Global economy won't bail out the US

By Bill Fleckenstein

Global economic and financial problems have been the subject of many newspaper articles lately, and rightly so. Take "Falling prices grip major stock markets around the world," which appeared in a recent edition of The New York Times.

That synchrony to the downside shouldn't seem shocking, given how intertwined world markets (and economies) were on the way up. But the folks here who believe in Goldilocks have tried to convince themselves that while the U.S. may suffer some sort of drive-by recession, the rest of the world will somehow be immune, helping offset the effects of our downturn.

I think that's quite unlikely, as we are the consumer for the world, and the whole world is in the late stages of an economic up-cycle. Thus, it should come as no shock that the United States economy is hardly alone in experiencing a slowdown.

A forecast with ballast

As to the potential severity of the current recession, last week Eli Broad, the founder of KB Home (KBH, news, msgs), said the economy is in all likelihood going to suffer the worst recession of the post-World War II era.

"I think housing is going to continue to have a corrosive effect on consumer psychology and the economy in general to a far greater extent than people think, or even far greater than I thought about a month or two ago," he said in an interview.

Broad also believes investors would be better off holding cash than trying to buy stocks.

Those sentiments echo my own, although they are certainly not something the mainstream media advocate. Instead, what often flows is a stream of misconceptions regarding the stock market. One of them is embodied by The New York Times in the article mentioned above (read it here; free registration required): "As the United States markets edge toward bear territory, losing nearly 20 percent . . . "

Bear marketology

There is no credence to the notion that "down 20% equals a bear market." (This is an urban legend, which I believe began somewhere on Bubblevision.) A 20% decline does not imply that we had a bear market and now it's over. This is just an expression of the bulls' desire to find a magic number, prompting cries of goodbye to all that.

Bear markets are periods when most stocks decline -- whether 18% or 40% -- and folks lose money. The size of the decline is not the arbiter of whether a bear market is under way. Before this bear market is over, the decline will be far worse than most think possible.

And, of course, the Dow industrials ($INDU) and Nasdaq Composite Index ($COMPX) did cross that 20% level last week, after the Times article appeared.

Out RIMM's window, a wistful vista

Turning to another misconception -- that technology stocks will rise above the fray -- a high-profile poster child right now is BlackBerry maker Research In Motion (RIMM, news, msgs).

Last week it was unsuccessful at Beat the Number. It missed the earnings estimate (even with benefit of a lower-than-expected tax rate), missed the revenue estimate and lowered the guidance.

Not only is Research In Motion's product becoming more of a consumer item (witness RIMM crowing about individual consumers constituting about 60% of its phone customers), but the businesses where the company has the deepest penetration (think Wall Street) are in trouble. Further, serious competition continues to escalate. Meanwhile, a friend who tracks insider selling has pointed out that insiders have sold more than $400 million worth of shares over the past three months.

In terms of denting the tech-is-immune psychology, I think the damage produced by RIMM's misstep is an important event. Mountains of hot money have been hiding out in tech, as demonstrated by the conclusions of various opinion polls: that the Goldilocks contingent has been betting on a second-half rebound and that tech would be the place to be.

It's going to be the place to be, all right, but only for those seeking major pain.

Finally, a word on the world of hurt known as the financial arena. "It's about to blow" is how a friend I've dubbed the "Lord of the Dark Matter" began a call to me last week. Behind the scenes, many parts of the credit/mortgage market were "offered only," with no buyers in sight for troubled loans. My friend said the problem had nothing to do with the end of the month or the end of the quarter. Instead, he believed it had to do with the enormous amount of inventory that would be looking for a home in the next quarter.

He said the equity market was "miles behind what was occurring in the mortgage-backed/credit markets." Though he noted that he'd said it before, he repeated: "It's never been this bad."

At the time of publication, Bill Fleckenstein was short shares of Research In Motion.