Friday August 3 10:16 AM ET

Bank: Tuesday US Data Could Spark Selloff

LONDON (Reuters) - U.S. productivity data due out on Tuesday could shatter the belief in a ``new paradigm'' economy of high growth and low inflation, triggering a stock market crash, a leading investment bank has predicted.

Dresdner Kleinwort Wasserstein said in a note to clients that revisions included with second quarter productivity numbers will revise away the ``productivity miracle'' of recent years, cited has a major factor in the bull market of the 1990's.

``Investing in the U.S. miracle will in retrospect be seen as a sick joke. The markets will be forced
to confront this harsh reality on August 7,'' DrKW Global Equity Strategist Albert Edwards wrote.

``Make a date in your diary! The U.S. 'new paradigm' will then be officially revised away! The risks of an equity crash are high.''

Edwards could not be reached to comment on how quickly this crash might happen.

The term ``new paradigm'' arose to explain the fact that strong U.S. economic growth during the 1990's failed to trigger inflation. Many economists credited a rise in productivity, caused by technology, which allowed businesses to produce more without raising costs.

This helped drive up stock markets because investors believed corporate profits could now grow at a faster pace than in the past.

But Edwards predicted revisions included in the second quarter productivity data will knock a full percentage point off longer-term estimates of productivity growth. He said trend productivity growth could be closer to 1.5 percent than the 2.5 percent many now predict.

Because earnings estimates are based on a 2.5 percent rate, Edwards said the equity market is vulnerable.

As a result, the firm's recommended equity portfolio is underweight equities and overweight bonds and cash.

DrKW's model portfolio recommends placing 40 percent in equities, 45 percent in bonds and 15 percent in cash.

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