It's not over yet for riders on the storm

Rock legend Jim Morrison isn't the first person you expect to hear quoted when you sit down for a coffee with the chief economist of mega-powerful ratings agency Standard & Poor's. But why not - if the quote fits, use it.

The world is in a "been down so long it looks like up to me" phase says David Wyss, citing a line once sung by The Doors.

The affable American has written a research paper subtitled "Spraying Roundup on the Green Shoots" but he is no merchant of doom.

He is just concerned about the risk of consumers and investors overreacting to news that the world did not end after last year's financial meltdown. "We've hit bottom," he says. "But that doesn't mean it's over."

Equity markets are ahead of themselves and are due for a correction at some point, he says. Gut feeling suggests that September and October - the historic bogey months for Wall St - are a hurdle that needs to be cleared.

Credit markets have returned to levels that are about normal for a recession. The spreads are still about three times worse than they were in March 2007, when cash was still cheap and easy. But they are well below the stratospheric heights they hit post-Lehman and are running at about double the long-term average.

So what that means is the parameters for dealing with the downturn have become more manageable. Historical precedents are more useful because we can look to recessions of the last 30 years instead of trying to second guess how the lessons of the 1930s apply to today's vastly different global landscape.

Unfortunately - unlike recessions of the 1980s and early 1990s - there is no way the world can expect US consumers to lead the recovery, Wyss says. It's not that the US consumer will necessarily be a big drag on the recovery either, he says. It's just that there is very little to stimulate demand - other than Government stimulus which has a finite lifespan of two or three years.

It's Wyss' job to set the tone for the analysts whose ratings determine the financial fate of everyone from banks to nations.

The rating agencies have copped their share of criticism for failing to pick the scale of the meltdown.

To his credit Wyss doesn't bristle at questions about why he didn't see it coming. Like many other economists he did pick the housing bubble.

But there were cultural factors at work which made the scale of the problem hard to see.

It had become common practice for US home buyers to take second mortgages on investment properties.

It was also common for buyers to tell the banks that they were going to be owner-occupiers to get more favourable terms. In fact they were renting the investment properties out.

Without actually knocking on doors these were issues that were extremely difficult for banks to pick up, he says.

When values fell the buyers - helped by US bankruptcy laws - simply sent the keys back to the banks and walked away.

Economists were modelling off the Texan housing crash of the 1980s where banks selling after foreclosure were getting back a miserable 60 per cent of the value. In the US that has now fallen to about 40 per cent and in places like Detroit it is minus 10 per cent. In other words the sale price doesn't even cover the costs of selling the property. In Detroit, inner-city houses are selling for about US$20,000.

There are other rays of hope though. Wyss doesn't see too much slowing down Chinese growth in the next few years.

But fundamentally the world needs to see a return to the kind of capital expenditure that creates new technology and drives improved production. We're going to need to be patient, he says.