The most optimistic forecasters still cling to the hope that we’re experiencing the beginning of a V-shaped recovery. As quickly as the economy nosedived, it will surge upward again on new-found consumer confidence and carefully timed government spending. The bears predict we’re due for more of a W-shape, where a rebound is followed by another dive into recession. Others point to a more gradual U-shape or even a long, drawn out L-shaped recovery. But the real outcome may well be an alphabet soup of all of these things, strung together over the coming years so that the economy and capital markets never really grow.
It has happened before. People may be feeling richer as they watch the markets rebound and their net worth rise again, but to some observers, this is the same kind of false start that has haunted Japan for so long. That country suffered a “lost decade” in the 1990s after its housing bubble burst. It continues to struggle to this day. “The reality is a 60 per cent jump in six months is not the hallmark of a bull market, it’s generally what you see in a secular bear market,” says Rosenberg. “Japan has had no fewer than four of these 50 per cent plus rallies, in the context of a market that’s down over 70 per cent from its peak.” Shedlock puts it in even starker terms: “This is the most massive suckers’ rally since the Great Depression.”
The unfortunate reality is that until households get their finances in order and are capable of spending again, the corporate sector won’t rebound and neither will jobs. That’s a healing process that could take years. So as bullish analysts and pundits feverishly ramp up their forecasts, maybe it’s time instead to listen to what those who predicted the crisis the first time around are warning—look out below.
