Roubini Sees Stock Declines as Soros Warns on Economy
Oct. 5, 2009 (BloombergTV) -- New York University Professor Nouriel Roubini
said stock markets may drop and billionaire George Soros warned the “bankrupt”
U.S. banking system will hamper its economy, highlighting doubts about the
sustainability of the global recovery.
“Markets have gone up too much, too soon, too fast,” Roubini, who accurately
predicted the financial crisis, said in an interview in Istanbul on Oct. 3.
U.S. stocks may suffer a “major decline” after climbing to the highest levels
in almost a year two weeks ago, according to technical analyst Robert Prechter,
founder of Elliott Wave International Inc
Stocks have surged around the world in the past six months as evidence mounts
that the economy is emerging from its deepest recession since the 1930s. The
Standard & Poor’s 500 Index has soared 51 percent from a 12-year low in March
while Europe’s Dow Jones Stoxx 600 is up 48 percent. The euphoria contrasts
with warnings from policy makers and investors like Soros, who said today that
the U.S. economic recovery will be “very slow.”
U.S. consumers are “overdebted” and the country’s banking system has been
“basically bankrupt,” Soros said in Istanbul today. “The United States has a
long way to go.”
Group of Seven finance ministers and central bankers also struck a cautious
tone after meeting on the shores of the Bosporus over the weekend, saying the
prospects for growth “remain fragile.”
‘Barely Recovering’
“The real economy is barely recovering while markets are going this way,”
Roubini said. “I see the risk of a correction, especially when the markets now
realize that the recovery is not rapid and V-shaped, but more like U-shaped.
That might be in the fourth quarter or the first quarter of next year.”
U.S. and European stocks gained today after reports showed service industries
expanded on both sides of the Atlantic.
“Stocks are very overvalued,” Prechter, who advised betting against U.S.
equities three months before the market peaked in October 2007, said in an Oct.
1 telephone interview. “Stocks peaked in September and are back in a bear
market.”
The S&P 500 will probably fall “substantially below” 676.53, the 12-year low
reached on March 9, he said. His projection implies a drop of more than 34
percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in
New York.
Valuations
Gains in the index have pushed valuations to more than 19 times reported
operating profits from the past year, data compiled by Bloomberg show. That’s
near the most expensive level since 2004.
U.S. stocks fell last week after manufacturing expanded less than anticipated
and unemployment climbed to a 26-year high of 9.8 percent. In the 16-nation
euro region, the jobless rate is at 9.6 percent, the highest in more than a
decade.
HSBC Holdings Plc Chief Executive Officer Michael Geoghegan fears there will be
a second global economic slump, the Financial Times reported today, citing an
interview. Geoghegan forecast a W-shaped recovery and said the “reality is that
profits will be quite reduced,” the newspaper reported.
Creating Bubbles
Stocks will continue to advance, according to Byron Wien, vice chairman of
Blackstone Group LP. The S&P 500 is poised for its biggest fourth-quarter rally
in a decade as the economy recovers and earnings exceed analysts’ forecasts,
Wien said in an interview on Sept. 28.
The global equity rally has added about $20.1 trillion to the value of stocks
worldwide since this year’s low on March 9. Governments have poured about $2
trillion of stimulus into the global economy while central banks have cut
interest rates to close to zero in efforts to revive growth.
“In the short run we need monetary and fiscal stimulus to avoid another tipping
point and to avoid deflation, but now this easy money has already started to
create asset bubbles in equities, commodities, credit and emerging markets,”
Roubini said. “For the sake of achieving growth stability again and avoiding
deflation, we may be planting the seeds of the next cycle of financial
instability.”
