Friday, January 2, 2009

“Double Dip” call sets up market bottom

Further to my recent post 10 contrarian reasons for a bottom the long-term investor psychology continues to deteriorate, which is contrarian bullish. First, there is widespread acceptance that the U.S. is in recession. Moreover, fears of a repeat of the Great Depression seem to have peaked and are subsiding. As the chart below shows, a Google Trend analysis shows that searches of the term “Great Depression” reached its zenith at the start of 4Q.

Google Trend Search: Great Depression

I have said before that the stock market will not put in a convincing bottom until there are widespread calls for a double-dip recession. Well, we are now seeing the first call from Niall Ferguson in a FT article entitled An imaginary retrospective of 2009:

2009 proved to be an annus horribilis. Japan was plunged back into the deflationary nightmare of the 1990s by yen appreciation and a collapse of consumer confidence. Things were little better in Europe. There had been much anti-American finger-pointing by European leaders in 2008. The French president Nicolas Sarkozy had talked at the G-20 summit in Washington as if he alone could save the world economy. The British prime minister Gordon Brown had sought to give a similar impression, claiming authorship of the policy of bank recapitalisation. The German chancellor Angela Merkel, meanwhile, voiced stern disapproval of the excessively large American deficit.

While Ferguson doesn’t actually come out and use the “double-dip” term in the article, a rose by any other name smells just as desperate and despondent.

Still a little too soon to buy
While this is the first call of a double-dip recession from a leading bear, I would like to see the double-dip term creep more into the consensus. A Google search of “double-dip” recession still shows entries dating from 2002 and 2003 on the first page.

I would like to see other doomsters and leading bears like David Rosenberg, Nouriel Roubini and Stephen Roach call for a double-dip before I can believe that a bottom is in convincingly for equities.


Otto said...


Roubini isn't as bearish as some for the 2009 macro scene, but has kept to his equities call of Dow 7k for '09.

Kieran McCarthy said...

I'm generally a big fan of this blog, but I think you contradict yourself in the first paragraph of your post. First, you say investor psychology continues to deteriorate, which is contrarian bullish. Ok, that's fine. Maybe it's true, maybe it's not. But then you say that fears of a repeat of the great depression are subsiding, which is hardly consistent with the sentence about deteriorating sentiment.

Cam Hui, CFA said...


I meant that the first waves of fears are subsiding, which should be bullish for the equity market.

knightrd said...

I'm checking out your blog for the first time. I put in 4-6 hours of time doing after-work research. I'm interested in hearing different views.

Checking the Google Trends doesn't mean a lot. Let me cite an example. One of my areas of study is energy, in particular oil. If I check Google Trends for "oil price" or "peak oil", I can't make the graphs represent more than the represent. They only indicate current human interest, but they do a poor job of predicting what will come next.

The Plunge Protection Team can only prop up the markets for so long. Equities are in for a roller coaster year that will leave traders begging to return to a year like 2008. The fundamentals are not there to support the theory that 2009 will be a net gain for the stock markets. Consumer spending is 70% of the economy and we are facing a vote of no confidence.

We will be lucky if we hit bottom in 2009. Right now it's too early to call, except to say that we haven't hit bottom yet. How can I tell? I can tell simply by the fact that housing hasn't yet fallen enough to be in line with historical averages. Even then, it will take time for confidence to come back.