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By Jason Stipp | 06-24-2010 11:01 AM

Derrick: No Double Dip, But Growth Will Slow

U.S. Global's John Derrick believes that loose monetary policy will prevent another recession, but that we should prepare for middling 1.5% or 2% growth.

Jason Stipp: I'm Jason Stipp for Morningstar. We're reporting from the 2010 Morningstar Investment Conference. And I'm here with John Derrick. He is a Director of Research at U.S. Global. It's a boutique advisory firm, and he has some expertise in government policy, and some municipal bonds and treasuries. He's here to tell us a little bit about his overall take. Then we're going to talk about some individual investment and asset classes.

John, thanks for joining me.

John Derrick: Thank you.

Stipp: First question for you, there's a lot of mixed signals in the market right now, some on the plus side. Corporate earnings have generally been stronger than expectation's recently. We're seeing still some strength in manufacturing, in the recovery, but there are some dark clouds in the horizon as well. We're seeing valuations that have run up quite a bit over the last year. The government debt and sovereign debt has become an issue in Europe and people are wondering about the U.S. debt problem. And we're also concerned about stimulus removal and what does that mean. This has a lot of folks talking about the possibilities for a double dip. Is that something that's on your radar, is it a distinct possibility right now?

Derrick: Sure. I think the double dip scenario is probably unlikely. I think what we have seen though, you are right, earnings have been pretty good. I think the economic recovery has generally been stronger than people had expected, but now, I think, you're getting to the point where those manufacturing indicators that you mentioned, a lot of those are actually starting to show signs of a decelerating rate of change.

You are seeing that also in some of the leading economic indicators as well. They're still up, but at a decelerating rate. And I think that shows you that the economy is at an inflection point. And we've talked about or you mentioned a little bit about some of the just global issues that are going on, particularly the austerity measures that are coming out of Europe, I think, are going to, obviously, be a drag on growth.

We had China just recently revalue their currency modestly, et cetera, but that's going to be a very modest drag on growth in China, but I think it impacts globally. And then here in the States, not so much at a federal level, but more at the state municipal level, you actually have quite a bit of a belt tightening going on as well. Either taxes are going up or budget deficits just have to be cut and reduced, and you have to balance your budget, and those kind of things and that's just going to reduce spending.

Actually, I think that's one area that maybe investors are overlooking right now, is how much austerity measures are going on here in the U.S. And so because of those factors I think over the next several – two or three quarters, I think economic growth actually could disappoint. I don't think a double dip. I don't think that's in the cards really. We have extremely low interest rates, very supportive monetary policy. So, I think a double dip is not likely, but I think you could get 1.5% to 2% growth instead of the 3% growth that a lot of people are expecting.

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