The U.S. economy stands a 31% chance of double-dipping into recession in the next year.
That's the average of the predictions by economists, chief executives, chief investment officers, portfolio managers and chief strategists of some of the world's largest traditional and hedge fund managers. Collectively, their companies manage $7.2 trillion.
Despite an Aug. 27 promise by Federal Reserve Chairman Ben S. Bernanke that the U.S. central bank “will do all that it can” to keep the country's economic recovery on track, negative sentiment ran high among the 16 senior money management executives invited by sister publication Pensions & Investments to give their views.
The vast majority put the odds of a double dip during the next 12 months at 25% or higher. Just 21% said the chance is 20% or less. Two sources declined to make a prediction.
Many investment executives, particularly those from hedge fund firms, declined to be interviewed.
Joseph H. Davis, chief economist and head of the investment strategy group at
The Vanguard Group Inc., said his 35% prediction of a double-dip recession “is uncomfortably high. I've rarely seen the chances of a double dip this high at this stage of a recovery.”
Mr. Davis said Vanguard has warned its clients that the recovery will be protracted — “one of the most drawn out since the 1870s, with the exception of the Great Depression.”
He added: “There is a fraying at the edges of confidence. Confidence is the link between falling and recovery. Business investment is the single most important linchpin for recovery. There are huge corporate profit margins. Cash levels are very high. Businesses have the capability to hire, but the question is whether they have the inclination, given the lack of regulatory clarity.”
Vanguard managed $1.4 trillion as of June 30.
The most bearish prediction — a “way over 50%” chance of a double dip — came from Robert Arnott, chairman of Research Affiliates LLC.
Robert L. Reynolds, president and CEO of Putnam Investments, was the most optimistic, putting the odds at just 10%.
GDP TO FALL
Mr. Arnott is convinced that U.S. gross domestic product will drop and plunge the U.S. back into a recession before the end of the year. “I'm highly disappointed at the high odds of a second recession, which was entirely preventable through policy moves,” he said.
As of June 30, Research Affiliates managed $3 billion internally; another $50 billion was managed by external money managers licensing the firm's investment strategies.
Mr. Reynolds, by contrast, looks at the current environment as a good buying opportunity. The record level of U.S. corporate profits is leading Putnam's equity strategy managers to be “very bullish. Stocks are cheap now, and the market waits for no one.” Still, Mr. Reynolds said, stock portfolios contain a little more cash than usual and are concentrated on higher-quality securities.
On the bond side, Putnam has been reducing durations “because interest rates can only go up from these levels, although that's probably not imminent. Our managers are going for more-high-quality bonds, especially in high yield.”
Putnam managed $115 billion as of July 31.
Philip A. Falcone, CEO and founder of hedge fund firm Harbinger Capital Partners LLC, put the odds of a double dip in the U.S. economy at 25%.
“This may be one of the toughest parlor games around,” Mr. Falcone wrote in an e-mail. “The macro picture in the U.S. feels balanced around a "flatish' GDP rate of change. Unemployment appears to have bottomed at a level that challenges growth and now looks as though it isn't likely to move much in either direction in the short term. Political and regulatory uncertainty is restraining corporate America's appetite to deploy very significant cash balances, muting "private-sector stimulus.'”
Harbinger managed $9 billion in its family of multistrategy hedge funds as of June 30.
Like Mr. Falcone, Mohamed A. El-Erian, CEO of Pacific Investment Management Co. LLC, puts the chance of a second recession at 25% and said it's “a meaningful number.”
The U.S. economy suffered “a weak handoff; it was only partially successful” after the “temporary sources of growth, such as the stimulus package,” spurred growth last year, he said. To avoid another recession, Mr. El-Erian said, “growth has to be fast. Part of the economy's fragility is the speed of the economy. It's at stall speed now, and it needs to move much faster for recovery to really take hold.”
Pimco managed $1.1 trillion as of June 30.
But Robert Doll, vice chairman and chief equity strategist of
BlackRock Inc., predicts a 20% to 25% chance of a double dip, which he said is “not very high.”
BlackRock managed $3.2 trillion as of June 30.
Christine Williamson is a reporter at sister publication Pensions & Investments.
