Merrill Lynch economist David Rosenberg has once again bucked the consensus among market commentators who appear to have agreed that the US economy will recover in the second half of 2009. Based on our entirely unscientific survey of people talking to financial news folks, it seems that many believe that a recovery will come sometime in the second half of the year and that the stock market will anticipate this recovery by rallying some nine months before the economy.
The lesson of this would seem to be: buy stocks now! The Obama recovery is coming and you might miss the bottom.
Well, not so fast says Rosenberg.
“Even if there is quick passage, the peak impact of the stimulus may not be felt until 2010,” David Rosenberg says in this Reuters story. “The pullback in consumer and business spending in the coming year will likely be so big that even under the latest leaks on the size of the coming fiscal package, we think it will barely offset half the retrenchment in organic private sector GDP.”
“It took more than three years for the economy to recover from both the dot.com bust of 2000 and the stock market crash of 1929,” he continues. “So, in our view, hopes that the economy is going to recover as soon as mid-year are likely to be dashed in coming months.”
Rosenberg bucked the consensus of economists last year, announcing in January of 2008 that we were already in a recession. He accurately predicted that the Fed would lower its main interest rate dramatically, while most economists were still thinking the Fed would bottom out around 3%. He’s also gained some stature for refusing to trust his own computer models when they told him the economy wouldn’t suffer as badly as he expected. Everyone now hates computer economic models, so refusing to welcome our robot monsters boosts Rosenberg’s rep.
Bottom line, Rosenberg predicts GDP will contract 2.5 n 2009. And, for the bonus round, he predicts historians calling these dark times “GDII.” As in, Great Depression II. (We expect GD 2.0 will win out.)
Jack McHugh at Barry Ritholtz’s BP Café explains Rosenberg’s thinking:
Go back a little further in time for historical guidelines, says Mr. Rosenberg, and one will find that economic downturns caused by broken credit bubbles are very different animals than are inventory-based recessions. He thinks that rate cuts and stimulus efforts will help cushion the blow, but he deems the negative wealth effect from falling equity and real estate prices to be an over-arching negative for the U.S. economy in 2009. In addition, Mr. Rosenberg draws comfort from being nearly alone in his pessimism. In his view, consensus forecasts for a second half recovery and gains of 15% or so in the stock market will be just as wrong this year as were consensus forecasts for S&P 1600 last year.
(Note: Although McHugh agrees with Rosenberg that the recovery probably won’t happen in 2009, he thinks that we may have a short lived rally in the markets as lots of investors become convinced that a recovery is on the way and try to anticipate good economic news by buying up stocks. As the bad economic news keeps rolling in, however, those who got long early might be in for a nasty surprise. Is McHugh right? Well, we’ve already seen a 24% rally in the S&P since it hit its lows so maybe McHugh is right but late to the party.)
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