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Crystal balls, tea leaves and tarot cards

Predicting the future of the economy and the markets is the favorite activity of every economist and financial analyst. The favorite spectator sport for every investor is sitting in on these fortune-telling sessions. With that in mind, the CFA Society of Mississippi held its third-annual CFA Forecast Dinner a couple of weeks ago.

By CFA standards, we are a small group. We have around 50 members, with most holding the Chartered Financial Analyst designation. Bear in mind that the New York Society has 9,000 members. While our group is, relatively, small, the turnout for this dinner was astounding. There were nearly 400 people in attendance. Jackson Country Club is a wonderful setting, with good food and good service all around, but the real reason for people turning out was the four prognosticators seated at the front of the room.

All-star lineup

Kathleen Camilli runs an economic forecasting firm. She is an economist with a master’s degree in French studies. If you put her in a room full of people and asked someone to pick out the economist, they would be able to do it. Her quiet demeanor and unruffled air lend credence to her statements. When she said that 35% of her personal portfolio was invested outside the U.S., she did it in such a deadpan manner that it seemed quite ordinary and conservative. I gasped.

Paul McCulley is a managing director at PIMCO, one of the leading fixed-income groups in the country. His boss is the famous bond investor, Bill Gross. These guys love to talk yield curves. Right now, the buzz is all about the inverted yield curve. Normal curves look like gently upward sloping hills. An inversion takes place when shorter-term rates exceed their longer-term sisters. The curve may look like a hump or ditch going through the hill, or the curve may actually start to look like a downhill slope.

For financial people, reading the yield curve is like reading a set of tarot cards for fortune tellers. First, you observe the signs, then you interpret them. We like to think we’re beyond the hocus-pocus stuff, but, the truth is, it’s still a guessing game. Inverted yield curves are like turning over the death card. They portend the end of the boom, the descent into recession. Not to worry… the doomsayers were not in attendance.

The third panelist was David Spika, an investment strategist with Westwood Holdings Group. He hails from Texas and is thinking big for 2006. Would you expect any less from a Texan?

The last member of our panel was one of our own, Tate Reeves. Tate is the treasurer for the State of Mississippi and had plenty to say about the financial state of the state and the situation on the Coast. It got quiet when he spoke. After all, these issues hit close to home.

So, what do the experts say about the economy?

Taking a breather

The consensus was that the recent slump in the stock market and that famous inverted yield curve do not signal recession. Rather, this appears to be a mid-cycle slowdown, a time for markets to take a breather and regroup.

Camilli predicted 3.8% growth in GDP for 2006 and no sign of recession until 2010. Spika thinks it’s time for large-caps to lead the pack but is afraid everyone else thinks so, too.

The solution? Diversify across asset classes, because we don’t really know which group will outperform. McCulley thinks the yield curve will “reslope.” We’ll go back to normal and continue in a secular upward trend.

Of course, this bit of fortune telling made me cheer.
Four years of good markets… what’s not to love? Of course, Camilli reminded us that the growth we’ll experience will probably be in the single digits.

Drat!

How about those oil prices?

The Texan had plenty to say about this. Spika thinks energy stocks are still a good value. I thought about the price of Exxon and cringed. He claims that current prices factor in a price per barrel of only $40, and that’s why they still look like a bargain. Will current high prices hold? Probably not. Will energy stocks be a good, long-term investment? All three said yes.

What about the global economy?

All were positive about the prospects of economies across the globe. McCulley is even positive about Japan. He said, “They found a customer… China!” He’s not terribly concerned about the trade deficit, since U.S. demand is fueling the activity. Other countries produce the goods that we like to consume. He thinks “capitalism is cool.” The rest of the world is discovering the benefits of our economic system. They are emerging capitalists, anxious to produce their own middle class. Until that happens, the whole world has plenty of room to grow.

In fact, Camilli said “the pie can grow.” If one part of the world starts to take off, that doesn’t mean another will suffer. The pie can get bigger, a strong incentive for us to promote growth around the globe.

Possible problems?

With all this rosy talk, were there any concerns?
Camilli spoke of the astounding number of American millionaires created each day. While this sounds like a good thing, she cautioned about the “bifurcation” in our society. The gap between the very wealthy and the very poor is widening, not a good thing in a democracy. That’s the stuff of revolution.

Which brings me back to Treasurer Reeves.

Coastal counties are still experiencing unemployment in the 20% range, and the return to normal levels is not expected for at least 2 1/2 years. All those homes that Katrina destroyed will take around five years to rebuild. The rest of the world appears ready for take-off, while our own state has suffered one of its biggest setbacks in history.

As with every fortune-telling session, I left excited about the possibilities and apprehensive about the, still, unknowns. I know these four people know their business. I know they have studied the signs for many years. I know they have a track record for forecasting. When all is said and done, though, it’s still just a high-brow bit of hocus-pocus.

But what fun!

Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is nanderson@newper.com, and she’s online at www.newper.com. Her column appears monthly in the Mississippi Business Journal.

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