ANALYSIS:While vital steps led to a one-day market bounce, experts believe recovery will be slow, writes Proinsias O'Mahony
MARKET UNCERTAINTY and volatility is unlikely to ease soon, a number of influential figures cautioned yesterday.
Federal Reserve chairman Ben Bernanke said global authorities had only taken a "critical first step" towards financial stabilisation and credit markets would "take some time to unfreeze". Even if conditions stabilised, Bernanke said, broader economic recovery would not happen right away.
JP Morgan chief executive officer Jamie Dimon was also circumspect after announcing $5.8 billion (€4.3 billion) in writedowns yesterday, saying "all business lines" would be hurt by the slowing economy and that "we have to be prepared that it gets a lot worse". His caution was echoed by Mohamed el-Erian, chief executive of Pimco, the world's biggest bond fund, who said recovery would be a "protracted process". El-Erian said he would "wait on the sidelines" for now.
That's exactly what some of Wall Street's most successful hedge-fund managers are doing, with a scramble for cash in recent days. Hedge-fund wizard Steve Cohen, whose $14 billion fund has generated an annual return of 43 per cent to investors since its launch in 1992, reportedly sold half of his stock holdings last week and moved into the safety of money-market and other short-term securities.
John Paulson, manager of a $35 billion hedge fund, is also said to have much of his fund in cash at the moment. Paulson was Wall Street's biggest earner last year after correctly predicting a meltdown in the subprime mortgage market. More recently, he has been raising money for a fund that would buy stakes in financials.
Cohen and Paulson's trepidation mirrors that of their hedge-fund colleagues, who are said to have put as much as $400 billion into cash equivalents recently. Hurt by the restrictions placed on short-selling, the industry is fearful of anticipated further regulation.
US Treasury secretary Hank Paulson wants to "kill the bad HFnds + heavily regulate the rest", according to an e-mail by former Lehman Brothers chief Dick Fuld, recounting an April meeting.
With Monday's euphoria being followed by heavy falls on Tuesday and yesterday, investors remain uncertain as to whether last Friday's falls mark the bottom for this bear market.
Statistics show there have been 36 days in the past 80 years when US markets rose by more than 6 per cent. Some 32 of these occurred between 1929 and 1933, with 12 occurring before the market nadir in June 1932.
While the enormous 11 per cent gain on Monday goes way beyond the standard "dead cat bounce", investors are undecided as to whether further pain is in store.
They're right to be cautious, according to Nouriel Roubini. The economics professor has become a household name as one after another of his dire predictions was fulfilled over the last year. He insisted yesterday stock markets would "sputter" as they see that the economy is "really tanking".
Roubini said "there are significant downside risks still to the market and the economy", predicting an 18- to 24-month recession, 9 per cent unemployment and a further 15 per cent fall in house prices.
That would mean a 40 per cent correction in house prices from peak to trough, exceeding falls seen during the Great Depression.
Roubini said the US government would need "twice as much" as the $250 billion recapitalisation programme earmarked for banks, adding that total bank losses from toxic debt would be "closer to $3 trillion". So far, banks have taken $650 billion of writedowns.
Despite his warnings, Roubini said the revised bailout was "going in the right direction" and was vastly superior to the "silly" plan devised by Paulson last month.
Former Fed chairman Paul Volcker was more unequivocal in his backing, saying this week that massive government intervention was "necessary" to "restore some sense of stability and confidence".
Like Roubini, however, Volcker said the global economy inevitably faced a "considerable" recession.
The global financial system was in "intensive care" and would remain there for a considerable time, he added.
