Wood warns of correction, says “key variable in the West is government policy”

By Edward Harrison of Credit Writedowns

Christopher Wood, the well-noted market strategist at CLSA and writer of the classic Japan crash warning book “The Bubble Economy,” is now warning of a market correction in the West.  According to CNBC India, Wood believes that the markets’ extreme upward move is increasing the chances of a major correction.

Wood is still cautious. He says there is some initial indication of a technical breakdown in the US. “The US market will be vulnerable early next year the US market. If it becomes clear, after this inventory cycle, that consumption, employment is not really recovering, then the market will go down. You will then get renewed stimulus in the US and measures trying to generate growth. The key variable in the West is government policy.” CLSA’s best case scenario is 1,200 on the S&P 500 by year-end, he added.

I agree with Wood that underlying economic demand may indeed be weak and all we may be seeing is an inventory and stimulus induced cyclical upturn (see my July post “ISM: Is this the mother of all inventory corrections?”). Of course, the worry is about the employment cycle not turning up before these measures’ positive effect wears off.  This is the question for 2010. If this happens, we get  a double dip and a huge market-sell off. Even if the employment situation starts to improve slowly while stimulus and the inventory cycle recede, this will lead to a muddle-through scenario, again inducing a correction. This is the heart of Van Hoisington and Lacy Hunt’s call about partial recoveries and stock market weakness.

For those of you who want to believe and want to load up on junk, there’s a clap for that too, via bear turned bull Richard Bernstein:

Richard Bernstein of Richard Bernstein Capital Management is a lot more bullish. “Right now, there is a blurring between the secular issues and the cyclical ones. There are people, including me, who are concerned about the secular issues, but we can’t ignore the fact that the economy is getting better, employment is improving. When that happens you will see a cyclical rebound.”

Just in September, Bernstein was saying America “practically invites another catastrophe.” What happened to that guy? He better be right on his bullish turn or he is going to have a lot of egg all over his face.


Chances of a deeper correction are rising: Chris Wood – CNBC TV18 India

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. Brick

    I don’t think inventory is well understood and it means different things to different participants in the market. What I see going on at the moment is a reduction in raw material inventories on the back of a dollar decline. Once hedging effects begin to lapse then this will feed through to margins or prices. Manufacturing and wholesaling inventories have declined, which is the result of improved efficiencies and is permanent, so don’t expect a big turn around in the ISM inventories data. Retailers are currently building inventories for the Christmas period and taking a bit of a gamble that the consumer will turn up. Despite manufacturers view point that retailers are holding too little stock I have a suspicion that it is the other way round.
    As for the employment improvement then I think once you take seasonal and cash for clunkers effects out there is very little improvement. As for seeing more stimulus then I have some doubts, why else would the treasury have ducked round trying to extend the debt ceiling, unless they know their will be a political backlash. Anyone looking for good news should have been looking at exports from the ISM data which does suggest a bit of a pick up. The problem is that the economic pick up is likely to feed into corporate profits with any upturn in US consumer disposable income likely to be a long way down the line.

    1. Edward Harrison Post author

      Good points on inventories and stimulus. Steve Keen made some similar points yesterday:


      He said if you strip out government expenditure growth and cash for clunkers, you get -0.5% for what was supposed to be a robust Q3. Clearly, underlying demand is weak.

      As for inventories, both wholesale and retail inventories were still declining in October according to the ISM data released yesterday. So inventories are still subtracting from GDP at this point. I see wholesale inventories turning up in a month or two.

  2. winterwarlock

    they haven’t a clue; it’s a new economic condition they are confronting, requiring a quantum approach. they were hoping you might help. here’s some help:

    The New Economy in a Nutshell:

    The nexus mechanism, the marriage between agency, public and private, and inside stockholders, which promulgated demographic Ponzi scheme economies, served the purpose of populating the entire face of the planet. Because we have reached relative planetary saturation, that mechanism has become cancerous; it’s consuming itself to death.

    In order to make the transition, and not be left behind, individuals need to become self-regulatory. They need to significantly increase their self-education effort to match planetary expectations.

