Real recovery won't be anytime soon

By Bill Fleckenstein

Folks are understandably trying to piece together an economic road map for these challenging times. To that end -- and to be a better investor -- I believe it's important to grasp the lessons of history.

As fine a primer as any is "The Trouble With Prosperity: The Loss of Fear, the Rise of Speculation, & the Risk to American Savings." The book's author is my good friend Jim Grant, who in 1996 (when the book was published) foresaw where artificially induced prosperity would land us.

One of Jim's premises, which I completely agree with, is that "booms do not merely precede busts. In some important sense, they cause them." That, of course, is the lesson the Federal Reserve does not understand.

The current bust is a direct consequence of a boom, but not an ordinary boom. It was a credit/real-estate bubble that caused a misallocation of capital of truly biblical proportions. Thus the pundits who think there will be any return to business as usual in the second half of 2009 are going to be very disappointed.

A more-than-mental recession

That reality was driven home last week in both the corporate and macroeconomic arenas, as bad news poured forth across a broad front. To look at just one example: Nvidia (NVDA, news, msgs) issued dramatically lowered expectations, projecting that fourth-quarter revenue would come in 40% to 50% lower than the previous quarter. (The latter, by comparison, had declined only 5% from the second quarter.)

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Meanwhile, it was reported last week (in a column by Ambrose Evans-Pritchard on the United Kingdom's Telegraph Web site) that the cost of shipping goods from Asia to Europe had "hit zero" -- which, as in the case of Nvidia, is a pretty good indication that in certain areas, business had stopped. Along those lines, Canadian telecom Nortel Networks (NRTLQ, news, msgs) announced Wednesday that it had filed for bankruptcy.

On to the macro arena, where most were surprised by data on December U.S. retail sales, which were twice as bad as expected. According to the folks with the Liscio Report, last month's sales were the 11th-worst since 1947, with the subcategory of autos being the worst December on record.

On top of that, in midweek Goldman Sachs Group (GS, news, msgs) increased estimates on how far home prices might fall. Previously, it thought that housing would perhaps bottom out at the end of 2009, down an additional 15%. Now Goldman thinks the bottom might not be reached until mid-2010 -- and that the lows will be 20% to 25% from here. The latter is more in line with my expectations, but I think it's certainly not what most people had factored in.

Another temporary rally

Now for some thoughts on what this dark macro/corporate landscape could mean for the stock market:

Potentially, the market may continue to be weak and ugly heading into Tuesday's inauguration. However, after the inauguration -- given that company expectations have been lowered and that by then we will likely enter a relatively quiet news period -- the stage may be set for a rally that might last longer than the one that just ended.

The probability of that scenario will increase if some economic bounce, however small, begins to take shape. (As weak as the economy appears, the data now suggest it is even weaker.)
Assuming the economy does bounce, a rally could occur sometime later in the first or second quarter -- as the bullish contingent seizes on the bounce as a sign the economy is recovering for real (a belief I do not share).

Live wires on either side

If that plays out, I suspect it will set up a very attractive short-selling opportunity because ultimately I believe that the market will work much lower again.

Later in the year, we will have a better opportunity to invest on the long side.

Obviously, anything is possible. But that's my current thinking on the most likely path for the market's twists and turns.

My goal for early in the year continues to be: Try not to get in trouble, and be patient while attempting to piece together some high-probability opportunities.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.