How deep, How long?

USNews.com: Merrill Lynch's bearish chief economist, David Rosenberg , says it doesn't matter whether we're in a recession or not. Investors already believe that we are, and the important thing now is how long the downturn lasts.

He writes:

We published our last recession piece on Monday. And we'll give you the reason. We field too many questions on when the recession began, and when we expect it to end, all for trying to time the optimal date to leap back into the equity market. It's not that easy. As we said, the GDP data are going to be subject to multiple revisions. But more to the point, with the stock market down 20% and the 10-year note yield down 100 basis points over the past year, investors already recognize that a recessionary backdrop has arrived. Here is what is important: not the peak-to-trough decline in GDP, but rather the length of time it is going to take to make the transition to the next economic expansion and bull market.

He also warns that watching GDP numbers won't tell you much about the current investing landscape. Just look at Japan back in 1993:

Japan did not incur a "technical" recession of back-to-back quarters of negative growth until the second half of 1993. But by that time, the Nikkei had sagged 55% (to just over 17,000) and the 10-year JGB yield had declined 300 basis points (to 3%)—just to put this into some sort of perspective. Indeed, by the time we saw those consecutive quarters of negative GDP prints, the [Bank of Japan] had sliced the overnight rate by 500 basis points—a sign of how ineffective monetary policy can be when confronted with a credit crunch.

Rosenberg concludes, grumpily, "We are nervous that we have ended up following in Japan's footsteps due to the inept fiscal response to the problem. A temporary tax rebate from Uncle Sam to buy iPods tackles a real estate deflation and credit crunch as effectively as the [Japanese Liberal Democratic Party's] 'solution' in the early 1990s to build bridges and pave river beds that nobody needed."

MyTake: I do agree with him that the official recession announcement in general comes a bit too late. This is because the official arbitrator of recession, National Bureau of Economic Research(NBER) does not define recession in terms of two consecutive quarters of decline in real GDP. Their interpretation of recession is based on significant decline in the economy, lasting more than a few months by refering to figures from GDP, income, employment, production and retail sales. A quick reference to an article by Seeking Alpha on time lag for recession announcements reveal the following findings which I reproduced below.

"The time-lines as shown below highlight the four recessions in the US economy since 1980 (red line). In each chart we also show the date (blue dot) when the National Bureau of Economic Research [NBER], declared that the U.S. economy was actually in a recession".

Except for 1981, did you noticed that most of NBER's recession announcements in the era 1980-2001 only came in towards end of recession or right after recession is finally over? Pretty slow huh? So is it correct to say that we should rejoice and jump straight into the stock market once NBER has announced recession in US(or rather..ending of recession ...hehe)? The answer is probably NO if history repeats itself again. If you look at the stock market's(S&P500) behaviour in the 2001-2003 period as discussed here before and attached below, the stock market did not recover upon announcement of recession by NBER. In fact it went from 1,150 (announcement date) and skidded off further to 770 before recovering in 2003. The market took almost 2 years to recover as it was stuck in a "major downtrend mode" from the 2001 recession effect. So the real question we are facing NOW is "How deep, How long is the US recession going to be this time?" A "V", "U" or "L" shape recovery? Can it be quicker this time due to the China/India/Middle East factors? What is your "calculated" guess?

* Bloomberg: S&P 500 may lose12% before bear market ends, history shows. The study was based on average retreat of 11 bear markets since 1946.

* China's June trade surplus hits USD21.4b, the 3rd straight decline as exports slows.

* China's stock markets are feeling "happy" again! Premier Wen's comments that the government is more interested in policies to boost growth than to combat inflation and over heating. Monetary loosening policy in months ahead? Bank of China's latest inflation forecast for the year is 7.2% (from 6.8% earlier)

* South Korea's central bank has decided to keep interest rate unchanged at 5% for the 11th straight months.

* Singapore will get a new commodity exchange by next year, ie Singapore Mercantile Exchange similar to the newly announced HK Mercantile Exchange. Talk about healthy rivalry. The exchange will provide a platform for futures and options trading on precious metals, based metals, energy, agricultural commodities, carbon credits and commodity indices.

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* So June 2010 is the handling over of power by Badawi to Najib? Let's see how it "blows out". Do we really have no other candidates? I dread to think the what is in store for our future.