IN an exclusive presentation for their Jamaican financial sector clients at the Courtleigh hotel yesterday evening, Oppenheimer’s veteran broker, Greg Fisher, argued that the US economy appeared to be in the process of stalling, with a “double dip” contraction increasingly likely.

He observed that in his 28 years as a broker, he had never seen such a divergence of views between the optimistic “stock jocks”, and the major institutional fixed income players (many of whom also see an increasing likelihood of a double dip) on the state of the economy.

Fisher believes that the recent “torrid” rises and falls in the stock market “are not a sign of a bull market”.

Moreover, he argues that for the key housing market, the “double dip” has already started, despite misleading media references, such as on financial channel CNBC, to a 23 per cent “bounce” in new home sales in June.

Fisher notes that this was the worst June on record (a significant 17 per cent below June 2009), and therefore, positive only by comparison with May’s all time record low. Moreover, new home sales for both April and May have also been revised downwards, by 15 per cent and 11 per cent respectively.

Just as importantly, Fisher believes an unemployment “double dip” may have begun, as the budget crisis in the US States forces mass layoffs in local government. In his view, the Federal Government will ultimately be forced to bail out the states, but “the question is how?”. The November election is likely to be a turning point, as the newly elected Governors will have an incentive to admit how broke their states are.

Fisher notes that the large “too big to fail” banks have seen “fantastic” earnings as a result of the government bail out. However, the incorporation of the Volcker rule into the recently passed 4,300 page financial reform bill (named after the former Federal Reserve Chairman, Paul Volcker), will reduce significantly the profitability of the big banks by limiting their non-client related speculative trading activities.

Furthermore, smaller banks are failing at an accelerating rate, with 102 US banks taken over so far this year by the Federal Deposit Insurance Corporation (FDIC), compared with 140 for the whole of 2009.

Fisher notes that US consumer confidence is also continuing to fall, as his mythical everyman, “Johnny Six-Pack”, sees his mortgage go into default, and consequently starts to save every dollar he can.

Whilst he doesn’t see a great depression, Fisher thinks the US could have a Japan style lost decade, irrespective of who is in the White House, and whether or not the US cuts taxes. Fisher believes the Dow is likely to fall to at least 8,000, and that gold will eventually hit $3,000.

In his follow-on presentation, Fisher’s colleague Dr Carl Ross argued that there is still a “risk on” mentality in global credit due to the government bailouts and easy money policies of the developed countries, as “someone always comes to the rescue”.

For example, the Federal government is already helping the states through the “Build America” programme, which provides a Federal guarantee for the issuance of bonds to build infrastructure.

Ross observed that, in contrast to the developed countries, the main economic agents in Latin America and Asia (particularly their governments) have deleveraged over the last 10 to 15 years. Consequently, even if the developed countries of the US and Europe have unusually low growth of between zero and two per cent, structural forces in emerging markets, for example a growing middle class, should allow them to experience “solid growth”. Some key emerging markets are no longer dependent on expansion in the developed countries for growth, and are “like a kid who can now walk on his own”.

Ross argues that, particularly if the Republicans win in November, interest rates are going to be “lower for longer” (actually a consensus view for nearly all the Central Banks of the developed countries), as the US government will start withdrawing fiscal stimulus.

The prospect of prolonged easy money is driving the flow of money into bond markets, in sharp contrast to the stock market, where half of the people think it is going up, and half think it is going down. The only conviction stock market investors have is to buy blue chips with high dividend yields.

Money is flowing into US investment grade corporate bonds and emerging market debt, with investors saying, “give me anything that has a decent story yielding over six per cent.” Although the average spread of emerging market debt over US treasuries is not the lowest ever at 300 basis points (three per cent), absolute emerging market yields are the lowest ever seen, with the 10 year bonds of Panama, Brazil and Peru all at four per cent or below.

As a consequence, the higher yielding international bonds of countries like Jamaica and Belize have rallied dramatically, outperforming their emerging market peers. Ross observes that the situation is starting to remind him of 2006/2007 when investors were clamouring for yield. Whilst in his view, “something always happens in emerging markets to widen the spreads”, he doesn’t see the current yield compression ending for at least another six to 12 months.

One interesting development is increased issuance by Caribbean investment grade names, including Cayman and Bahamas last fall, Bermuda a month and half ago, and Barbados in the last two weeks, all coming at very attractive yields relative to their ratings.

Ross observes that a double dip is still a non-consensus call, and as such would be a “surprise” that could widen spreads. However, this would be more localised or “country specific” than in the past.

Ross observes that the large overseas institutions increased their holdings of Jamaican Eurobonds sharply between January and March of this year, whilst their Jamaican institutions have been merely “nibbling”, seemingly for their retail clients. Overseas investors’ main concern is the large Jamaican Eurobond issue coming due on May 2011, which if resolved would allay any short-term concerns about our creditworthiness. He believes that despite our recent problems in areas, such as crime, international investors are impressed that, particularly recently, the administration appears to be getting the right things done.