December 21, 2010
After the events last spring – the BP oil spill, increased deleveraging, and the sovereign debt crisis in Europe – the economy was suffering, said Ed Hyman, CEO the of NY-based consulting firm ISI Group. He spoke at GaveKal’s winter seminar in New York City last week.
“Reflecting on the things mentioned, the stock market began to go down, and with it, the economy,” he told seminar participants. “It looked like we lost.” The country appeared well down the path once followed by Japan – years of stagnant conditions in the wake of crisis.
What a difference six months can make. Despite that worrisome outlook earlier this year, Hyman provided an upbeat forecast of the US economy, arguing that we are in the midst of an economic recovery that will lead to expansion. We are demonstrating that we are not Japan, he said. Instead, Hyman predicted a quick recovery in the first quarter, with an increase in GDP, decrease in unemployment, rising bond yields, and increased S&P 500 earnings.
“I think this is a very special time,” said Hyman, explaining that two major factors are at work simultaneously that will have a positive effect on the economy. First, he pointed to quantitative easing, arguing that the success of QE2 can be measured in one way – by an increase in bond rates. Unlike other economists, who argue that success is measured by a decrease in bond rates, Hyman said rising bond rates point to to the policy’s initial success. When QE1 was instituted last year, Hyman pointed out, bond yields increased from 2.5% to 4% in 12 weeks. “I know it is counterintuitive,” said Hyman, “but as the market goes up and people realize the economy is going to get better, the yields go up. They just don’t go up as much as they otherwise would if not for QE.”
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