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The Reformed Broker

The double-dip recession has already begun

One expert predicts that government spending will decline, pushing the country into yet another recession

By Joshua M. BrownGuest blogger / September 22, 2011

The U.S. economy may already be in another recession, according to at least one expert.

Rafael Ben-Ari/Newscom/File

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Today I had the pleasure of attending a luncheon at the Ritz-Carlton in NYC to hear one of the great intellects of the investment management business speak - Rob Arnott, founder of Research Affiliates and manager of Pimco's All Asset Fund.

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For those who don't know:

Over his 30-year career, Robert Arnott has endeavored to bridge the worlds of academic theorists and financial markets. His success in doing so has resulted in a reputation as one of the world’s most provocative and respected financial analysts. Rob has pioneered several unconventional portfolio strategies that are now widely applied, including tactical asset allocation, global tactical asset allocation, tax-advantaged equity management, and the Fundamental Index® approach to indexation.

Rob spent some time giving us his views on the current economic picture, the big headwinds we face now and how we should be allocating for what's to come.

I'm jotting these nuggets down here off the dome, normally I take notes before putting out one of these posts but the food was actually decent so my hands were full...

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(Mostly paraphrased except where in quotes)

On the Double Dip Recession: It's already begun, especially when you look at structural GDP (GDP minus deficit spending by the government). It looks like government spending will decline which virtually assures recession.

On Bipolar Markets: "When bonds and stocks disagree, the bond market is usually right."

On Greece and the PIIGS: By some measures of spending money we don't have, we are even bigger pigs here so we shouldn't be calling names. Greece would be wise to "cross the river" sooner than later because the river is getting faster and will only be tougher to cross with every passing day. (editor's note - I think he means default)

On Inflation: It will continue to tick up through the end of the year (in the form of CPI), the rolling three year average inflation rate will start to look scary (5% annual rate) as we start to lose the deflationary 2nd half of 2008 in that rolling three year number. Now imagine 2% Treasury yields and 5% inflation rate and how equities will respond to that.

On the Paradox of Inflation and Recession Co-Existing: So you say that with 10% unemployment and collapsing housing prices that inflation can't truly exist? Go ask the folks in Zimbabwe about their job and housing markets during the country's epic bout with inflation.

On Inflation and Stocks: It turns out that anything above a 4% inflation rate is very harsh for stock market PE ratios, they are very sensitive at that level and compress.

On Inflation Tools: TIPS are very expensive but could go even higher, junk bonds are actually a great inflation hedge - it turns out they outperform TIPS in that regard, REITs could get interesting for inflation hedging but not at today's prices. Commodities are the best bang for your buck in an inflationary environment, they are a 10x reaction, meaning if inflation jumps 2%, commodities as an asset class give you a 20% response.