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John Ryding Provides ‘Sense on Cents’

Posted by Larry Doyle on February 1, 2010 8:54 AM |

For those who missed my interview last evening with Wall Street’s top economist, John Ryding of RDQ Economics, I am happy to provide a synopsis. To listen to the entire show (John comes on 15 minutes into the show), you can access it here.

Feedback from those who listened to the show has been fabulous. John’s career as a central banker, both in the U.K and U.S., and top rated Wall Street economist is beyond compare. He provided a wealth of “sense on cents” to our audience last evening. I thank John for his time and am thrilled to have brought him to Sense on Cents.

Let’s navigate the economic landscape guided by John Ryding. I interpreted John’s views as such:

1. 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. John believes future growth will settle into the 3-3.5% range. That range is not robust after such a severe recession.

2. China: experienced a 10+% growth rate in 2009. The Chinese currency remains formally tied to the U.S. greenback and thus the Chinese economy remains largely linked to our economy. There are definitely signs of a bubble in selected segments of Chinese real estate.

3. Employment: the 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. John does not project unemployment getting to 11%, but it will likely stay in the current range.

John is a proponent of tax cuts to stimulate job growth and capital formation. He believes the policies and proposed legislation, including healthcare, emanating from Washington create too much uncertainty for companies to increase hiring.

John is also a proponent of free trade and does not believe we will see or should see increased protectionism.

4. Federal Reserve: Ben Bernanke, as a student of The Great Depression, 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.  

5. 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.

6. Inflation vs Deflation: John has no concerns about deflation, but real concern about future inflation given the Fed’s policy of easy money. We will have to worry about this later given the problems with growth and labor currently.

7. Interest Rate Outlook: despite the fact that John sees the Fed keeping short term rates low, he sees rates for longer maturity debt moving higher. Why? Massive fiscal deficits. John projects the rate for the 10yr note for U.S. government debt will move to 5% this year. The rate is currently 3.6%.

If John’s call is accurate (and his call in 2009 of this rate getting to 4% was spot on), then I envision 30yr fixed mortgage rates will move to at least 6.5% and more probably 7-7.5%. Why? The Fed’s program to support the mortgage market ends on March 31.

8. The Hair of the Dog: John shared with our audience the Irish cure for a hangover. The idea that a person, or an economy, badly hungover and easing that pain by drinking from the same bottle of booze is likely a precursor to an even worse hangover a few years down the road.

I thank John for providing us real financial and economic wisdom, or dare I say a healthy dose of “sense on cents.”

LD

  • whoisjohngalt

    Larry, a few things do not add up in my opinion. If official unemployment remains about 10% & housing as a drag on the economy, then it is hard to see inflation as a problem even with increase gov’t spending. The following statement bothers me:

    “If John’s call is accurate (and his call in 2009 of this rate getting to 4% was spot on), then I envision 30yr fixed mortgage rates will move to at least 6.5% and more probably 7-7.5%. Why? The Fed’s program to support the mortgage market ends on March 31.”

    The reason that the 10-year note % increased in the last year was not because of inflation, but that a year ago it was a safe haven & that kept the rate low. As the probability for a financial meltdown lessen, the rate went up. OK, so there is too much gov’t spending, but what about asset deflation? People and banks who once thought they were asset rich now are not. This asset deflation is probably much larger than the gov’t increase in spending.

    What you are describing is stagflation, which occurred in the 70’s because OPEC formed and raised oil prices. Do you think this is going to happen again?

    Bottom line in my book, if 30-year treasuries get to 7% you should buy buy buy. Look at utilities now, many offer over 5 to 6% dividends.

    • LD

      Whoisjohngalt,

      The big questions are as follows:

      1. How much liquidity will the Fed have injected into the system?

      2. When and how will the economy recover?

      3. Will the deflationary forces in the economy overpower the attempts by Fed chair Bernanke to counter them by providing all the liquidity?

      4. Is it reasonable to think that we can experience asset deflation and economic stagnation along with inflation due primarily to an excess supply of currency? This phenomena stagflation did occur in the 70s and it was UGLY. You are correct. Do I think it will? Great question. Could it? Almost anything, but mostly bad, can happen in this economy.

      I realize I am putting forth more questions than answers here but I do believe it s important to frame the debate and monitor the economy while looking for answers that are not readily apparent right now given the mask provided by Uncle Sam.

      All good points on your part.






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