BEAR MARKET RALLY

Professor Nouriel Roubini says that we are far from a recovery and things will get worse before they get better :

“This time around the recession will be at least 24 months – three times as long and five times deeper in terms of GDP contraction – than the one in 2001. This time the deflationary forces are global, not just in the US and Japan as you got a severe global recession; thus pricing power of the corporate sector and earnings recovery will be weak with such sharp global deflationary pressures. This time you have the worst financial crisis and banking crisis since the Great Depression while in 2001 there was no banking crisis. This time you got the worst housing recession since the Great Depression with home prices still bound to fall another 15-20% for a cumulative fall of 40-45%. This time corporate default rates on junk bonds are predicted by Moody’s to peak at 20%, not the13% of the previous recession.  Thus, the idea that a weak US and global recovery with massive deflationary pressures and a severe financial crisis and massive corporate defaults will lead to a robust recovery of earnings and a sharp persistent bull market rally in equities is totally far-fetched.

The global economic contraction is still very severe: in the Eurozone and Japan there is no evidence of “green shoots” or positive second derivatives; and in the US and China such evidence is still very very weak. So investors and markets are way ahead of actual improvements in economic data.”

We think that this is an unusual  balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.

The path will be rough and the recovery Dull…