Viv
03-29-2008, 01:29 PM
How accurate is this person, is he reliable? Scaremongering, or the end of the world is nigh?
Also, in the final item at the foot of the page, the winners and losers are predicted as a knock-on impact of the US financial crisis. I notice some countries are listed as both. How can this be and what is the predicted outcome for countries like Japan, whose economy is almost always on a shaky peg and who may rely heavily on the global economy for survival?
Mar 26, 2008Nouriel Roubini, one of the biggest bears on Wall Street, wasn't surprised by the fire sale at The Bear Stearns Cos Inc. of New York. He said it just reinforces his 12-point gloom-and-doom outlook, which he unleashed on Wall Street in February, and he now thinks that total financial losses in the credit debacle may top the $1 trillion he previously projected.
Mr. Roubini, 49, a professor at New York University's Stern School of Business and founder of RGE Monitor, a New York-based economic research firm, was met by skepticism when he first predicted a downturn in a July 2006 report, "A Coming Recession in the U.S. Economy." Today, few doubt his early insight.
Since then, his predictions have become even more dire, with forecasts of mounting financial losses and a possible "catastrophic" meltdown in U.S. financial markets.
Mr. Roubini's 12-point outlook forecasts that housing prices will plummet 20% to 30% from their peak, subprime mortgage losses will exceed $300 billion and credit losses will spread outside the subprime arena to credit cards, auto loans and other areas.
He further expects monoline companies, which insure against defaults on certain municipal bonds and mortgage-related securities, to be downgraded, leading to more write-downs.
Other predictions include a meltdown in commercial real estate (see story, Page 44), a wave of defaults on corporate debt and credit default swaps and a sharp drop in liquidity, which could lead to fire sales of assets.
Reached by phone in Stockholm, Mr. Roubini spoke about current conditions and what he expects next.
Q. You have been quite bearish about the economy and financial markets. What was your reaction to the takeout of Bear Stearns?
A. It was not a surprise to me. Last month, I wrote a piece on 12 steps to financial disaster and my Step 9 said that one or two major financial or broker-dealer firms would go belly up, so I saw it coming, quite frankly. I put it in the context of a shadow financial system that is composed of not just broker-dealers, but hedge funds, money market funds, SIVs, conduits and so on that are all subject to a liquidity risk in addition to the credit risk. So, to me, this is just the beginning of a generalized run on these.
Q. Will we see more major banking institutions collapse or get taken out at fire sale prices?
A. Certainly some of the other broker-dealers, like Lehman Brothers [Inc. of New York], have exposure to toxic stuff like mortgage-backed securities and collateralized debt obligations, as Bear Stearns did. And all of the institutions have the characteristics of being highly leveraged, having funded themselves in forms that are very short and liquid and having done investments that are now highly liquid and highly risky. So I see other institutions being at risk — absolutely.
Q. The Fed agreed to provide financing of up to $30 billion to cover the Bear assets that were less attractive to JPMorgan Chase & Co., and this marked the first time the Fed has offered a bailout to a non-regulated bank since the Great Depression. Are you concerned?
A. It's the beginning of a radical change in monetary policy. It's not just the $30 billion that the Fed confirmed to Bear Stearns via JPMorgan — there were two other major options that went in the same direction. One was the decision [two weeks ago] to provide $200 billion so that all primary dealers, including non-bank financial institutions, would be able to swap their illiquid and toxic MBS [paper] for safe Treasuries. The other was the Fed giving any primary dealer, including non-banks, access to the Fed discount window on the same terms as banking institutions. This is a radical change; we haven't seen anything like this since the Great Depression.
These are financial institutions that are not regulated or supervised by the Fed. The Fed has no idea of whether they are just illiquid or insolvent, which creates a massive moral hazard problem. It's a radical shift in the way the Fed operates — and a dangerous way, I would argue.
Q. Dangerous in what way?
A. You're telling people that even if they have made reckless lending and investment decisions, mismanaged risk or continue to do stupid things, the government will bail them out. We are in a systemic financial crisis.
