No-Double-Dip Conventional Wisdom

Chidem Kurdas

In the past week I’ve encountered a number of forecasts – some from hedge funds and one from the research team at Barclays Capital – of higher-than expected economic growth in the next two quarters. Modest but sustained growth is the most likely immediate scenario, is what you hear all around. But unforeseen events are always, well, unforeseen. They are what the accepted wisdom of the day misses.

Hedge funds’ gold purchases in the past year are evidence of relatively benign expectations. People who talk about why they’re buying gold say it’s protection against inflation, expected to be fueled by persistent federal deficits. But if you believed that an imminent downturn is a serious possibility, then you should fear deflation, not inflation.

So while gold is regarded as a safe haven investment and recent heavy demand for it highlights future economic problems in particular related to government spending, it does not suggest that near-term growth will turn negative.

Several global macro managers who keep a close watch on broad economic trends and have done very well in recent months are putting their money on inflation as the bigger risk. They don’t foresee another recession that would tamp down on prices.

Larry Kantor, Barclays Capital’s head of research, says that it would take a very bad new event to cause a double dip—to have a recession, there has to be a collapse like the housing slump, but there is no market to collapse now. His forecast of around 2.5% growth does not suggest a boom but a muted recovery. Incidentally, if growth remains modest, inflation is not likely to rear up, barring excess money creation by the Federal Reserve.

Government actions are a big question, however. Barry Knapp, head of US equity strategy at Barclays, suggests that a win by the Republicans in the coming election may mean more control over the federal budget. That would favor the equity market, which in the past did well when there was fiscal tightening but monetary accommodation.

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