Bond fund guru Bill Gross, founder of Pimco, is worried that the recent rally in equity and credit markets is premature.
The continuing catastrophe in the housing market may drag down Wall Street once again, he warns.
In a research note, Gross said the short-term stock market recovery is primarily due to federal policy moves to restore liquidity. Investors, too, seem to have bet on an overly optimistic view that the market has hit bottom and that banks are recapitalizing.
It won’t last long, Gross warns.
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"Recession, and its vicious-cycle effect on employment and consumer spending, remains a threat,” Gross says.
In fact, real economy downturns often follow financial market corrections, since stocks lead the economy by as much as a half year. As a result, it’s too early to write off the slowdown, Gross says.
"This recession, though currently mild, and, as of yet, not even officially validated, may not be your garden-variety, father’s-Oldsmobile type of downturn.”
Home prices, for instance, fell by nearly 13 percent nationwide, according to the most recent S&P/Case Shiller index. Its founder, Yale Professor Robert Shiller, sees as much as a 30 percent total decline before things turn around.
The impact of such continuing asset devaluations on the economy would be "disastrous,” said Gross.
Other market observers agreed.
"On the national level, we’ve found that the housing market recession will continue through early 2009,” Steven Kleber, president of Kleber & Associates, a housing market research firm, tells MoneyNews.
"It is predicted that activity will begin to stabilize in late 2008, while 2009 will finally begin to bring a measurable improvement in sales, construction and pricing.”
Consumer spending will likely move in parallel with housing prices, Kleber says. If so, that would be in line with Gross’ estimation that the economy will slow even after Wall Street signals all clear.
"Consumers typically default to nest cozily in their homes in uneasy times,” says Kleber. "Sacrifices are made with limited dining out and entertainment outings. Consumers’ spending habits are dwindling to a less-than-desirable level of activity.”
This is causing businesses that cater to consumers to adjust. Retail bankruptcies are popping up across the board, including recently housewares vendor Linens ’N Things, and there has been a sudden rise in serious airline merger talks
"What was once considered a necessity now seems superfluous to the price-weary consumer,” says Kleber.
"Consequently, businesses must make attitudinal shifts to satisfy today’s sober audiences.”
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