Q. In your 12-step prediction, you estimated total financial losses from subprime lending, credit cards and auto loans at $1 trillion. Has your view changed after Bear Stearns?
A. The losses that we're facing at this point — $1 trillion — is the floor, not the ceiling. Losses might be much bigger than that. Even if you believe subprime losses might be in the order of $300 billion to $400 billion, more losses are going to be derived from commercial real estate, credit cards, auto loans, student loans and leverage loans, as well as from corporate defaults and losses from city assets.
Eventually the monolines will be downgraded, which means we'll see another round of write-downs on the things that they insured.
Q. Where are home prices going?
A. Two years ago, I predicted home prices would fall cumulatively 20%, but now I believe it will be at least 30%.
With a 20% fall in home prices, about 16 million households are under water. They have negative equity, which means the value of their homes is below the value of their mortgages. With a 30% drop in prices, you have 21 million households that are in negative equity. And since the mortgages are no-recourse loans, essentially they can walk away.
Even if only half of the 16 million households were to walk away, that alone could lead to losses for the financial system of $1 trillion. Even a 20% drop in home values may imply losses of $1 trillion that are not priced into the market today. So that's the floor. Again, it could be higher — as much as $2 trillion — if prices fall 30% and more people walk.
Q. You are predicting problems in commercial real estate, which we haven't seen yet. When do you expect the crisis to hit?
A. The same kind of reckless lending practices that occurred in subprime also occurred in commercial real estate — things like really high loan-to-value ratios and inflated estimations of how much rent would increase. If you look at the CMBX index (which tracks bonds backed by real estate loans), the spreads imply a huge number of defaults on existing commercial real estate loans. More important, the market for new commercial real estate loans is totally frozen, like the one for subprime new originations.
Q. But when will this happen?
A. That shoe has not dropped yet. But I expect the severe recession in residential housing will lead to a severe recession in commercial real estate. The reason is simple: If you go west, you have entire ghost towns outside of Phoenix, Las Vegas and throughout California. Who is going to be building new shopping centers, shopping malls, offices and stores where you have ghost towns? Also, there has been a lot of commercial real estate activity in the last couple of years, including a huge increase in retail capacity at a time of consumer-led recession. So, I expect [a commercial real estate] collapse will occur in the next few quarters.
Q. How bad will things get?
A. I would argue this is the worst financial crisis the U.S. has had since the Great Depression. We haven't seen this type of real financial turmoil for the last 70 years. Of course, it's not going to be as bad as the Great Depression. But this isn't your typical run-of-the-mill recession that in the last two episodes lasted only eight months with a minor contraction in output. This is going to last at least 12 months and more likely 18 months, which is something we haven't seen in decades.
Q. So you expect the economy to start turning around in mid-2009?
A. The real economic activity, yes. But some parts of the system are going to be in a severe contraction for much longer; home prices are going to keep falling for another three years, in my view. And the financial mess is going to take years to clean up.
E-mail Janet Morrissey at jmorrissey@investmentnews.com.
Since I gave that interview a few days ago the flow of the latest macro news has been utterly dismal: consumer confidence falling sharply, new and existing home prices falling at an accelerated rate, new home sales down, existing home sales up only because of sharply falling prices, building permits in free fall, durable goods orders sharply down, defaults and foreclosures on mortgages sharply up, estimates of financial losses and writedowns rising, jobless claim sharply up, etc.
Thus, the new conventional wisdom that this will be a short and shallow recession lasting only six months is rapidly losing its credibility. This will be a much longer, deeper and more severe recession, lasting at least 12 months and as much as 18 months. Thus, expect that the latest equity market suckers' rally following the Bear Stearns bailout will soon fizzle away as the onslaught of lousy macro and financial news will dominate any hope that the Fed can rescue the economy and the markets.
In the meanwhile it was good to hear that Secretary Paulson is now agreeing with my view that, after the Bear Stearns rescue and the extension of the Fed's safety net to systemically important non bank primary dealers, it is time to supervise and regulate such systemically important primary delalers on the same terms as banks.http://www.rgemonitor.com/blog/roubini/251661
and
In an era of globalization, no country is immune when the United States falls onto hard times. Here’s a look at how economies elsewhere will fare.
