Economic Purgatory: 2% GDP

Good Monday morning.

Good to be back at my desk, where I will try to ease back into my usual routine after way too much travel the past few months.

Camp Kotok, as it is known, brings together about 40 economists, strategists, fund managers and Fed researchers for a weekend in the woods. Unlike the typical 1,000 person conferences I attend, you really get to spend some quality time with people you mostly know from Soundbite TV^TM. There are not many events where my instinct is to shut up and listen, but this is one of them (my lost my voice was due to the scotch and cigars, not my usual incessant yammering).

The entire event is subject to Chatham House rules — we can use the comments made no background, but we are not permitted to identify the speaker (nor their affiliation) regarding specific quotes. I cannot tell you who got too drunk and danced, who said what about dinner with Alan Greenspan, or which well regarded analyst type, long thought of as a far right conservative, came out of the closet as a liberal.  Such are the rules of the weekend.

I fly from La Guardia to Bangor, hook up with Scott Frew (he drives up from the hedge fund region of Connecticut), and we drive the 2 hours to Leens Lodge. Joining us on the drive this year was Stu Hoffman, Chief Economist of PNC Bank.

Of the many interesting discussions we had on the drive up, the one that is safe for publication (with Stu’s permission) was our GDP conversation. Stu, who I would describe as grudgingly bullish on the economy, takes the other side of John Mauldin’s position regarding the Muddle Through economy.

Stu’s thesis: 2% GDP is unsustainable, and the economy must either break out higher or fade lower. It cannot muddle along at 2% indefinitely.

Why? Stu sums it up thusly: Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP. At 200, the jumbo liner will stall. At 2% GDP, the economy stalls, and will fall into a recession. So the captain of the plane must increase thrust and fly faster, or lose altitude and land.

The economy, according to Stu, behaves the same way. There are virtuous and vicious cycles, and 2% is a form of economic purgatory. It is not encouraging enough to get corporations to ramp up CapEx spending in anticipation of more growth and opportunity. It will not create enough jobs to stimulate domestic retail sales and other beneficial actions.

Hence, the only options are that 2% GDP either stalls, or achieve escape velocity. Stu believes the latter, and is mildly bullish — for both growth, and the markets.

I suspect the economy can also avoid stalling — for now — but that following the 78% SPX pop, market prices mostly reflect the improved economic backdrop. The headwinds of Housing and employment will cap forward economic momentum at 2.5-3% or so. Hence, I expect no double dip, but also a range bound, mediocre stock market.

More on the trip later this week . . .