in this financial crisis...
Nouriel Roubini | Apr 9, 2008
As times are very busy it is sometimes easier for me to present my
views as reported by the press/media rather than by writing directly.
So my apologies for free riding today on this press reporting.
As reported by the Financial Post today here is a summary of remarks I
made today at an event in Toronto:
Wall St bear may be gloomy but he's often right
Jacqueline Thorpe, Financial Post Published: Wednesday, April 09, 2008
Nouriel Roubini says the United States is facing a 12- to 18-month
recession that will make a mockery of the recent stock market bounce
and the notion of global economic decoupling, cause commodity prices to
slide 20% to 30%, and hit Canada hard.
"I see the stock market rally as being the last leg of a sucker's rally
-- essentially people believing the Fed can rescue the economy," Mr.
Roubini said in an interview Wednesday. "Once the flow of market and
financial news gets worse and worse, the expectation of the Fed
rescuing the economy is going to be dashed, and the stock market is
going to plunge much more."
Mr. Roubini, economics professor at the Stern School of Business,
co-founder of economics Web site RGE Monitor and Wall Street bear
extraordinaire, may sound alarming but the rest of the global economics
community has spent the better part of the past two years playing
catch-up to his increasingly dire prognostications.
He spoke on Wednesday at a panel discussion in Toronto, delivering his
comments in a rapid-fire monotone as gloomy as his message.
Mr. Roubini first forecast a slowdown in the fall of 2005 and said the
U.S. housing bubble was heading for a bust in early 2006 just as
housing starts peaked. By August 2006, while many economists were still
forecasting a soft landing, he said the recession of 2007 would be
nasty, brutish and long.
This February, Mr. Roubini predicted "one or two large and systemically
important broker dealers" would "go belly up," and credit market losses
stemming from the subprime meltdown could top US$1-trillion.
A few weeks later, Bear Stearns collapsed and the International
Monetary Fund came up with a remarkably similar prediction of losses:
US$945-billion. It must be pointed out, however, the IMF estimate is
only an estimate of losses that might be realized if distressed
securities had to be sold or marked-to-market at current prices. Some
of the assets are now attracting buyers.
In that view then, the estimates are still a worst-case scenario. Mr.
Roubini has, in fact, recently raised his credit loss forecast to
US$1.7-trillion as corporate losses pile on.
He says the stock market is following the same pattern it did in the
2001 recession. It started in March and by April the S&P 500 rose 18%
on the view Fed interest rate cuts would stave off a recession. When it
couldn't, the market eventually fell off a cliff, dropping 42%.
The S&P 500 typically drops 28% in a recession, Mr. Roubini says, and
having only come off 12% so far, it has a long way to go, he said.
Canada will not be immune. A U.S. recession of the duration he is
predicting will drag down growth in China and the rest of the world and
the idea the rest of the world can decouple from the United States goes
out the window, Mr. Roubini said.
That could knock commodity prices back 20% to 30% and remove a
significant strut of the Canadian economy.
Mr. Roubini is basing his prediction that the U.S. is facing the worst
recession in decades on the view house prices will tumble a total of
30% -- they have dropped 10% so far -- wiping out US$6-trillion in home
equity and putting 21 million households, or 40% of all
mortgage-holders, in a negative equity position. Corporate America will
be the next to suffer and the credit crisis will continue to spread,
Mr. Roubini said.
But as usually the case in economic forecasting, neither the best case
nor the worst case scenario works out but usually somewhere in the
middle.
