Who Has It Right On The Economy and The Markets

There is a fair amount of mass confusion and uncertainty about the intermediate term outlook for the economy and the markets as prognosticators were out in full force last week.

Although there are many areas of debate, the most important is certainly the prospect for entering another full-blown recession, with the factors of the Euro zone crisis, slowing economic growth, and lack of confidence in world leaders being the main talking points.

We thought it might be useful to “review the bidding” as a new week starts and apologize in advance for the length of the piece, but these are important and volatile times.

Here are a few excerpts from some of the various reports, polls and comments which have recently surfaced.

-Economic Cycle Research Institute- This was noted last week on State of the Markets, as the well-respected Institute seems to feel there is no doubt whatsoever that a recession has started already.

“Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.

ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”

Last year, amid the double-dip hysteria, we definitively ruled out an imminent recession based on leading indexes that began to turn up before QE2 was announced. Today, the key is that cyclical weakness is spreading widely from economic indicator to indicator in a telltale recessionary fashion.

Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987.”

-Bloomberg Investor Poll- The quarterly Bloomberg Global Poll of over 1000 investment professionals, analysts and traders who are Bloomberg subscribers was released last week.

“Global investors anticipate Europe’s debt crisis leading to an economic slump, a financial meltdown and social unrest in the next year with 72 percent predicting a country abandoning the euro as a shared currency within five years.

About three-quarters of those questioned this week said the euro-area economy will fall into recession during the next 12 months and 53 percent said turmoil will worsen

especially in the banking sector. Forty percent see the 17-nation currency bloc losing at least one member in the next year.

More than a third of participants say deteriorating European debt will derail the world economy over the next year, with the pessimism highlighting the pressure European policy makers face as they try again to fix their 18-month sovereign crisis.”

-Reuters Equity Strategist Poll- Also released last week, and a bit more optimistic, predicting more short-term volatility in the equity markets but a rebound into year-end 2011 and into 2012.

“World stock markets will recover next year from a nightmarish 2011 that has wiped trillions of dollars off share prices, according to a Reuters poll that showed almost all major stock indexes will end 2011 in the red.

Only the Dow Jones Industrial Average and South Korea's KOSPI are expected to finish the year with gains compared with 2010's closing levels, among the 19 major stock indexes covered by Reuters polls over the last week. The U.S. Standard & Poor's 500 index is expected to finish the year down for the first time in three years as an escalating European debt crisis and stalling U.S. economy lead strategists to slash forecasts in the latest Reuters poll.

Concern about whether the United States may be able to avoid another recession has hit stocks hard over the past few months and strategists polled by Reuters have accordingly taken a hatchet to optimistic forecasts made in June. The S&P 500 index is expected to rise slightly from current levels to 1,250 by year-end, a huge 150-point downgrade from the 1,400 consensus three months ago, according to a median forecast from 47 respondents polled in the past 10 days.”

FICO Survey- While not an economic or equity market survey, this quarter-end poll of financial risk managers is showing increasing bearishness for consumer credit markets.

“U.S. banks have seen delinquency rates declining for credit card borrowers in recent months, but a growing number of bankers believe that trend is going to change. The third-quarter survey of 188 risk management professionals at banks found that almost 40% of respondents predict delinquencies among credit card borrowers will increase, compared with about 30% in the second quarter.

30% expect auto delinquencies to rise, 46% expect mortgage delinquencies to rise. Bankers have been stressing that credit card borrowers have been paying down their balances, and loss rates have improved substantially in recent quarters. A reversal of such trends would be a setback that might spook bank stock investors at a time when revenue growth, rather than credit quality, has moved to the forefront of shareholder attention.”

-FED officials- As reported on State of the Markets, several Fed officials are feeling their options are somewhat limited at this time, but that a double dip recession is not in the cards.

“Recently, Atlanta Fed President Dennis Lockhart has modified his future growth forecast, however, he is still confident enough not to believe we’re headed back down for a double dip. In agreement, Dallas’s Federal Reserve Bank President Richard Fisher admitted to “some forward momentum,” however, added that the economy is closing in on “stall speed.”

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, dismisses calls for a recession in the U.S., saying "I don't see the basis for it."

Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ, says the U.S. faces “slow growth but no recession”.

Jamie Dimon of JPMorgan Chase, according to the Financial Times, launched a tirade early this week at Mark Carney, Bank of Canada governor, in a closed-door meeting in front of more than two dozen bankers and finance officials. “Dimon told Carney that many of the new international capital rules discriminated against US banks and he was going to continue to use the phrase “anti-American”, to describe what is going on.” (If Mr. Dimon was feeling rosy about the outlook, might his behavior be different?).

And Barron’s reported this weekend in one column that “not a single economist with a vote in standard economic surveys is predicting outright recession”, while in the next column pointing out that “one of the global economy’s leading indicators, copper futures, were down -25% in September.”

And we can count on Warren Buffet for his usual his positive and upbeat outlook (although a just little less chipper these days with the “billionaire tax flap”) saying Friday, “he thinks it is very, very unlikely