Five phases to the current down-cycle

Interesting analysis via David Rosenberg of Merrill Lynch:

"There have been five phases to this current down-cycle – the first four are still in full swing, but it is the fifth that will very likely emerge as the most difficult stage of this economic downturn and bear market:

• The first wave was the end of the housing cycle when starts peaked and began to roll over in the first quarter of 2006.

• The second wave was the end of the home price bubble when the Case-Shiller index began to deflate in the first quarter of 2007.

• The third wave was the end of the credit cycle when the interbank market froze in August 2007.

• The fourth wave was the employment cycle, which peaked when payrolls did in December 2007, prompting the Fed to reluctantly embark on an aggressive policy easing course.

• The fifth wave will be the end of the consumer cycle and the beginning of what may well prove to be the most significant recession since the mid-1970s, and while delayed by the tax rebates, this phase seems to have commenced in June when U of M consumer sentiment collapsed to its lowest level in 28 years."

Rosenberg has been consistent in terms of warning about an economic slowdown over the past year, and dates the likely start of the recession to January 2008. Going forward, he is more concerned with Deflation than Inflation . . . 


Five phases to the current down-cycle
David Rosenberg North American Economist 
Merrill Lynch, 07 July 2008

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  1. super-anon commented on Jul 8

    … and while delayed by the tax rebates, this phase seems to have commenced in June when U of M consumer sentiment collapsed to its lowest level in 28 years.”

    Then why would the politicians ever stop the tax rebates? Nobody in the congress has demonstrated even the tiniest bit of fiscal responsibility or concern with the solvency of the US government in the long-term.

    Didn’t Obama even propose automatic stimulus checks triggered by consecutive declines in the payroll numbers?

  2. Neal commented on Jul 8

    The real collapse will begin sometime this fall when the realization that recovery is still a long way off, no matter who is in the White House.

    Housing has not hit bottom–it’s still a couple years off. People who think they are picking up bargains now will find those bargains expensive in a year or do. Manufacurers, retailers and service providers still have not factored in the full effect of the the loss of equity extraction. Employment will continue to spriral downward as the depth of the problem becomes more apparent. Wages will stgnate under the rise of unemployment. Oil demand will continue to grow regardless of what happens with the the US economy. Oilfield depletion signals the end of cheap energy. The effect of higher energy and electricity costs going forward from this winter have not been felt yet.

    All in all, we are years away from a necessary restructuring of the US economy. What has worked in the past won’t now. When the realization of that fact has become widespread, then we will have hit bottom.

  3. Steve Barry commented on Jul 8

    The real collpase happens if Obama gets elected and Bush lets things fall apart so Obama is put behind the 8-ball day one. Then they blame Obama getting elected for triggering the worst of the collapse. A win-win for Bush.

  4. Roman commented on Jul 8

    “Going forward, he is more concerned with Deflation than Inflation . . . ”

    YES! YES! YES! Short the commodities. Get out of oil while you still can. In 2009 gas will be back below 3 bucks a gallon, but I don’t know if anyone will have the 3 bucks to buy it.

  5. Roman commented on Jul 8

    Steve Barry,

    I don’t the American public is THAT stupid. Ted Strickland got elected in 2006 as Ohio’s new Democratic governor and no one is blaming him for this downturn here in Ohio.

    People will understand that Obama is being put into a tough situation.

  6. N commented on Jul 8

    Wealth distruction thru’ stock market crashes and deflation is a nature’s way of saying — enough of this crap you delustional human beings! Get back to basics; stop consuming; have a little compassion and do some introsepction/soul searching.

  7. Francois commented on Jul 8

    “People will understand that Obama is being put into a tough situation.”

    Only those who want to understand will do so.

  8. scorpio commented on Jul 8

    Obama wins, Democrats sweep, the Fed puts the screws to the economy, banks, markets post-election (no matter who wins), we make some kind of a bottom in Oct ’09 way below today’s levels. then poke our little heads up and try to figure out how rolling ’70s style stagflation/recession (remember, 3 recessions in one decade, that hasnt happened in a while) and increasing geopolitical tensions in a resource-deprived world impacts our pocketbooks.

