MacroScope

Hey Europe, stop acting so happy

January 26, 2009

Merrill Lynch economist David Rosenberg’s views are well-known for bearing no resemblance to his firm’s trademark bull, so when he says European clients seem too upbeat, what he really means is they weren’t thoroughly depressed. The New York-based economist just got back from a marketing trip across the Atlantic and didn’t find much common ground.

In particular, he said European clients seemed more concerned about inflation than the deflation that he sees coming, and they may have unrealistically high expectations for President Barack Obama.

“Unbelievably … portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the sell-offs,” he wrote in a note to clients. “I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets.”

For the record, Rosenberg thinks the Standard & Poor’s 500 index may have another 20 percent to fall, and U.S. house prices could drop an additional 15 percent. That would take the cumulative loss in U.S. household net worth to $20 trillion. Yes, trillion.

He said European clients had a “very high degree of confidence” that Obama would be forceful in addressing reflation, credit and the recession, and he heard frequent comparisons to Franklin Roosevelt.

“But the dirty little secret from the New Deal is that even by the end of the 1930s, the unemployment rate was still north of 15 percent compared to 2 percent when the Great Depression began, and the CPI was deflating at a 2 percent annual rate,” Rosenberg points out.

And on inflation? He doesn’t see that happening when unemployment is high and the manufacturing sector is saddled with 30 percent idle capacity. “Spare capacity in the economy is now so big that it would take six years of 4 percent real GDP growth or alternatively three years of 5 percent real growth just to get the economy back to full employment.”

Aren’t Americans supposed to be the irrationally exuberant ones?

- Reuters photo by Toby Melville

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