Partying Like It's Japan, 1993

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."