Maudlin Melodies

John Mauldin typically posts some pretty good stuff at a reasonable frequency and with an emphasis on longer more thoughtful pieces, as opposed to the quick one off that has become the blogging norm. Today he has something from David Rosenberg, Merrill's chief economist. Rosenberg is pretty bearish, as is anyone in their right mind, frankly, though there's nothing that I would call new in what he's saying. A few things did catch my attention though. First, screw GDP:

More to the point, if you're waiting as an investor for GDP to actually turn negative, you're going to miss a lot of action along the way. I think the best example is to just go back to Japan. They had a real estate bubble that turned bust and they had their own credit contraction back in the early 1990s. Guess what; Japan didn't post its first back-to-back contraction of real GDP until the second half of 1993. By the time the back-to-back negative that people seem to be waiting for happened, the Nikkei had already plunged 50%, the 10-year JGB yield rallied 300 basis points, and the Bank of Japan had cut the overnight rate 500 basis points, which said a thing or two about the efficacy of using the traditional monetary policy response of cutting interest rates into a credit contraction (as we're now finding out here in the US).

Second, not everything gets marked to market instantaneously:

I was around in the 1980s, and I remember that it played out very similarly. What people called resilience and people called contained and people called decoupling were all very pleasant euphemisms for lags. That's what they are; they're lags. There are built-in lags. Housing peaked in 1988, rolled over, the credit crunch intensified in 1989 when RTC got into real action. Then 1990 ... two years after housing peaked, we had this very surprising consumer recession that caught even the Fed off guard.

Perhaps I'm just constitutionally bearish, but I feel like it's just common sense to suggest that the depth of the pullback in the US will eventually have an impact al over the world. But not right away. People take time to adjust to the reality that a lot of the wealth created in the last 10 years was illusory, and that the baseline is much lower than they think because they aren't accounting for the fact that we had one giant credit bubble that came in two episodes. We're not going back to 2005, but 1995.