The Losers:
Mexico and Canada: Living next door to world’s biggest economy has its advantages, but it has big drawbacks, too. Exports to the United States represent about a quarter of each country’s GDP, so direct trade links will bear the brunt of a slowdown. Expect the manufacturing sectors of both countries to feel the pinch.
China: The world’s fastest-growing economy can’t help but be affected when the world’s largest economy slows down, since China relies on exports to the United States as one of its main sources of growth. In recent years, China has boasted double-digit growth. Officially, Chinese economists expect growth to slow down to 9 percent in the wake of a U.S. recession, but only if such a recession is mild, lasting two quarters. If the U.S. recession is severe—four quarters or more—and is centered on a faltering U.S. consumer who buys fewer Chinese goods, then China’s growth is likely to slow to 6 or 7 percent, a hard landing, indeed.
Indonesia, Malaysia, Taiwan, and South Korea: China gets raw materials such as timber and rubber from Southeast Asian countries like Indonesia and Malaysia. Other East Asian countries, like Taiwan and South Korea, send component parts to the mainland, which are then assembled into finished products that are shipped to the United States. Both groups of exporters are likely to fall—and fall hard—if a drop in Chinese exports to the United States leads to less Chinese demand for these goods and raw materials throughout Asia. Keep an eye on metals, coal, and food products in particular.
Latin America: Chile’s got copper; Brazil’s got minerals; Argentina’s got livestock and feed. They’ll have to scrounge to sell these and other commodities elsewhere if the United States and China isn’t buying as much as before. Prices of commodities could fall by 20 to 30 percent in a U.S. recession followed by a sharp economic slowdown.
Estonia, Latvia, Lithuania, Hungary, Bulgaria, Romania: They all run large deficits, are experiencing excessive credit booms and housing bubbles, and have an overvalued currency. If capital dries up because of the global credit crunch, it could lead to deep financial woes for these smaller European economies: Households that borrowed Swiss francs or Euros to finance their mortgages could go bankrupt and, in turn, local banks could go belly up.
Britain, France, and Germany: As a recession in the United States takes hold, the fall in U.S. demand will mean lower exports by European companies, as well as lower sales and profits for European firms—such as BMW, Unilever, and others—that produce everything from cars to consumer products in the United States. A weaker dollar means that the value—in euros—of European investments in the United States will suffer a major capital loss. High oil prices won’t help, either. And the deflation of housing bubbles in Britain, France, Spain, and elsewhere will slow down growth across the continent.
Japan: The Japanese economy is perpetually anemic, always on the borderline between growth and recession, between inflation and deflation. A deep U.S. recession will likely tip Japan over the edge, and into a recession of its own. Most of Japan’s economic growth in the last few years has been driven by external demand for its goods (such as consumer electronics, cars, etc.), net exports with a weak yen. Domestic private consumption has been weak, as incomes and wage growth have remained flat. And, as one of the world’s largest energy importers, oil hovering at $100 a barrel will make it hard for Tokyo to shake off its economic malaise any time soon.
And a Few Winners:
The United States: Ironically, some parts of the U.S. economy will be the biggest winner. For example, a weaker dollar means that the export competitiveness of American trade partners will be reduced while U.S. competitiveness will receive a boost. American firms will benefit from more exports to the rest of the world. Sharply lower home prices are bad news for current home owners but good news to those renters who will now find buying a house more affordable.
Importers in Europe, Japan, and China: A U.S. recession and global economic slowdown will eventually lead to a sharp fall in the price of oil, energy, and other commodities. So expect the heavy importers in these areas—particularly Europe, Japan, and China—to find a silver lining amidst the storm.
European Shoppers: American goods may have never been so cheap for people with euros in their pockets. If you have visited New York City recently, you may have noticed the swarm of European tourists hunting for bargains from a weak dollar. Expect these European crowds to grow even larger as the savings on luxury goods, clothes, and shoes climbs higher and higher. It may also put a smile on the face of a few American retailers, too.
