Here it comes…. the latest bit of insight from ‘Dr. Doom,’ a.k.a Nouriel Roubini.
And, of course, he was right again — it’s all been a sucker’s rally:
I have been predicting for a while that the most recent bear market sucker’s rally would lose its steam and — like the previous bear market rallies in the last 18 months — US and global equities prices would head again towards new lows. Let me now explain why…
Firstly, let’s not forget, Roubini has always said we are facing the worst US recession in the last 50 years and the worst synchronised global recession in decades.
But to the nitty gritty of what every investor should have recognised in November, December and early January - d’uh, it was the much worse than expected macro news. As he explains:
The drumbeat of terrible — and worse than expected - macro news and earnings news and financial news has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the US and global economy would recover in the second half of 2009.
So equity prices have already reversed more than half of their most recent bear market rally as the lousy macro news have finally shocked in the last week the wishful thinkers. Indeed, the retail sales figures published today confirmed a shopped-out, saving-less and debt-burdened US consumer is now faltering as job losses, income losses, fall in home wealth, fall in equity wealth, high and rising debt and debt servicing ratios and a severe credit crunch take a severe toll on the ability of consumers to spend.
And the suggestion is that because it will take years to rebuild the savings rate, the associated economic recovery obviously has to take years too, with a ‘Japan mark 2′ lost decade not ruled out at all. As he puts it (our emphasis):
Our research at RGE Monitor suggests that the US and global recession will continue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped recession) and that the recovery in 2010-11 will be very weak with growth in the 1% range that is well below a potential of 2.75%. And we cannot rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold.
But there is some good news. Roubini does believe the odds of a systemic financial meltdown have been reduced due to the actions of the G7 economies. That said, severe vulnerabilities remain.
These include the likelihood the credit crunch will spread beyond mortgages, that deleveraging will continue to drive price declines and that more finanical institutions will go to the wall. Plus:
Credit losses will mount as the recession deepens. And a few emerging-market economies will certainly enter a full-blown financial crisis. So 2009 will be a painful year of global recession and further financial stresses, losses and bankruptcies.
So in a nutshell, don’t be fooled - the worst is still ahead of us.
Related links
Taleb: It’s worse than Roubini thinks - FT Alphaville
The latest bear market sucker’s rally is losing its steam - RGE Monitor
Four bad bear markets: update - Dshort.com
