Economic Outlook 2010: John Ryding and Taylor Cottam

Today, John Ryding, who has worked as an economist for both the US and UK central banks, was interviewed with his thoughts on the economy (See http://bit.ly/aGXCOF). In January, I was interviewed by Arjun Rudra, a regular contributor to Seeking Alpha on January 21st. I gave my opinion on the economy, housing, etc. (See http://bit.ly/bY1Och). I also gave my outlook on the economy, stock market and housing in a previous interview (See http://bit.ly/6BNFOJ). Although, I have half the experience of this central bank economist, in many ways, our expectations are identical.

Just how the economy plays out seems to elude the most saavy of experts, but John Ryding is an insider who's seems to come up right more often than not, although prior to his current economic research company which he owns (RDQ Economics), he was chief economist of Bear Stears, which is kind of like being the chief engineer of the Titanic, but take a look at his opinions and you decide if you like them. 

As a point of reference, I have given my expectations for 2010 below: 
  1. Economy:  GDP will grow from between 1.5% and 3%.  Little chance of a double dip recession as the structural adjustments are taking place.  It would take another shock to put us into double dip.  I don't see that happening unless real estate drops 20-40%.
  2. Labor Market:  Unemployment will hover around 10%, probably will not go to 11% but not get to 9% in 2010 either. 
  3. Inflation:   CPI will finally show real inflation as it will hover around 3% by the end of 2010. 
  4. Interest Rates:  Ten Year Treasury will go above 5.5%.
  5. Stock Market:  S&P 500 will drop another 10-20%, due to steepening of the yield curve, sending long term interest rates higher.
  6. Housing/Real Estate:  Aggregate housing prices will drop another 10-20%, due to increases in interest rates which reduces affordability. 
  7. Commodities:  Increase in value both as an inflation hedge and as a short term investment as short term hard assets are the only assets which will maintain, or increase their values. 
You can see below, Mr. Ryding's expectations in the interview that he conducted, and just below, my own comments from previous postings. 

John Ryding: 
4th Quarter GDP: the 5.7% pace reflected in the report from this past Friday is most likely unsustainable. Why? The consumer remains strapped and thus unable to provide the purchasing power necessary to keep growth elevated. Future growth will settle into the 3-3.5% range. That range is not robust after such a severe recession.
...Federal Reserve... will leave the Fed Funds rate at the current 0-.25% range for an extended period given the slack in the economy from depressed labor conditions.

... unemployment rate will likely stay uncomfortably high and may actually inch higher if and when people who have dropped out of the labor pool reenter to seek employment.
... a proponent of tax cuts to stimulate job growth and capital formation.  The policies and proposed legislation, including healthcare, emanating from Washington create too much uncertainty for companies to increase hiring.
...Housing no longer an issue of systemic risk, but will remain a drag on the economy. A lot of the demand for housing was pulled forward by the housing tax credit.
...no concerns about deflation, but real concern about future inflation given the Fed’s policy of easy money.  Fed will likely keep short term rates low, as rates for longer maturity debt moves higher. Why? Massive fiscal deficits. The rate for the 10yr note for U.S. government debt will move to 5% this year. The rate is currently 3.6%.

Taylor Cottam, CFA:
During normal times I would focus on imminent bank profits, as the differential between the 2 and 10 year spot rates are as high as they have ever been, however, asset quality is the key for price discovery for these banks and will ultimately determine where the price rests. There is no profit wad that can plug a 20%+ decline in commercial real estate prices.

Inflation as an increase in the Money supply M2 can be different from the CPI/PPI numbers. The Fed’s extraordinary efforts to increase the money supply have just compensated for the deflation from housing. The question is how much longer will the Federal Reserve keep the spigot open. If the Fed keeps the rates at zero much later than June, which I deem likely, inflation should show up in the CPI numbers. I think right now the danger of inflation is much greater than deflation.

A steep yield curve is associated with stock market rallies. However, a steepening yield curve is associated with its opposite. Just look at what happened to the stock market when it went from flat to where it is today.

Comments

  1. Why the hell should ANYONE value this guy's opinion on anything?

    ReplyDelete
  2. Well, economists are like academics. It is pretty easy to give your opinion on things in the past. Heck, even Krugman can make sense with his punditry of the past.

    Predictions are difficult and even the best ones are right just over 50% of the time. The all time worst economist has to be Duncan Hunter of Fannie Mae. Man that guy was a perma bull on mortgages even way into 2008.

    As far as who would listen to Ryding, he is on CNBC all the time, so I guess a lot of people still follow this dude.

    I just give my Caveats and allow you to decide. Is Ryding right? or is your humble blogger's opinions worth a mess of pottage. Probably not, but it's up for you to decide. Thanks for your comments and be sure to tell your friends about us.

    ReplyDelete

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