are “just stupid.” But money manager Richard Bernstein, the former Merrill Lynch strategist who created a stir years ago with bearish reports, says he’s turned bullish on stocks now — though it hasn’t been easy.

  “People who thought I was so insightful as a bear think I’m an idiot,” he says.

  “Hopefully, I’m still a likable guy,” he adds, wistfully.

  Bernstein says he’s optimistic because much of Obama’s US$787 billion stimulus plan passed last year has yet to be spent and that means a big boost to growth is still to come.

  He also notes that a reliable predictor of a strong recovery — a big gap between yields on short and long-term bonds — is at an historical high.

  But perhaps the best reason is also the quirkiest.

  While at Merrill, he came up with something called the “sell-side indicator.” It tells you whether to buy or sell stocks based on changes by Wall Street strategists in their recommended allocations.

  The quirky part: Bernstein discovered that strategists were wrong on stocks so often that it paid to do the opposite, that is, buy when they’re selling and vice versa.

  Right now, he says they’re underweight stocks, on average, or telling people to sell. So he thinks you should buy.

  Or maybe the real takeaway here is to just ignore the professionals and do what you think is right — if amid the data you can figure that out.
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