Saturday, July 10, 2010

Gloomier Economists And Rosier Bond Picture

Consensus economic forecasts are pretty much worthless but Wall Street needs them to keep herding suckers into proprietary funds and other bad ideas.  A new forecast summary paints a weakening picture

The Blue Chip Economic Indicators survey of private forecasters found analysts increasingly glum about the outlook. They now see the economy expanding just 3.1 percent in 2010, down from 3.3 percent in the June poll.

The forecasters aren't bold enough to push the stagflation button so they settle for a modest restatement of "more of the same."  They ought to read the Shadow Government Statistics primer on GDP; one of its chief findings is that cumulative revisions to the methodology for estimating GDP overstate its annual growth by three percent.  Adjusting the Blue Chip forecast downward using the SGS correction of 3% leaves it at just about zero.  Call it stagflation. 

Bond dealers find the new consensus useful in marketing Treasury debt:

Primary dealers cited the growing consensus that the U.S. economic recovery will be slow and anemic as a driver for demand for three-year notes, even as their yields held at 1.02 percent late on Friday.

Bond strategists are counting on little to no inflation as a prop for demand.  The strategy of "don't fight the Fed" that PIMCO and other large bond managers have followed for the past two years has so far born fruit.