The world's greatest investors and economists spent much of Milken dispelling 3 key misconceptions. Here's what they said to set the record straight.

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The world's greatest investors and economists spent much of Milken dispelling 3 key misconceptions. Here's what they said to set the record straight.

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  • The main theme among the top financial minds at the Milken Institute Global Conference was challenging consensus and rejecting popular narratives that have recently gained steam.
  • Those include: a recession is imminent, the Fed's next move will be a rate cut, and inflation will stay low on a permanent basis.
  • Christine Lagarde, Scott Minerd, and Mark Attanasio were among the financial heavyweights to dispute these ideas. Their thoughts, and many more, are provided in detail below.
  • Follow all of Business Insider's coverage of the 2019 Milken Conference here.

By the time the world's foremost financial elite descended upon the Beverly Hilton for the 2019 Milken Institute Global Conference earlier this week, there were a handful of prevailing narratives dominating the landscape.

The first dealt with forecasts for an economic recession. For months, pundits pointed at red flags like an inverted yield curve and sluggish growth as signs of an imminent slowdown.

The second revolved around the Federal Reserve. After years spent laying out and executing a monetary-tightening plan, the central bank pumped the brakes in early 2019.

Investor expectations quickly became so subverted that many pundits said a rate cut was the most likely scenario. President Donald Trump said on Twitter on Tuesday that the economy would "go up like a rocket if we did some lowering of rates."

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And the third focused on inflation - the key pricing metric closely monitored by the Fed. As 2019 progressed, an growing chorus of pundits began openly wondering if inflation would stay low forever. Bloomberg Businessweek ran a cover story entitled "Is Inflation Dead?"

All three narratives were quickly dismissed by those in attendance at Milken.

Read more: 10 of the world's best investing minds shared their biggest fears at Milken - and the lack of consensus is a major red flag of its own

It started immediately with the opening discussion. Moderated by International Monetary Fund chairwoman Christine Lagarde - who challenged the ideas herself during opening remarks - a five-person panel featuring some of the world's smartest financial minds immediately laid seige.

That laid the groundwork for similarly skeptical comments on subsequent panels. By the end of the conference, a clear theme had emerged: challenging the consensus.

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1) Misconception #1: A recession is imminent

Lagarde led the charge right off the bat, stating that fears of a near-term meltdown are vastly overblown. She pointed to the latest quarterly US gross domestic product number, which, at 3.2%, came in almost a full percentage point higher than consensus estimates.

"You have about 70% of the global economy that is slowing, but it's still growing," she said. "We're not expecting a recession. It's certainly not in our baseline."

Lagarde also said the recent GDP number will "certainly lead us to reassess our forecast for growth in the United States."

Perhaps the most optimistic out of anyone was David Hunt, the president and CEO of PGIM, which is one of the world's 10 biggest asset managers. He thinks the US economy is in no serious danger of a recession, and believes it's stronger than most realize.

"There is not a synchronized global slowdown at all," he told Lagarde during his panel. "The US is actually doing very well, and we would argue that it's actually doing better than its long-term potential. So we're rather optimistic."

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Read more: Inside Milken 2019, where Masters of the Universe fret over the economy even as their wealth grows

Nathan Sheets - the chief economist at PGIM - also cited recent economic data as putting to rest the idea of an imminent recession. In addition to the latest GDP print, he pointed to stronger-than-expected consumer confidence data released on Tuesday.

"I think it's important for the Fed to note that the curve inverted," Sheets told Business Insider. "But I also think those circumstances were special and reflected concerns about economic conditions that have improved since."

Lori Heinel - the deputy CIO of State Street Global Advisors - said that, yes, the economy is in the latter part of its current cycle. But she still sees it extending, possibly until 2021 and beyond. To Heinel, the key is the Fed's pivot towards monetary accommodation.

"The fact that the Fed has become much more dovish actually gives us confidence that the cycle extends," she told BI. "You don't typically have recessions in the conditions we have right now - because the Fed is usually one of the reasons you have a recession, because they tighten too quickly."

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To Seema Shah, a global investment strategist at Principal Global Advisors, the key variable is China. And judging by how conditions are presently, she says there's reason for optimism.

"We don't see a recession in the near future," she told BI. "Even if there's a slowdown, it definitely won't drop into dangerous territory. One of the main reasons for that is the US is being lifted by Chinese growth. We strongly believe in the Chinese economy coming through."

