David Rosenberg is making some new noise about the US being in a depression. He is not alone in this line of thinking but, of course, he has the ear of much of the investing population. He has generally been on the right side of the trade for the last several years but drew much criticism for missing the rally that started in March 2009. He has been just as right about US treasury bonds as yields have continued to drop in what looks like fear of deflation playing out in the US bond market.
For now the yield on 10-year treasuries is very low at 2.50% (per the TNX close), the VIX is high, relative to the last month and, of course, in the last month the S&P 500 is down 5%. The economic numbers that would seem to be most important, those pertaining to housing and jobs, also seem to be deteriorating. One pundit noted that bank stocks have rolled over and are turning lower.
In trying to better understand the magnitude of what is going on I would circle back to a couple of points made here previously. There was a lot of commentary calling for a V-shaped recovery; Tony Dwyer used to be on CNBC a lot calling for a "capital V" recovery. This line of thinking never made a lick of sense to me. As I stated many times over, and it still applies now, if you believe this has been the worst financial crisis in 80 years then there is no way it was going to resolve like other cyclical downturns. Thinking otherwise is to not appreciate the potential magnitude of such a monumental event.
This does not have to mean that from here the market has to go much lower or that there will be some sort of Armageddon scenario. Obviously the market could cut in half but panicked selling does exhaust and while I believe the US market will be feeling this for a while I believe it will look like below average growth as other countries recover faster. This is something I've been saying all along and something that has been playing out of late.
To the point of a depression or not, if it turns out that this period does get labeled as being a depression, at this point, summer of 2010, we are a long way into it.
Another point I would reiterate is that despite some heroic rallies in some of the big American banks most impacted by the crisis it is going to be a long time before they are healthy again; great trades along the way, yes, healthy companies on solid fundamental ground, no.
As the US equity market continues to churn around here in between whatever you want to define as the range it is correcting in terms of time; markets correct in both price and time. The SPX is down 38% from its high almost three years ago. While there have certainly been periods in the last three years of extreme volatility we are now three years on and are still down a lot. If from here, in the process of sorting through and eventually recovering, the S&P 500 bottoms out at 950 then I don't think history will discern between 1050 and 950. If it goes back to 650, history will discern that but I do not think the seemingly miserable back drop of a deflation threat, lousy housing data, much we don't know about coming writedowns and an employment situation that is much further behind where it should be by now has to mean equity prices implode.
Not imploding is not a bullish argument to buy 'em with both hands and, as I said before, while the market could cut in half from here the probability is low as the things I mentioned in the previous paragraph are not secrets and sometimes the market is efficient.
Either way I still come to the same conclusion which is the need to allocate more to foreign markets. It is very difficult to build a case that over a period of years the US is going to be relatively compelling versus a lot of other countries, with Western Europe and Japan as possible exceptions. One of the complaints during the meltdown was that decoupling was bogus. Well, maybe for six months or a year that is the case but (repeat data coming) during the last decade as the S&P 500 was dropping 24% on a price basis, Brazil was going up 301%, India up 243%, Chile up 194%, Norway up 121%, Israel up 109%, Australia up 51% and Canada up 39%.
You can do your own work to try to figure out what countries will do well in the new decade should my base case of below "normal" growth in the US turn out to be right. Or if it turns out to be worse than just below normal growth there will be plenty of countries that outperform. And if you think the US will have normal or better than normal growth then you don't need to worry about country selection.