More bearish than Roubini is Rosenberg
While the 200-day moving average on the S&P 500 has proven to be major resistance on the upside during the intermittent rallies, we clearly see that 1,040 is the line being drawn in the sand in terms of support on the downside. So the rally into yesterday’s close has been extended overnight with most European and Asian bourses in the green column to start out the day. But make no mistake, the uptrend line has been broken in this latest corrective phase and yesterday’s bounce, what do you know, was on lower volume — as was the case with most of these recovery sessions.
That said, our overall cautious economic and market views have not changed and we believe that a consensus view of 2.5% real U.S. GDP growth for the second half of the year will be marked down. At the same time, the process of unwinding overly optimistic earnings projections by Street analysts will continue for many months and that, along with reduced corporate guidance, will keep the overall downward path in equity market valuation intact. While forecasts have been trimmed since the market peaked in April, there seems little doubt that double-digit growth in corporate earnings is not going to be attained in the coming year and yet that is still the expectation being embedded in stock prices. When the analysts stop cutting their numbers, it will be safer to dip your toes back into the market, which is still likely several months away.
And, when double-dip risks become the consensus forecast then we will know that ALL of the bad news is priced in. But let’s face it — when the ‘pessimistas’ like our friend Nouriel Roubini take their double-dip odds to 40% (that’s it?) as he did today, then you know that sentiment is hardly washed up (see more on this below). Jim Tisch reportedly has a 2% real GDP growth forecast and considers himself to be an optimist. When that estimate is down closer to 0%, it will likely be safer to tack on risk to the portfolio.
We get asked all the time why we are not more bullish seeing as the B.R.I.C. countries are going to manage to offset the weakening pace of economic activity in the United States. Well, the problem with that logic is that the markets in those countries are actually telling you to expect the opposite. Brazil’s stock market is down 6% so far this year and interest rate futures have rallied to levels not seen for 11 months as rate hike expectations have completely stalled out. Russia’s market is also down 6%. China is down more than 20% and India’s stock market is barely in positive territory.
In a nutshell, we have more evidence now than we did back in 2008 that we are in a secular credit contraction, a deflationary backdrop and a liquidity trap. After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response to all these efforts by the government to turn things around is testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the Treasury market is signalling. The last time that bond yields were rallying to the levels they are at today, core inflation was running at 1.8% (versus 0.9% now) and the unemployment rate was sitting at 7.4% (versus 9.5% today). So, the output gap and the deflation backdrop are actually offering much more fertile soil for the bond market today than was the case back then. Those are facts, by the way, not mere opinions.
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