  9. Greg commented on Jul 8

    I really like this from the writing. “The ultimate indicator to see when the recession ends
    …. the date that the NBER
    announces when the recession started has actually taken place within a month of
    the same recession ending 75% of the time in the past. In fact, the median lag
    was exactly one month between the announcement of the recession and its

  10. criticalthought commented on Jul 8

    “The real collpase happens if Obama gets elected andBush lets things fall apart so Obama is put behind the 8-ball day one”

    yeah, because Bush has a little lever in the oval office that says either “keep things together” or “let things fall apart”. . and it is a fast acting lever, so that he can decide after the November election whether to help Mccain or hurt Obama. . . and the lever is fact acting. .. in just 60 days, the whole economy can go to pieces, and it would not be the fault of Obama’s stated anti-trade policies, or his higher taxes, or anything. . . it would be all Bush’s fault.

    Just like when Bush inherited a perfect economy in 2000 and screwed it up all on his own doing.

    Nope. . .there is no lever, and nope, Bush probably wasn’t the cause of the collapse of the NASDAQ in 2001 (and everything that went with it). The fact that is out of business right now, and that we aren’t buying stuff with Flooz is a direct result of Bush’s policies and his mishandling of Clinton’s economy.

    Yes, I’m sure that Obama will inherit a really crappy econonmy, and the media, no doubt, will give him all kinds of leeway to blame his predecessor for anything and everything. McCain won’t get that kind of break.

    Either way, the presidents approval rating is most often tied to the economy, so, this presidential election is a bit of booby prize. . . the real prize is the 2010 midterms and 2012 general election.

  11. Steve Barry commented on Jul 8


    You maybe right, but what else can Bush do? I’ve heard Kudlow on CNBC already try to pin the market drop on Obama getting the nomination. All they have to say is the market is looking ahead and dislikes Obama’s policies. Plus, if the gov’t is making things look better than they are (NFP, CPI, PPT) what incentive do they have to continue to do that once Obama is elected? NONE. From Nov. 4-Jan. 20, they will have no reason to pump things.

  12. Jim D commented on Jul 8

    No reason to pump things? Really?

    You’re confusing politics and business.

    Businesses reliant on selling financial instruments and equities will continue to have every reason to pump them. Whether they will have cash to do so is another question entirely.

    As for “peak oil” – as supplies contract, prices will not necessarily go up in a straight line – instead, volatility will increase, with wild swings in prices. That’s just Econ 101 guys. Expect wild, 50%+ yearly swings in oil prices from here on out – both up *and* down. We had an equilibrium oil market for 50 years. That’s over.

  13. David commented on Jul 8

    The problem America faces is neither party is for true reform and solutions. Neither party. They are both in it for the power for their parties.

    We need a strong and viable centrist 3rd party. The dems and reps are too indebted to the radical elements within each of their parties to be effective.

  14. squeezed commented on Jul 8

    “We need a strong and viable centrist 3rd party. ”

    IMO, the republicans cater to radical elements while democrats advocate a center-right pro-business platform.

    Frodo failed.

  15. DL commented on Jul 8

    The foregoing is consistent with Gary Shilling’s analysis (

    David Rosenberg, however, doesn’t mention anything about inflation, or the Fed’s ultimate response to it.

    That could be the basis for yet another phase.

  16. leftback commented on Jul 8

    Interesting and a little omimous (over the longer term) that gold didn’t dive today as oil corrected. The fear trades are alive and well – look at the 2 year – and I think caution is well placed.

    But do not be surprised to see oil rally tomorrow – the media is in love with the long oil trade (see the Boone Pickens infomercial this morning. WTF??) The media love to twist the inventory numbers.

    Still think we are going to see a 1-2 week stock market rally here – it may be simply technical, there is support in the range of SPX 1220-1245. Even if you don’t believe in TA, if enough people do there can be a rally and it will then be amplified and sustained by short covering. Best not to get too greedy on the short side.

