This week's prediction roundup
A collection of thoughts from people who think they know what the future hold.
Those seeing sun
According to AP, Paul Krugman says the worst is over, but the recovery won't be fun: "'We have managed to avoid a second Great Depression ... but full recovery is at least two years and probably more,' Krugman said. Asia is likely to see a faster rebound, than the U.S. and Europe, partly driven by the recovery in manufacturing exports, he said."
Larry Kudlow says this is a new bull market: "This is not just a summer rally -- although a 12 percent market rise since July 10 is absolutely splendid. There’s a lot more going on here. Over the last five months, since March 9, the broad-based S&P 500 is up 46 percent. If I’m not mistaken, a 20 percent rally that is not quickly reversed constitutes a bull market. We are more than double that, and there will be no total reversal."
The Associated Press reports that John Paulson is buying Bank of America, gold producers, and drug companies: "The hedge fund run by John Paulson, who foresaw the distress in subprime mortgages and reaped billions by betting against the related securities, has bought about 168 million shares of Bank of America Corp., according to a regulatory filing Wednesday.... Paulson also purchased sizable stakes last quarter in gold producers such as Anglogold Ashanti, Kinross Gold Corp. and Gold Fields Ltd., drugmakers Boston Scientific Corp., Schering-Plough and Wyeth, and server and software maker Sun Microsystems Inc."
Barton Biggs thinks the recovery will be stronger than expected: "The surprise is going to be how strongly the U.S. — and the world for that matter — emerges from this thing over the next six to nine months. History says the steeper the decline, the steeper the recovery, and I think we'll see that play out. In addition, we've had unprecedented amounts of stimulus, both fiscal and monetary, as well as coordination by governments and central banks around the world. I think we are going to have a very steep recovery that is going to last for another two to three quarters.... As the stimulus wears off, I expect that we will flatten out in the big developed economies — not have a double dip as the economic bears would argue, but just flatten out."
Those seeing rain
Nassim Taleb told CNBC that the economy will get worse because nothing has changed: "It is a matter of risk and responsibility, and I think the risks that were there before, these problems are still there. We still have a very high level of debt, we still have leadership that's literally incompetent ... They did not see the problem, they don't look at the core of problem. There's an elephant in the room and they did not identify it."
Zachary Karabell thinks unemployment in the U.S. will remain high for a while: "[M]any larger companies have been profiting because they can focus on where the growth is around the globe. Companies such as Intel, Caterpillar, Microsoft and IBM now derive a majority of their revenues from outside the U.S., with the dynamic economies of the Asian rim and above all China assuming an ever-larger role. Companies are thriving in spite of economic activity in the U.S., not because of it. That suggests the connection between corporate profits and robust economic recovery in the U.S. is tenuous at best. In fact, the financial crisis hastened the trend toward efficiencies, toward leaner inventories, and towards integrating both technology and global supply chains that has been taking place over the past decade. That has led to severe pressure on the American working class and eroding employment. As these companies profit from global expansion and greater efficiency, they have little or no reason to rehire fired workers, or to expand their work force in a U.S. that is barely growing. If you are a global company, you want to hire and expand where the most dynamic growth is. Unfortunately for Americans, that’s not the U.S."
According to Bloomberg, Tudor Investment Corp. says the rise in stock prices is a bear-market rally: "'Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets,' Tudor said. 'We are not inclined to aggressively chase the market here. Many doubts remain about the sustainability of this recovery, most prominently the weakness of household income growth.'”
Bill Fleckenstein liberally quotes Marc Faber to argue that hyperinflation is a real (get it, "real"?) possibility: "[W]hereas near-term deflation is a distinct possibility, in the longer term inflation is more likely because of several factors. When the economy recovers (and the recovery is likely to be fragile), the Fed will be very reluctant to increase short-term rates. Another reason for the Fed's reluctance in this respect will be the size of the government debt, given that higher interest rates would increase the interest burden. Therefore, I can't imagine any scenario under which the Fed wouldn't keep interest rates at an artificially low level, as it also did post-2001. That such a monetary policy, combined with the growing fiscal deficits discussed above, is more likely to lead to inflation rather than deflation should be clear."
Bloomberg cites the VIX as predicting a lower S&P 500: "Options traders are increasing bets that the steepest rally in the S&P 500 since the 1930s won’t survive September, historically the worst month for U.S. equities. Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg. That’s the biggest spread since August 2008, before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show."
According to Tech Ticker, Bob Prechter thinks the market will drop below the March lows: "The 2000 market peak market a 'major trend change' for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade, Prechter says. 'The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large,' he says. 'The bear market is going to have balance that out with some sort of significant retrenchment.'"