Thursday, February 17, 2011

Rosenberg: Rally ‘Seriously Overextended,’ Brace for a Big Drop

By Greg Brown

Strategist David Rosenberg is warning investors not to jump into stocks at this point. He calls the 90 percent run from the bottom since March 2009 “an intense bear market rally, which is likely at the very late stage” and suggests that a correction is ahead.

The market is “seriously overextended,” the Gluskin Sheff chief economist writes in the Financial Times. While it “hurts” to miss such a huge run, Rosenberg says, it is much harder to withstand the sharp move downward that can follow.

Rosenberg argues that the market is simply missing the impetus that pushed stocks higher over decades, like the postwar boom from 1949 to 1996 and the transformative effects of disinflation from 1982 to 2000.

What we have now is a Federal Reserve bent on making inflation, “surreal public sector intervention” which cannot continue and is no recipe for real growth, Rosenberg contends.

He believes that the Fed and the government are out of tricks and that stock buyers will soon recognize that fact, ending the bear really.

“How the Federal Reserve and the federal government in the future manage to redress their pregnant balance sheets without creating a major disturbance for the overall economy is a legitimate question and, sorry, does not deserve a double-digit market multiple,” he says.‬

In just-released documents, Federal Reserve Chairman Ben Bernanke admits that the Fed’s low interest-rate policy during the time of his predecessor, Alan Greenspan, might have contributed to the stock bubble.

However, Bernanke said, even critics of the Fed agree that the error was small, not enough by itself to upset the entire global economy.

“And so then the question is, you know, how can you have — if you have a situation where a relatively small mistake — if it was a mistake, I’m just accepting that hypothesis — leads to the biggest financial crisis since World War II, I mean, what does that say?” Bernanke told member of the Financial Crisis Inquiry Commission in November 2009 in a private session.

“They say that the system itself was inherently unstable and that a relatively small shock was enough to knock it off the pedestal,” Bernanke said.

1 comment:

  1. So economy is about 'it might have been'. That is good statement. One can only talk about the greatest financial crisis if it is a historical fact. Is it? The only way the stock markets are looking for is not down. So it might have been the consequence of the FED's policy or not, I should say. It goes up if the risks of going down is very small and the intention of the FED was to make the risk of a further decline of the stock market very small.

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