  17. wunsacon commented on Jul 8

    David, I agree the GOP has been indebted to professional Christianity and has “forgotten” its libertarian wing. But, IMO, the Dems have been shifting right for 25 years in an effort not to lose every election to the GOP, who successfully blamed Carter for ills of prior policies and took credit for the business boom that cheap credit in 1982 finally unleashed. (It takes a whole generation to “unlearn” that blame placement, because for most who grew up under Reagan it is an unassailable fact that everything was Carter’s fault.) The Dems haven’t been listening to the “radical” elements within their own party, because to do so meant losing more elections.

    We might see a change here. I can’t say I expect to be pleased. But, I expect newer policies will “suck less” than whatever the current and near-future GOP would push.

  18. Bob_in_MA commented on Jul 8

    I’d add in a three more phases:

    First, the asset led slowdowns in other net-consuming nations: UK, Spain, Ireland (Eastern Europe ex Russia probably soon to follow.)

    Second, the need for aggressive tightening in fast-growth, net export, emerging market countries–which seem bent on keeping their currencies over-valued.

    Third, a slowdown in slower growth developed net exporters, ie., Japan, Germany, and others like Italy and France.

    All of which will contribute to a more profound (than most expect) slowdown in India, China, and the rest of Southeast Asia sometime over the next year.

    That will lead to a big fall in Commodity prices, taking down Russia, Brazil, etc.

  19. Darkness commented on Jul 8

    >We need a strong and viable centrist 3rd party. The dems and reps are too indebted to the radical elements big industry and trade groups within supporting each of their parties to be effective representatives of the public good.


  20. alex commented on Jul 8

    I have been reading Rosenberg’s commentary for a while and he seems to be one of the wall st guys who is spot on. He is calling for much lower yield on the long end of the curve going forward — deflation.

    There was a recent analysis cited in John Mauldin’s last newsletter from a bond fund in texas asserting the same thing. They pointed out that between public equity market declines and housing asset declines, US wealth has fallen by $5.2 Trillion.

    In addition, the financial system has experienced losses of over $1 Trillion (depending on which source you believe) and will experience more. All of these effects are deflationary.

    The two primary macroecon questions driving the market today are:

    1) what is causing oil to go up so dramatically?

    2) is the price of oil inflationary or deflationary?

    My guess is that it is deflationary.

    The big risk to the downside in both the price of oil as well as equities in general is that China experiences a major slowdown and/or a major revaluation of its currency or energy subsidies. My guess is that all will happen post-Olympics as the US economy slows.

    If China slows along with the US, look out below for oil, as well as for US equities

  21. Peter T commented on Jul 8

    >We need a strong and viable centrist 3rd party.

    The party system is determined by the election system. Without some kind of run-off voting (instant or second round), there will be no strong third party.

  22. Victor commented on Jul 8

    This is Mish’s perspective over at globaleconomicanalysis. He’s been more spot on than any other economic commentator in the blogosphere.

  23. zackattack commented on Jul 8

    Holy crap, I just had a TGBBGDDD (the great big bell goes ding, ding, ding) moment!

    You know your bear market is long in the tooth when your plan administrator introduces a 130/30 long/short fund as an option for your 401K.

  24. commented on Jul 8

    I just read Rosenberg’s morning market memo and glad to know I’m spot on in my portfolio.

    Began shorting oil and coal like a MoFo today. I saw the same exact thing myself where energy sector equities have not risen yet the price of oil was leaping higher.

    I also believe the story with financials is not over (how could it be? credit contraction just got started).

    You can check my portfolio out here

  25. Trends I’m Watching commented on Jul 9

    The five phases to 2008 down-cycle

    Trend: Housing starts peaked in Q1 2006, starting the current down cycle; the end is not yet in sight. The Big Picture reports an analysis from David Rosenberg of Merrill Lynch – the five phases to this current down-cycle. Link: The Big Picture | Five …

  26. ben commented on Jul 10

    Number 6 is when rosenberg turns bullish by calling a bottom.


    don’t hold your breath.

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