This is the second article in a two-part series about Camp Kotok, a yearly gathering of economists and financial professionals organized by Cumberland Advisors Chairman and Chief Investment Officer David Kotok. Click here to read the first part.
There was plenty of pessimism at Camp Kotok this year about the direction of U.S. leadership both at home and abroad. But while the gathering's namesake sees ample cause for concern, he also sees some reasons for optimism.
"Risk is rising," David Kotok said in an Aug. 6 interview while waiting for smallmouth bass to bite. The conversation took place toward the end of a long weekend at Leen's Lodge in rural Maine, where Kotok had invited several dozen economists, investment professionals and others to fish with him and, as he puts it half-jokingly, "solve all the world's problems."
International problems abound, and Kotok said he cannot think of another period of such chaos in Washington in modern history. He sees a narrative unfolding where economists and market participants, accustomed to operating in a "world of numeracy," are at a loss to cope.
Most attendees surveyed on Aug. 3 indicated that U.S. leadership in the world has weakened in the past year. The group's political views are diverse, and various people made it clear that they saw weak U.S. foreign policy, executive overreach and congressional dysfunction long before Donald Trump became president.
Fierce, yet friendly, political debates sprang up all weekend. There was still post-game analysis of the U.S. presidential election, and various people lamented the choice between two U.S. presidential candidates whom they considered the worst in history.
But Kotok and some others took comfort in the recent actions of one of Maine's senators. Republican Susan Collins, who visited the group on Friday evening, recently cast one of the votes that downed her party's controversial healthcare bill.
Sen. Susan Collins, R-Maine (center), with David Kotok and Sharon Prizant of Cumberland Advisors
The vast majority of Camp Kotok attendees do not expect to see healthcare or tax reform in 2017. But Collins expressed more optimism, despite a daunting to-do list facing Congress. She has participated in bipartisan discussions about healthcare, with three meetings of Democrats and Republicans happening recently.
Collins and her audience at Leen's Lodge could at least agree on one thing. Loud applause broke out in the dining hall when the senator noted that, had she been president, she would have tackled infrastructure first, followed by tax reform and then healthcare.
Trump missed low hanging economic fruit when he did not tackle infrastructure first, said economic consultant and former Dallas Fed adviser Danielle DiMartino Booth. Others agreed that infrastructure could have been a much easier and more productive path than the one taken with healthcare.
Several Camp Kotok attendees thanked Collins for her healthcare vote, though some were less impressed. Kotok for his part called her a heroine for putting her conscience and constituents before her political party. Her action gave him hope that other politicians can do the same.
Recession and correction
While Congress and the Fed wrestle with policy issues in Washington, questions about the next recession and the likelihood of a market correction were inevitable at Camp Kotok.
The average expectation of the 27 attendees who completed an online survey in the days surrounding the event is for the S&P 500 to be at 2,416 on July 31, 2018, down slightly from its recent highs. The lowest and highest estimates were 1,800 and 2,718, respectively. KPMG Chief Economist Constance Hunter said that if legislators accomplish even "a mild form of tax reform" and some repatriation of foreign assets, it might be possible to keep the stock market rally going until the midterm elections in 2018.
Like many economists, Kotok would be looking for some sort of catalyst or shock to the system to spur a recession, rather than just the passage of time amid this unusually lengthy period of U.S. economic growth. He said a market correction could do this, depending on its magnitude.
Cumberland Advisors Vice Chairman and Chief Monetary Economist Bob Eisenbeis sees risk in low- or no-down payment mortgages and subprime auto loans, saying their systemic interconnectedness and derivative footprints are unclear. DiMartino Booth said credit has already turned, sounding a note of caution on consumer credit, commercial real estate, the potential flightiness of foreign money in U.S. real estate and bank commercial real estate exposure.
"I don't see the credit cycle turning," said Hunter. Barring the "wild card" of a productivity surge, she anticipates instead a business cycle recession, probably in 2019, "where labor shortages cause price increases, and those price increases cause a fall-off in demand."
The next recession is likely to begin in 2019, according to more than a third of attendees surveyed online. The remaining responses were almost evenly split between 2018 and 2020 or later. Stuart Hoffman, a senior economic adviser at PNC Financial Services Group, sees some cracks in subprime auto and the auto industry generally, but is not worried about a recession right now.
"History would tell you it's overdue, but at this point I don't see the signs of it," he said.