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"James Paulsen, chief investment strategist of Wells Capital Management\nFORTUNE &amp;#8212; If you\u2019re nervous about the economy, you could do worse than talk to James Paulsen, chief investment strategist of Wells Capital Management (and, yes, the other Paulsen &amp;#8212; not former Treasury Secretary Hank Paulson or the hedge fund world\u2019s John Paulson of the infamous Abacus trade). This Paulsen operates out of Minneapolis, where his firm, a subsidiary of Wells Fargo \n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\tWFC\n\t\t\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\n\t\t\t, manages $325 billion. He also pens a newsletter known for its scribbled-on charts and colorful commentary. Now, with debate over the recovery raging, he argues that we\u2019ve hit the \u201Cgear year,\u201D the point in the recovery at which confidence will return. Paulsen, 54 &amp;#8212; sometimes dubbed a perma-bull for his rosy outlook the past few years &amp;#8212; forecasts economic growth of 3% and sees the S&amp;amp;P 500 (SPX) hitting 1500. Edited excerpts from a conversation:\nWhat\u2019s your view on the recovery? \nThis recovery is the third in a row that has been much weaker than recoveries used to be. It looks remarkably similar to both the early-\u201990s and the early-2000s recoveries. And on many metrics, 10 quarters in, it is. Annualized real GDP growth is just slightly less than the average of the last two recoveries at this point, average real gross domestic income growth is slightly better, and total job growth is right on par. People say this is a \u201Cnew normal\u201D &amp;#8212; that we\u2019ve never been this weak before, ever &amp;#8212; and I am suggesting that there is indeed a new normal but it is already 25 years old. It started in the mid- \u201980s and has nothing to do with debt, balance sheets, or savings.\nThen what is the new normal about? \nIn the mid-1980s we had a significant downward shift in the rate of labor force growth in this country. Prior to that, in the 25 years from 1960 to 1985, we had a really juiced-up labor force growth rate with the post- World War II baby boom and women entering the labor force. In the 1970s the labor force grew 2.6% per annum, while in the last decade, it\u2019s grown at 0.7%. Throughout economic history, the rate of resource growth sets the speed limit of an economy. The U.S. now has almost zero labor force growth. Conceptually, in a recovery we might get up to 4%, and in a recession we might fall to -4%. It\u2019s not that our economy is broken and China\u2019s isn\u2019t, and we should get more money supply, or lower interest rates, or cut taxes. None of that is going to affect the central average speed limit, which is the labor force.\nSo what does that mean for this recovery? \nIn the 25 years before 1985, the economy would have jack-rabbit-start recoveries and grow 5% to 8%. But since 1985 that hasn\u2019t happened. That\u2019s because when the labor force downshifted, it lowered the aggregate growth rate and broke the inflation cycle. So it now takes 2 1/2 to three years before the job market takes off, and, because of that, confidence doesn\u2019t come back until the \u201Cgear year,\u201D or year three. I\u2019m not suggesting we\u2019ll have explosive growth. Our speed limit is about 4%. The entire 1990s recovery, which we\u2019ll forever refer to as a boom, averaged a little over 3% growth. So we can have good times even though our recoveries have a very different character. That\u2019s why I think our leaders should calm down a bit, and so should investors.\nWhat about the markets? \nThis year is about revaluation. Last year we had a good gain in earnings, but the multiple on the market contracted because of two fears that were grossly overstated: that the U.S. was headed for imminent recession and that the European situation could blow up and take down the global recovery. This year the valuation could go higher again, to 15 times earnings, as people get more confident about the recovery. I have a target on the S&amp;amp;P of 1500. If we can keep inflation under control, then we have a buy-and-hold market for a long time with a slow and steady increase in prices. We look back at the dotcom era as a ridiculous mania of optimism where everybody ran off a cliff together. I would argue that the past few years we\u2019ve been living through a mania of pessimism. A mania of optimism says there is a lot of risk. A mania of pessimism says there is a lot of potential.\nWhere do you see opportunity? \nI would lean more toward stocks and less toward bonds. I would underweight safe havens, like Treasury bonds, gold, steady-Eddie stocks like utilities and consumer staples, and the U.S. dollar, which have been so popular, and overweight what\u2019s been out of favor &amp;#8212; like emerging markets, which are leading the globe and will for another generation. Within the U.S. market I like manufacturing; I think we\u2019re going to have a manufacturing renaissance in this country. Financials are extraordinarily cheap, and large-cap financials are cleaned up.\nYou missed the 2008 crisis, arguing the recession wouldn\u2019t be so bad. Has that caused you to reevaluate? \nThis is an uncertain world, and an uncertain business, and you\u2019re going to miss things. Have I gone back and thought about it? Yes. Does it affect me that much going forward? No. It would\u2019ve been easy for me after the collapse to go bearish, and I wouldn\u2019t be known as a perma-bull. In some odd way I have been right for three years, and that has done nothing but hurt my image.\nThis story is from the May 21, 2012 issue of\u00A0Fortune."^^<http://www.w3.org/2001/XMLSchema#string>
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