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Bank of Japan building in Tokyo

Shizuo Kambayashi

Hedgeye Risk Management hosted a conference call with investors on Tuesday afternoon, outlining why they see big problems ahead for the global economy. Among their calls: The S&P 500 could easily slide 7 per cent in a single day; U.S. economic growth won't rise above 1.3 per cent over the next few quarters; and U.S. home prices, as represented by the S&P/Case-Shiller index, could slump another 20 per cent.

Oh, and Japan's economy is about to blow up.

That's right, these folks are bearish. And much of their bearishness is derived from a belief that regulatory interference in the economy is a no-no - whether it comes in the form of ultra-low interest rates, asset purchases by central banks or government stimulus spending.

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As you can probably guess, they're not Keynesians and nor are they fans of Paul Krugman, the New York Times columnist and influential professor at Princeton University. And as for the stock market's rally over the past five weeks - coinciding with investor enthusiasm over the possibility that the U.S. Federal Reserve will attempt to stoke economic growth with another round of quantitative easing - they're not believers.

"It's this academic dogma that we can fix everything by cutting interest rates to zero and infusing stimulus," said Keith McCullough, Hedgeye's chief executive.

He's a keen observer of Japan, where massive debt loads and an over-reliance upon exports is setting up the world's third-largest economy for disaster, and signalling where much of the rest of world is going. Despite the fact that the Nikkei 225 has slumped about 16 per cent since April and isn't far above a recent 28-year low, he believes there's worse to come.

The country's central bank cut its key interest rate to zero on Tuesday and announced more asset purchases to stimulate the economy, triggering a global rally in stocks. But Mr. McCullough argued that the moves didn't work before and won't work this time (listen up, Ben Bernanke) - and zero interest rates leave the country without further ammunition with which to combat the economic slump.

"This is Japan's jugular. It's done, it's over," he said.

At the same time, the export-led economy there is slowing to a halt, due largely to the rising yen. This has left Japanese exporters unable to earn a return.

"This has happened before and it didn't end well," he said, pointing to the 1995 yen rally that contributed to the Asian crisis in 1997. "Don't forget that Japan is the top three economy in the world. When economic growth really slows, and concerns become pervasive, the unintended consequences to the global economy are far-reaching."

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But in case you're concerned that the folks at Hedgeye are all about pessimism and fail to offer solutions, Mr. McCullough has got one for Mr. Krugman and the Fed's Mr. Bernanke (and other supporters of fiscal and monetary stimulus): "Number one, stop what you're doing. Number two, think and start over."

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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