Six Reasons a Noted Economist Is Less Bullish

Doug Kass

This blog post originally appeared on RealMoney Silver on Oct. 4 at 8:12 a.m. EDT.

As we all know, contrary (bearish) thinking has its limitations, as the crowd usually outsmarts the remnants. What is significant, though, is when a previously bullish observer turns more cautious -- or vice versa.

Such was the case this week, as Bear Stearns (BSC Quote) Chief Economist David Malpass grew less bullish on the economy. Malpass has been with the brokerage house for almost 15 years. Prior to his association with the firm, he held a number of economic roles in the Reagan and Bush administrations.

I have always found Malpass to be a force of reason.

Malpass believes that the August credit seizure "marked a major downward inflection point in growth prospects," and, after being a steadfast economic bull, he has lowered both his domestic and non-U.S. economic outlooks.

Despite a strong correlation between rising equities and commodities signaling economic growth, there are several reasons Malpass believes the economy is facing a meaningful slowdown. Here are six of them:

1. The momentum in many asset classes has been a byproduct of prolonged excess liquidity provided by the Fed. Clear signals of a slowdown in global economic growth are needed to break the momentum.

2. A profound change in credit occurred in August, but it typically takes months for the economic effect to be felt. He sees Christmas-order cancellations and reasonably large inventory markdowns surfacing over the next month or so.

3. Credit market changes, like the one experienced in the late summer, are "hard for the markets to evaluate." It takes time. For example, the 1989-1991 credit crunch didn't get priced into stocks until August 1990 (coincident with the recession). Interpreting the late summer seizure will be particularly difficult for markets to analyze, as it was an outgrowth from a "unique period of extremely low real interest rates, dollar weakness and untested price leaps for a broad range of asset classes from commodities and equities to art and luxury homes." Malpass expects a long period of price discovery.



4. Over the short term, the domestic slowdown will be hard to see, owing to the momentum from the second quarter of 2007. As the economy moderates, inflation will increase, serving to pressure forward growth.

5. While tomorrow's employment report will likely show strength from the prior month's weakness, jobless claims will increase in the fourth quarter, and unemployment should breach the 5% level by the second quarter of 2008.

6. The coming slowdown will not be limited to housing, as tighter credit conditions make businesses more circumspect in their decisions. He sees "business spending, hiring, consumption [including high-end consumption], imports and foreign economies" -- Europe shows signs of slowing -- all moderating. Small-business hirings, moderating auto sales and a "second leg down in housing," coupled with a slowdown in commercial real estate activity, are in the offing.

I recognize that there is some conformation bias in my highlighting of Malpass' changing economic views. In psychology, confirmation bias is a tendency to search for or interpret new information in a way that confirms one's preconceptions -- and to avoid information and interpretations that contradict one's belief. Nevertheless, whether an economic bull or bear, Malpass has always been a must-read for me.

In the current climate, it might pay for stock market/economic bulls to consider his new outlook -- perhaps even to counteract one's own tendency to confirm potential biases -- in an attempt to broaden one's own market and economic prism.

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