A generation of money managers conditioned to buy on the dips is being betrayed by their training in this wrenching market downturn.
Merrill Lynch chief economist David Rosenberg fired out a note Monday after a marketing visit to European institutions and opened with the observation: “Portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the selloffs. I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets.”
Mr. Rosenberg is no fan of portfolio managers - PMs - being fully invested. The Merrill Lynch economist is calling for a 20 per cent decline in the S&P 500, and a further 15 per cent fall on U.S. home prices. That's a huge hit to household worth - a loss of $20-trillion (U.S.) that's “proportionally on par with the 1930s experience.”
“My sense is that many clients are totally underestimating the extent of the trauma that exists on the household balance sheet from this credit collapse and asset deflation,” said Mr. Rosenberg.
In a report that came the same day as widespread layoff notices, Mr. Rosebnberg said: “We now have 30 per cent idle capacity in the manufacturing sector, which we've seen only one other time in the past five decades. That means that spare capacity in the economy is now so big that it would take six years of 4 per cent real GDP growth or alternatively three years of 5 per cent real growth just to get the economy back to full employment.”
