A Tale of Two Wall Streets: Recession vs. Recovery

In my line of work I’m used to opposing opinions, but even I have to admit the “great debate” raging on Wall Street is getting a bit dizzying. You know the one. It’s the Bulls vs. the Bears. It’s the deepening Recession (or Depression as some would say) vs. the painfully slow, but improving, Recovery.

I spent time before Labor Day at the annual Ambrosetti conference, where Europe’s top bankers, financiers, business leaders and economists gather to discuss the financial state of the globe. Given the setting on Lake Como in spectacular northern Italy, you might think the participants would be more relaxed and optimistic. Heck, how bad can it be when the sky is blue and the Barolo is a rich, dark red?

Well, let’s just say the crowd laughed when I had to challenge NYU professor Noriel Roubini to come up with at least one shred of good news after he gave his dark outlook.

The Recession Camp

CNBC.com

Nouriel Roubini

Roubini, the current leading man in a long line of media-anointed “Dr. Dooms”, repeated his current prognosis that the U.S. economy has a 40% chance of entering a second or double-dip recession over the next few months. More distressing perhaps was his declaration that even if the economy doesn’t technically go into recession, it will feel like it anyway. Among the reasons Roubini cited were timid businesses worried about higher costs for healthcare, higher taxes and, in financial services, heightened regulations that impose fresh costs and restrict profitable operations.

And as you know, Roubini is not alone in his stance. I returned to U.S. soil to hear legendary bear Jeremy Grantham say the United States is looking at “seven lean years” of lackluster growth.

Alright, but these guys are known for their bearish outlooks. Are there any non-traditional bears joining their recession camp? You bet. Last week, I caught up with Mario Gabelli, founder and CEO of GAMCO Investors, who said we’ve gone from a 15 to 20 percent probability of a double dip to a 30 percent probability.

Team Painfully Slow, But Recovery Camp

Now before you duck and hide, feeling all may be lost in the coming months, there is another camp giving a slight ray of hope to investors. Last week I spoke with Bob Doll, vice chairman of BlackRock and Wall Street contributor, who described Wall Street’s great debate to me as, “I guess if there are two camps out there, it’s the double dip and the muddle through camp. I can’t find anybody really optimistic. I lean to the muddle through camp. I think that double dips are rare, if ever, and as a result we’re going to muddle through.”

Jean Claude Trichet, president of the European Central Bank, could also be said to fall into the “muddle through” camp. While at the Ambrosetti conference, he told me he was seeing real end-market demand in many parts of Europe, particularly in Germany. Moreover, he said that observation lets him and his fellow Eurobankers focus more on long-term structural reforms than on short-term stimulus.

Perhaps one of the more opportunistic views I’ve heard as of late comes from John Calamos, chief executive officer of Calamos Asset Management and Wall Street contributor. When it came to the question of a double-dip, he said, “Our sense is that we don’t think so, and the valuations are very attractive at current prices. With the spikes of volatility that we’ve seen in here, there are still good opportunities in the market on a valuation basis. We’re watching [the market], but we just don’t think [a double dip] is going to happen.”

The Road Ahead for Investors

Now, which camp has it right? That’s the million-dollar question we all wish we could answer today. But here’s the most likely scenario as I see it: We’re in for another eight weeks of what the markets dislike most: uncertainty. So strap on your seatbelt and get ready for a fair amount of stock market volatility.

Over the next eight weeks we’ll see the elections play out, as well as collect another two months worth of economic data. At that time, we’ll have a better sense which side of the “great debate” has gained the most ground.

Questions? Comments? Write [e-mail]