    Without evolution, capital, everything physical, becomes inert. The universe is evolving. We serve at the pleasure of the planet; the planet serves at the pleasure of the solar system; the solar system serves at the pleasure of the galaxy, and the galaxy serves at the pleasure of the universe. Evolution, expansion and distillation, is the mechanism that makes the whole system go.

    The tiny electron, or the individual outlier, seeks to escape regulation by the massive nucleus, capital already formed, and does so by orbiting in a random pattern, until it is joined by enough additional individuals, at a sufficient distance from the nucleus, to virtually balance the fulcrum. As these individuals, electrons, form a stable orbit configuration, a neutral center develops, the middle class, acting as a buffer between the two.

    This semi-neutral center becomes a capacitor, a battery, between poles, that drives economies, and everything else in the universe – squirrels, trees, suns, everything.

    Once you can visualize this basic battery setup, and see how all systems reside on a fulcrum of fulcrums, which is the universe, you can regulate your own activity. You assess your basic talents, and develop them with trial and error as you insert yourself into sub-fulcrums. If you do not make the same mistake repeatedly, insanity, you will find your place.

    The individual operators in that nexus can voluntarily make the transition, or they can hold onto their non-performing assets and be expunged, all in one efficient cleaving. The planet is very efficient at eliminating organisms that it no longer requires. It has been doing that for quite some time. In human history, you can draw a line from the chief-medicine man nexus through the king–pope nexus to present day, and fill in the gaps between.

    One way or another, the universe is going to get its way. We are going to move toward self-regulation, we are going to roll out a quantum improvement to the Internet, and we are going to distribute independent energy cells. Of all that you can be sure. The amount of growing pain depends on you.

    The system is fully loaded with the necessary components for catalysis. The nexus may decide to shut off the Internet and drop nuclear bombs all over the place. Who knows? The universe could care less. Put the laws of physics to your back, and follow the same policy. You cannot prevent people from choosing to be ignorant, and the contagious nature of ignorance serves the purpose of the universe.

    You do not need to control the electron to benefit from its energy. In fact, that policy is counter-productive, which everyone is now learning. The fulcrum of fulcrums is a symbiotic structure. You have to improve, extend, the structure if you want to go along for the ride. Free riders are systematically expunged, by their own choices. Don’t waste your energy.

    They shorted the motor, and drained the battery. Once everyone recognizes the problem, we can get on with assembling the components. We are on the planet’s time, and in case you haven’t noticed, the planet is losing patience.

    From the perspective of the universe, the distilled wealth is mobility, the electron jumping out there against all forces limiting its effort. If you are able, jump a gap and throw back a temporary bridge for those who are not. Life is about choices.

    The fact that the old economy is liquidating, and its proprietors cannot make an incremental improvement to get it going again, tells you that there is a new economy up and running, and the planet is shifting resources accordingly.

    They should not have shorted the US Constitution, but, now that they have, and the system is both depleted and the components burnt up, they need to consider how they are going to co-exist in a world of virtual economies that cross nation/state geographic boundaries.

    1. winterwarlock

      kids being paid to have kids, and turn them over to the institutions so the people working in those institutions can make 6 figures, talking about the symptoms of their own creation?

      Oh yea, there is going to be a correction.

  3. Richard Kline

    So Brick, I think you’re on top of it with your perspective on inventories. Manufacturing is still building down, but exports have had a dab of sugar, and the policy oomph of cash-for-clunkers and first-time-suckers (ahh buyers) programs has put some money in motion in the domestic economy. What has been _very_ poorly articulated in the sound and fury about stimulus, even by most of those advocating it, is the simple fact that the function of stimulus is to handcrank the virtuous cycle of demand via artificial spending. Everyone in the present Administration is praying nightly that the consumer is a mook and bellies up for another round. And in light of that it does appear that retailers are plumping up a little in hope that discounts and money in motion will give Christmas a little boost. And that’s the $64B question. I’m with you in suspecting that surprises will be all to the downside. Everything in the markets for Q1 and Q2 will key on what the buy tape shows through 2 Jan 10. Myself, I think that the majority of consumers haven’t even had the full impact of employment and hours’ declines factored into their spending yet, and that the party spending via Wall Street of the public’s money forked over to them will prove insufficient to the corpse of the domestic economy walk along singing ‘Oh Come, All Ye Faithful.’

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