Dead cat bounce

14 July 2009

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Far from being dull, the finance industry is full of colourful images. We've had a number of weather-related metaphors, ranging from "perfect storms" to "restructuring tsunamis", we've been warned to not "catch falling knives", and the much-touted "green shoots of recovery" now face W- or J-shaped recoveries, with many expecting fish hooks to be the predominant shape on any graph mapping the (eventual) recovery. One of my favourite metaphors is the so-called "dead cat bounce", which is an - admittedly gruesome - term that describes a short-lived rebound of stocks after a crash in prices, only then to give way to further drops.

In May, Germany increased production in April by 3.7% in the construction, industry and energy sectors. Some journalists already see that as the beginning of the end of the recession as Germany regains its footing and may find its way out of the slump. That would fit well with Germany's collective concept of the "Wirtschaftswunder" (the so-called economic miracle) that led to widespread prosperity after WWII. It would also suit the political parties that go into election in September and have been using the economic crisis as part of their mutual finger-pointing and campaigning in the run-up. Everybody will be claiming this as their success.

Much, however, indicates that the recovery is indeed a "dead cat bounce", as it may be too little, too late, and less than 4% recovery is just a fraction of the amount that industrial output dropped over the last year. This recovery is unlikely to be enough to refinance a mountain of debt or allow for proper forecasting - nobody knows whether this is sustainable, and industry professionals remain sombre in their outlook. Months ago, many forecasters warned of a false recovery when some of the released liquidity makes it out of the banks' pockets into the economy.

Now that we do have something that looks exactly like a false recovery, people begin to hope for a rebound, a sure sign of how desperate some are for good news. The challenge will now be to remain vigilant and observe whether the bouncing cat is, indeed, alive.

Yours sincerely,

Mareen Goebel, Editor, Deutsche unquote"

Tel: +44 20 7004 7462

mareen.goebel@incisivemedia.com.