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Double dip recession soon?
I remember a few key people who warned about an impending recession back in 2007 when the stock market was still making new highs. One very vocal person was Nouriel Roubini, an economics professor from New York University, who was so bearish that he was nicknamed “Dr Doom”. Since his predictions have come true, his views have been frequently sought by the press and I always try to keep up with what he says. I noticed him getting less bearish in 2009, after all the stimulus measures were put in place and even said there is still a possibility of “a light at the end of the tunnel” in March 2009. In July 2009, his opinion in the article he wrote for the New York Times was that Ben Bernanke’s actions have prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0. His most recent comments in the press, however have become a lot more bearish (see “A big crash is coming and I don’t believe in gold“on 23 Oct 2009). Nouriel Roubini believes that a “wall of liquidity” is chasing all kinds of assets, yet once the economy disappoints expectations, it will all come crashing down. According to him, despite the temporarily asset bubbles right now, we’re still in a deflationary world and we’ll realize it soon enough once growth stagnates and all kinds of inflated asset categories come falling down.
Meredith Whitney, a former banking analyst from Oppenheimer & Co (she is now CEO of her own company) was also someone who shot to fame in 2007 when she correctly predicted Citigroup’s dividend cut in October 2007. She was very bearish on banks all though 2008 but became less bearish in 2009 and even issued a “Buy” recommendation on Goldman Sachs in July 2009. Her bearishness on banks and the economic recovery has also returned in recent days. In her article “The credit crunch continues” in the Wall Street Journal on 1 Oct 2009, she highlights the problem of lack of access to credit especially for small business, who typically raise funds for their business through home equity loans and credit cards. Small businesses employ 50% of the country’s workforce and contribute 38% of GDP. Without access to credit, small businesses can’t grow, can’t hire, and too often end up going out of business. Meredith follows credit and credit is contracting in the US.
All the above concur with what Robert Prechter from Elliott Wave International has been saying. He turned bearish in August 2009 when the S&P 500 and DOW reached the lower end of the target levels for the rally that started on 9 March 2009. In late February 2009, he predicted that there would be a bear market rally which should see the S&P 500 go up to 1000-1100 and the DOW go up to 9000-10,000. These targets were set based on Elliott Wave and Fibonacci retracement levels. Now the markets are testing the upper end of his targets so if he is right (again), the rally should be ending soon. He expects the next wave down to be a BIG one because it is part of the grand supercycle wave count. To understand his predictions, you really need a basic understanding of Elliott Waves. You should be able to find 10 free lessons on the Elliott Wave principles, on the ElliottWave resource page on this website. I am still learning about Elliott Waves and find it really fascinating so far. The wave principles are quite simple but knowing how to count waves properly is not so easy and will probably take years to master. [4 Nov 09 update: Robert Prechter repeating what he told his subscribers in Aug 2009 in a CNBC interview]
Finally, I would like to share some of my own observations on why I think a reversal is imminent in the US markets. I keep track of the Russell 2000 Index (^RUT) which is an index comprising of 2000 small cap stocks. Most Australians investors look at the DOW (^DJI) and S&P 500 (^GSPC) which track large cap stocks. Small caps tend to move up faster during bull markets (see chart below) and the converse is true in bear markets, so the ^RUT is a leading indicator. In Oct 2009, both the ^DJI and the ^GSPC put in new highs but the ^RUT did not. It only came close to the September 23 high, completing a bearish double top chart pattern (see chart below). A similar pattern can be observed if you go back to July-October 2007.
Further evidence of weakness can also be seen in the Banking Index ($BKX) which shows a similar double top pattern and prices have already broken below the 50 day MA (see chart below). In a healthy bull market, pull backs should find support at this level. Banks led the markets down in 2007 and 2008 so it again can be a leading indicator.
Although the above observations are on the US markets, the last time their markets crashed, it affected all markets globally so I don’t think Australia’s stock market will be immune to a crash in the US markets even though our economy seems to be in a much better shape than theirs.
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