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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 9, 2009 at 10:25 AM

Big merger no longer has the power to move a market facing fearsome changes

Top of the News: Remember back in those palmy days when all the distortions that cooked this recessionary brew still seemed tasty? A $41 billion merger would make the markets rocket up on anticipation of other deals, more fees to the investment bankers and lawyers, golden parachutes to CEOs, a nice payoff to shareholders… No more. Today’s deal between Merck and Schering-Plough is doing little to stop the market swoon.

Why? First, while this is another anti-competitive merger among many, it mostly allows the surviving company to slash jobs and costs, rather than also take out a pesky rival. Big Pharma has wasted more than a decade spending big on marketing of existing drugs whose patent protections are now expiring. The marketing culture, along with the demand to produce unrealistic short-term returns to Wall Street, gutted the research that create the blockbuster drugs of the 1990s. So two staggering drunks have become one. Happy days are not here again. The market is more moved by the World Bank’s forecast that the global economy will shrink for the first time since World War II. The future is discontinuity.

Catching Up With Dr. Doom Dept.: Nouriel Roubini was one of the few major economists to call the current downturn when most of his peers said the subprime uh-oh was no big deal. Now he’s going against the grain again, worrying that however ugly the current recession, it may not assume the shape of a “U,” as is the conventional wisdom.

How about an “L” instead. “With economic activity contracting in Q1 at the same rate as in Q4 a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation)…,” he writes on his RGE Monitor site. (Registration required). Deflation — sustained falling prices and with it falling asset values — was one of the worst aspects of the Great Depression.

“The scale and speed of syncronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, (capital expenditure) spending around the world.” Without a recovery in the U.S. and elsewhere, production in China can’t be sustained and…well, you get the picture. He says the recession could persist to the end of 2010.

How about the market? “Most likely we can brace ourselves for new lows on U.S. and global equities in the next 12 to 18 months.”

Today’s Econ Haiku:

Omaha seems flat

Still, even Warren Buffet

Sees us cliff diving

Comments | More in Macro/Big picture, Stock market

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