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They don't call economist Nouriel Roubini Dr. Doom for nothing. The New York University professor has ridden the global financial crisis to celebrity status and privileged access to the world's political and business elite, thanks to his early warnings and depressingly accurate forecasts about exploding bubbles and credit freezes, dating back to 2005. In fact, he's such a prominent bear that a market rally after one of his typically gloomy prognostications was dubbed a Roubini bounce.

Does the current stock market rally make it harder to be so bearish?

It doesn't change my views, because we have already had about six bear market rallies in the past year.

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The market has been a lousy predictor. People used to say that the stock market predicted 12 out of the last nine recessions. This time, it predicted six out of the last zero economic recoveries. Every time there was a rally, and then the macro[economic]news, the earning news, the financial news was worse, and the market touched a new low.

So you don't think we have reached the bottom?

Of course, as we get lower and lower, we're going to be closer to the bottom. But the way to think about the markets is for us to think about the real economy. And ... I see a real economy which is still in severe recession.

The consensus calls for U.S. economic growth to resume in the second half at about a 2-per-cent annual clip. Is it safe to assume that you don't agree?

I expect the recession to continue all the way through the end of this year. The rate of economic contraction is going to slow down from minus 6 [per cent annually]in the first quarter to something close to minus 2 by [the fourth quarter]

And next year?

Growth is going to be so weak next year - 1 per cent or below - and the unemployment rate peaking at 10 per cent, it's going to feel like a recession, even if we're technically out of it.

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So you think it's too early to jump back into equities.

Given the severe recession and weak recovery, deflationary forces are going to still be strong. That means the pricing power of firms is going to be weak.

A weak recovery and weak pricing power means ... earnings growth is not going to be very fast, even next year.

Given that, you have to be cautious about the stock market. Eventually, the economy might bottom out, but it's not going to be in the second half of this year.

What do you think is the likely time frame then?

Maybe some time in 2010. But a market rally is going to be sustained only when there is much more robust evidence of strong economic recovery.

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So you don't see the market leading the way here.Usually people say the stock market is forward-looking. And six, nine months before the [economic] bottom, it's going to rally. First of all, the bottom ... is going to be the middle of next year. So even if it was six to nine months, then the [market] recovery would be more like towards the third or fourth quarter, not today.

Secondly, the last recession [in 2001]was short and shallow. It was only eight months, but the stock market kept on falling and falling and falling for another 16 months. So the argument that it's forward-looking and always sees the light at the end of the tunnel is actually incorrect.

Do you see this same pattern being repeated?

This time around, we have a 24-month recession, maybe longer, a global recession with bigger deflationary forces. Corporate defaults might be twice as much as in the last recession, and we have a severe financial crisis and a severe housing crisis. So where are you going to get this robust recovery? Eventually, there'll be a recovery. But I think the markets are getting ahead of the actual macroeconomic, financial and earnings data.

What's your assessment of government interventions so far, and what impact is it having on your outlook, if any?

Government policies in the U.S. and abroad are becoming more aggressive and more robust in many dimensions - monetary, fiscal, credit, foreclosures - than they were a few months ago. I always said that if we don't have more aggressive policy action, we risk having an L-shaped near-depression. The policy response is not perfect, but it's more than it was before. Now I believe that the risk of a near-depression is lower. That doesn't mean that we're not going to have a severe recession. I always said, even if we do everything right, policy-wise, we're going to have a severe U-shaped recession lasting through the end of this year.

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People are desperate for good news. Do you have anything positive to tell us?

The positive news is that there is light at the end of the tunnel, and it's not going to be a coming depression train wreck. But that's the only good news. I think the markets are way too optimistic about the recovery of the economy, of macro news, of earnings and of financial institutions. I think they'll be surprised on the downside in the next few months.

What's your take on gold in this environment?

I'm bearish on gold . I think that there will be deflationary - not inflationary - forces in the global economy for the next few years. Gold represents a safe haven not against inflation but against Armageddon, in a world in which ... banks can't even be bailed out and people are going to buy guns, ammunition, gold bars and canned food and rush to their log cabins. But that's a world of great depression. I don't think we're going to end up there.

On a personal basis, don't you find it getting harder to knock the feeble legs of confidence out from under people?

I would say people have moved in my direction. I've always been realistic. I've never been overpessimistic. And I got it right on the economy and on the markets. Actually, compared to some people who are talking about Armageddon, I'm giving a qualified statement that there is light at the end of the tunnel. But that light is going to be more towards next year, rather than this year.

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bmilner@globeandmail.com

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