[it's somewhat hard to separate what Roubini writes from what he quotes. The parts with numbers on the right are what he says.]
Estimates of $1 trillion are now a floor, not a ceiling, for the losses 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. [1] 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. [2] Also, as widely reported by the press, the IMF is now on board with my estimate that credit losses from this financial crisis could be close to $1 trillion (exactly $945 billion according to the IMF). As summarized by Helen Thomas in FT's Alphaville: $1 trillion and bust Another one in the can for Nouriel Roubini. He first mooted an estimate of $1 trillion in financial losses from the subprime fallout back in February. The IMF is the latest to fall, almost, into line. See the 2008 Global Financial Stability Report, all 211 pages of it (rather more diminutive executive summary also available). The IMF estimates total global losses from the deterioration of credit as of March at $945bn, with $565bn coming on residential mortgages and related securities. The remainder is broken down into $240bn on commercial real estate, $120bn on corporate debt and $20bn on consumer debt. The full break down is on page 51. Its numbers come out some way above other recent estimates - even taking into account that about half the IMF estimate on subprime mortgage-related losses will hit banks. S&P last month put total writedowns on subprime-related ABS at $285bn, with about $110bn already taken by the banks and $150bn logged in total. The agency didn't include government sponsored enterprises in its figures. According to the IMF, US banks and GSEs could report a further $49bn in writedowns, while European banks could be set for a further $43bn. The full breakdown is below. In any case, as Alea suggests, the IMF report is rather damning, citing a "collective failure" to appreciate the extent to which leverage was being taken on by institutions, and indicating that if anything the credit crisis is still playing out. For those perplexed by what's going on, the IMF's monster report should provide some pointers, if little succor. It even has a section, page 23, entitled, "Credit squeeze, or credit crunch?" [3] Indeed, as I argued a few weeks ago "$1 trillion is the new size 6!" [4] As for the blogosphere debate on the shape of the current recession, following my recent The US Recession: V or U or W or L-Shaped?, here is again - as a sample - FT's Alphaville's take: Taking a bath: the shape of the downturn to come Now that US recession is a racing certainty, the debate has moved on to the shape of things to come. V-shaped, good: a short, sharp downturn with a speedy recovery. Those who were last year telling us that all was enduringly rosy have tended to move towards this letter of the alphabet in describing the forthcoming downturn. W-shaped: a double dip. U-shaped, or Martin Sorrell's bath-shaped or even saucer-shaped variant: a more protracted period spent at the bottom. And most feared of all, the Japanese influenced L-shaped recession: a lasting period of stagnation, bordering on economic depression. Nouriel Roubini considers the options. His view is that we're headed for a U-shaped downturn, with the contraction lasting 12 to 18 months through to the middle of 2009. The US, he adds, is experiencing the worst housing recession since the Great Depression, the US consumer is shopped-out and debt-burdened, and losses that started in the subprime meltdown will spread across the financial landscape in the coming slump. One cannot rule out a W-shaped experience either. That largely depends on whether the tax rebate received by US households in the middle of 2008 is saved or consumed. But the notoriously bearish Roubini doesn't think the US is in for the ultimate L.: "My view is that a protracted economic stagnation - bordering on an economic depression - is unlikely in the case of the US as the policy response of the US is already more aggressive than the one of Japan…..Also Japanese postponed the necessary corporate and banking restructuring for years keeping alive zombie firms and zombie banks via inappropriate forms of forbearance. In the US both private and especially public efforts to restructure the impaired assets and firms will start faster and more aggressively. Thus the risk of a decade-long economic stagnation is quite limited so far." Roubini though is betting on the "most severe recession and financial crisis that the US has experienced for decades," while markets are still pricing in a relatively mild downturn. Calculated Risk picks up his thread, but is slightly more positive about the potential for employment to hold up. Either way, it's all going pear-shaped. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