Even people who have been bracing for a recession for years have changed their tune. That includes Mark Attanasio, the cofounder and managing partner of Crescent Capital, who also owns the Milwaukee Brewers.

"We've been concerned since 2014 that the cycle is coming to an end," he said on a panel about global capital markets. "Yet here we are, in 2019, and we feel we still have at least another year to go."

2) Misconception #2: The Fed's next move will be an interest-rate cut

"The question of the hour: Is the Fed going to cut rates just days after we got 3.2% GDP?" Lagarde asked her panel of experts.

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What followed was a cavalcade of skepticism that extended into other panels and private interviews. The takeaway was clear: most everyone thinks a rate cut is a far-flung outcome - even for the more moderate folks who expect the Fed to stay on hold indefinitely.

Ronald O'Hanley, the president and CEO of State Street, was one of the first to throw cold water on the idea of a rate cut.

"The data is so overwhelmingly positive in the US that it would be very hard to cut rates at this point," he said. "I personally don't believe that the Fed will do it."

His colleague Heinel agreed.

"Our macro view is that that US is bottoming out and starting to gain momentum again," she told BI. "That may precipitate the need for a rate hike."

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Read more: The CEO of SoftBank Investment Advisers, who runs the world's biggest venture fund, offers an inside look at how he picks which companies to lavish with billions of capital

Others who fielded the question were more keenly focused on how inflation will dictate the Fed's next move. That included Scott Minerd, the global CIO for Guggenheim Investments.

"By the time we get to December, we're going to see another pickup in inflationary pressure, which will cause the Federal Reserve to have to act to increase rates again," he said. "Even though the economy is strong, it's probably a good time to lighten up on risk assets and prepare for possible rate hikes."

Shah also thinks misinformed rate-cut expectations are stemming from an incorrect understanding of the inflationary landscape.

"I feel like inflation will eventually come back, so the discussion over whether the Fed is going to cut rates is confusing," she told BI. "And if they do move in that direction, it would be a mistake. The pressure is actually going to be on the Fed to hike."

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Sheets, meanwhile, occupies the middle ground between rate-cutters and those forecasting hikes. He thinks the Fed will be on hold for a long time.

"Inflation is soft enough that [the Fed] doesn't need to hike," he told BI. "But the labor market is tight enough that it's going to be a heavy lift to cut."

3) Misconception #3: Inflation is gone forever

Speaking of inflation, another theory that gathered serious steam in the weeks leading up to Milken was the idea that price increases would stay subdued indefinitely.

A main component of this argument revolves around the Phillips curve - an econometric model that suggests inflation should rise as unemployment falls. Yet, with unemployment currently sitting near its lowest level in 50 years, rising inflation is nowhere to be found. Those who say inflation is dead point to the inefficacy of the Phillips curve as a primary reason.

But the experts at Milken viewed this as incorrect, if not simplistic, reasoning.

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Lagarde, for one, is still hopeful the Phillips curve will spring into action at some point. She's confident it will work, and that inflation will gradually pick up.

Read more: The global elite at Milken have zeroed in on an overlooked signal they say will determine the future of the global economy

Minerd shares the view that while inflation is hibernating, it won't stay asleep forever.

"This lull in inflation that we're seeing right now will slowly pass away," he said.

And then there's Sheets, who doesn't see anything problematic about low inflation. He told BI that the combination of solid growth, low inflation, and sidelined central banks has created a strong enviroment for markets. Beyond that, he thinks calls for the death of inflation are vastly overstated.

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"I think the idea that inflation is dead is more rhetoric than anything," he said. "At some point, we'll start to see inflation pick up."

Bonus: Brexit was a laughingstock

One final note from Milken revolves around the ongoing Brexit situation. It didn't come up often, but each time it did, the mere mention elicited laughter and eye-rolls.

It's not that the conference experts think it's particularly funny. They were just bemused by the fact that it's such an opaque, uncertain situation. Nearly everyone punted on the topic, citing a lack of understand or, in some cases, downright fatigue.

Shah was one of the few people with a core Brexit view, and she's advising investors to stay away. The way she sees it, the possible outcomes are split 50/50. And it's unwise to trade around odds that amount to a coin flip.

Perhaps by next year Brexit takes will have crystalized. Until then, the world's global financial elite will worry themselves with the other three debates outlined above.

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