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VOL. 125 | NO. 148 | Monday, August 02, 2010

Villains, Heroes: Observing Fight in Recession Battle

By Andy Meek

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Listening to Sean Dieterle, a portfolio specialist with the prominent PIMCO investment company, give his insight on investing and the economy, it’s hard not to think of the classic villain in a horror flick.

The kind of bad guy or beast the hero thinks he’s finished off, only to be proven wrong when it makes a surprising return and requires something as dramatic as a stake through the heart to finish the job.

In “Investing in the New Normal,” a presentation Dieterle gave at The Racquet Club of Memphis to clients and staff of Atkins Capital Management LLC, the villain appeared in the form of the recession. The hero’s attempts to defeat it were the gobs of cash and emergency programs the federal government has relied on to pull the economy out of the ditch.

Like the well-intentioned but ineffective movie hero, some observers argue early attempts to win the battle against the recession are turning out to be either short-lived or ineffective. And Dieterle had a message for anyone crossing their fingers that more government cash or public sector programs might juice an economy that still seems stuck in the mud: Don’t hold your breath.

“Letting the economy continue in a downward spiral isn’t a good thing, but you can’t continually issue more debt to get yourself out of debt,” said Dieterle, whose employer carries considerable weight among economists and investors.

PIMCO vigorously debates economic issues of the day within its own organization and brings in prominent outside voices like Fed chairman Ben Bernanke to get their views. Mohamed El-Erian, PIMCO’s chief executive, and co-founder Bill Gross also are regularly on TV and in newspapers sharing their pronouncements.

Dieterle shared his idea of “the new normal” in investing the same way Gross frequently defines the idea: that developed countries need to downshift their growth expectations because of de-globalization, de-leveraging and re-regulation.

In other words, countries like the U.S. are rewriting the rulebook for industries like finance and health care. Consumers are keeping their wallets closed, and businesses are stuffing money under the corporate mattress.

In theory, he suggested the U.S.’ economic rescue plan might produce positive results if it unfolded perfectly. Private sector borrowing collapsed, so the government stepped into the breach. It became the lender of last resort.

In that scenario, once the private sector recovers, the government would ideally ratchet down its emergency spending.

Uncertainty over what happens next may be one reason why non-financial companies in the Standard & Poor’s 500 index are sitting on more than $800 billion in cash, a historic record according to recent news reports.

“The reason not to invest cash is that tax, regulations, employee benefit costs and incentive structures are so unclear,” said David Waddell, president and CEO of Waddell & Associates. “Will the new health care bill bloat my already high benefit costs? Will a deteriorating U.S. fiscal situation drag on economic growth and weaken the dollar? Will the government stoke inflation as a way of mitigating its debts?”

All of which is why Dieterle said PIMCO’s outlook for future growth in the U.S. economy is “muted.”

Whereas the country once expected 3 to 4 percent economic growth, “our idea for the new normal GDP growth rate is half of what it used to be, so 1 to 2 percent,” Dieterle told his Memphis audience.

Responding to a question from the audience, he also said deflation – not inflation – is the more immediate concern.

Deflation is a general slump in the price of goods and services, and a downward spiral of deflation can become a black hole for an economy. When prices fall, so can company profits, which has a negative effect on wages and employment.

Coincidentally, one day later, James Bullard – president of the Federal Reserve Bank of St. Louis, a Fed region that encompasses Memphis – warned that the U.S. might be risking getting “enmeshed in a Japanese-style deflationary outcome within the next several years.”

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 32 344 10,222
MORTGAGES 52 452 13,327
FORECLOSURE NOTICES 30 106 2,644
BUILDING PERMITS 0 783 24,307
BANKRUPTCIES 60 359 9,892
BUSINESS LICENSES 23 133 3,736
UTILITY CONNECTIONS 76 595 14,558
MARRIAGE LICENSES 23 104 3,167

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