3 different voices about U.S. outlook

Undated handout image of Bruce Kasman. Newton Don / Undated handout image of Bruce Kasman. Newton Don / Photo: Newton Don Photo: Newton Don Image 1 of / 4 Caption Close 3 different voices about U.S. outlook 1 / 4 Back to Gallery

Oil. Gold. Cotton. Brazil.

Those are a few of Byron Wien's favorite things.

Wien is an influential Wall Street strategist who was at Morgan Stanley for two decades before moving to hedge fund Pequot Capital two years ago. He helped draw a crowd of 450 investment analysts to the CFA Society of San Francisco's third annual forecast dinner on Thursday night.

Other speakers included Christopher Ailman, chief investment officer for the $174 billion California State Teachers' Retirement System, and Bruce Kasman, chief economist for JPMorgan Chase.

Wien was the gloomiest of the three.

MBA BY THE BAY: See how an MBA could change your life with SFGATE's interactive directory of Bay Area programs.

Despite interest rate cuts - he sees the federal funds rate dropping below 3 percent this year and possibly below 2 percent - Wien says the United States will suffer a recession as housing remains soft and lenders avoid anyone with a whiff of risk.

He predicts the Standard & Poor's 500 index will drop 10 percent this year, with the first half being rougher than the second. Early last week, when stocks were in a freefall, he recommended buying, but "We're not out of the woods yet," he said.

Nevertheless, he predicts energy and material stocks will hold up well and agricultural commodities will remain strong.

Wien says oil prices will fall to $80 a barrel early in the year but will rise to $115 in the second half and to $125 before long as rising demand - especially from developing countries - outstrips declining production from "tired" wells.

The United States consumes 25 barrels of oil per person per year, compared with 2 barrels per person in China and less than 1 in India. "If 2.5 billion people (in China and India) use a quarter of a barrel more per year," he says, prices have to go up.

He doesn't anticipate a decline in U.S. demand. Even though oil prices have more than tripled since 2000 to around $90 a barrel, "We have no energy policy at all," he says. "We don't want to sacrifice or suffer or even be realistic" about oil consumption.

When Wien asked how many people in the audience had a hybrid car, only a few hands went up.

Asked about the vast deposits of oil in the tar sands in places like Canada and Venezuela, Wien said it costs about $5 billion to extract oil from those fields and people are afraid to make that investment. "If the price (of oil) goes to $60, the guy who made the decision to develop the tar sands gets fired."

He sees the price of gold, now around $900 per ounce, hitting $1,000 as investors worldwide become reluctant to hold paper currencies.

Another asset he likes a lot is cotton.

"The parts of the world that are getting richer are warm," he says. People there want new lightweight clothes made of cotton. Meanwhile, a lot of cotton fields are being converted to corn and soybeans because richer people also want to eat beef and chicken.

Demand for cotton is going up and acreage is going down, Wien said. But when he asked the audience how many people own cotton futures, nobody raised a hand.

Wien also encouraged investors to look outside the United States, which he says is on the verge of becoming "just another country" instead of the world's economic leader.

About 60 percent of Pequot's assets are invested overseas. Wien is cautious about China's overheated stock market but likes Brazil's. Even though it was up 40 percent last year, he still considers it a bargain.

On the political front, Wien predicted that Barack Obama would beat Mitt Romney "in a landslide."

Ailman, of CalSTRS, was more optimistic about the U.S. economy and market.

"I think we are in the middle of the tunnel ... where things look most bleak," he said.

He said that monetary policy (interest rate cuts) and fiscal policy (the proposed tax rebates) "will coalesce in the spring" and stimulate the economy.

The big risk, he says, is that the Internal Revenue Service won't be able to issue checks until May through July.

"A $600 check in someone's pocket in July is a heck of a long time to wait," he says. On the other hand, a delay might be good if people spend their check "three times over" before they get it.

Ailman says stocks seem reasonably priced today. His pension fund has been underweighted in stocks since last summer, but was buying on dips last week. He wants to shift some of the fund's assets out of bonds into stocks, but gradually.

As the year progresses, election rhetoric "may cause Wall Street angst," he says. "We may find ourselves locked into a trading range until that is resolved."

He says technology and health care stocks "will be OK."

Kasman, of JPMorgan Chase, says the United States will avoid a recession this year, but "it will be a close call."

His big fear is that if we do skirt a recession, the Fed's drastic interest rate cuts could cause an inflation problem six to 12 months from now.

Partly in response to a big drop in foreign stock markets on Monday, when the U.S. markets were closed, the Fed early Tuesday slashed the federal funds rate by three-quarters of a percentage point to 3.5 percent. The Fed left the door open for another rate cut - perhaps as much as half a percentage point - at its regular meeting this week.

If the economy is in a recession, "that's a reasonable strategy," Kasman said. If it's not in a recession, the Fed will have to "significantly adjust policy as we shift into 2009," and that could prove highly disruptive to the markets.

Kasman is not so sure the Fed will continue cutting rates after this week, for several reasons.

After the Fed's big rate cut, Société Générale disclosed that a low-level employee engaged in fraudulent trades that cost the French bank $7.2 billion. There is speculation that the bank's unwinding of those trades on Monday and Tuesday might have contributed to the panic that in turn prompted the Fed to take action.

The Fed also was likely motivated by a big jump in the unemployment rate in December - to 5.0 percent from 4.7 percent in November.

Kasman says the January employment report won't come out until after the Federal Open Market Committee meeting on Tuesday and Wednesday. It's likely to be stronger than the December report, he predicts.

He also points out that the committee that meets this week will be different from the one that approved last week's rate cut.

This committee, which sets interest rates, has 12 voting members, four of whom rotate at the first regularly scheduled meeting of the year. (Two permanent positions are vacant.)

As a result of all these factors, Kasman predicts that the open market committee statement that comes out this week might look different from the last one. It might say "that the balance of risk is not so clear-cut on the downside."

After their prepared remarks, the panelists took questions from audience members. One asked them to comment on Fed Chairman Ben Bernanke's performance.

Wien criticized him for not reining in the mortgage and lending business.

He "should have imposed much stricter regulations on the banking system," Wien says. But "when you have a new job, you don't do a lot of courageous things. You build a political base."

One exception, he says, he says, was Paul Volker, who was appointed Fed chairman in 1979 and quickly took painful steps to resolve stagflation.

Ailman said there's a chance that the next U.S. president could appoint a new Fed chairman and blame the economy's woes on Bernanke. "He could be our first one-term chairman," Ailman says.

But Kasman, a former Fed economist, had sympathy for Bernanke. "Greenspan was much slower responding to events," he says.

Asked to speculate on disasters that might strike, Wien said that an accelerated withdrawal of troops from Iraq could create an opening for Iran to move in, causing instability in the Middle East. That would drive oil prices to $200 a barrel and cause U.S. and European recessions.

Ailman said there's always a risk of a terrorist attack or a hedge fund growing broke.