Nouriel Roubini is chairman of RGE Monitor and professor of economics at New York University’s Stern School of Business.http://www.foreignpolicy.com/story/cms.php?story_id=4196
Also, in the final item at the foot of the page, the winners and losers are predicted as a knock-on impact of the US financial crisis. I notice some countries are listed as both. How can this be and what is the predicted outcome for countries like Japan, whose economy is almost always on a shaky peg and who may rely heavily on the global economy for survival?
Mar 26, 2008Nouriel Roubini, one of the biggest bears on Wall Street, wasn't surprised by the fire sale at The Bear Stearns Cos Inc. of New York. He said it just reinforces his 12-point gloom-and-doom outlook, which he unleashed on Wall Street in February, and he now thinks that total financial losses in the credit debacle may top the $1 trillion he previously projected.
Mr. Roubini, 49, a professor at New York University's Stern School of Business and founder of RGE Monitor, a New York-based economic research firm, was met by skepticism when he first predicted a downturn in a July 2006 report, "A Coming Recession in the U.S. Economy." Today, few doubt his early insight.
Since then, his predictions have become even more dire, with forecasts of mounting financial losses and a possible "catastrophic" meltdown in U.S. financial markets.
Mr. Roubini's 12-point outlook forecasts that housing prices will plummet 20% to 30% from their peak, subprime mortgage losses will exceed $300 billion and credit losses will spread outside the subprime arena to credit cards, auto loans and other areas.
He further expects monoline companies, which insure against defaults on certain municipal bonds and mortgage-related securities, to be downgraded, leading to more write-downs.
Other predictions include a meltdown in commercial real estate (see story, Page 44), a wave of defaults on corporate debt and credit default swaps and a sharp drop in liquidity, which could lead to fire sales of assets.
Reached by phone in Stockholm, Mr. Roubini spoke about current conditions and what he expects next.
Q. You have been quite bearish about the economy and financial markets. What was your reaction to the takeout of Bear Stearns?
A. It was not a surprise to me. Last month, I wrote a piece on 12 steps to financial disaster and my Step 9 said that one or two major financial or broker-dealer firms would go belly up, so I saw it coming, quite frankly. I put it in the context of a shadow financial system that is composed of not just broker-dealers, but hedge funds, money market funds, SIVs, conduits and so on that are all subject to a liquidity risk in addition to the credit risk. So, to me, this is just the beginning of a generalized run on these.
Q. Will we see more major banking institutions collapse or get taken out at fire sale prices?
A. Certainly some of the other broker-dealers, like Lehman Brothers [Inc. of New York], have exposure to toxic stuff like mortgage-backed securities and collateralized debt obligations, as Bear Stearns did. And all of the institutions have the characteristics of being highly leveraged, having funded themselves in forms that are very short and liquid and having done investments that are now highly liquid and highly risky. So I see other institutions being at risk — absolutely.
Q. The Fed agreed to provide financing of up to $30 billion to cover the Bear assets that were less attractive to JPMorgan Chase & Co., and this marked the first time the Fed has offered a bailout to a non-regulated bank since the Great Depression. Are you concerned?
A. It's the beginning of a radical change in monetary policy. It's not just the $30 billion that the Fed confirmed to Bear Stearns via JPMorgan — there were two other major options that went in the same direction. One was the decision [two weeks ago] to provide $200 billion so that all primary dealers, including non-bank financial institutions, would be able to swap their illiquid and toxic MBS [paper] for safe Treasuries. The other was the Fed giving any primary dealer, including non-banks, access to the Fed discount window on the same terms as banking institutions. This is a radical change; we haven't seen anything like this since the Great Depression.
These are financial institutions that are not regulated or supervised by the Fed. The Fed has no idea of whether they are just illiquid or insolvent, which creates a massive moral hazard problem. It's a radical shift in the way the Fed operates — and a dangerous way, I would argue.
Q. Dangerous in what way?
A. You're telling people that even if they have made reckless lending and investment decisions, mismanaged risk or continue to do stupid things, the government will bail them out. We are in a systemic financial crisis.
Q. In your 12-step prediction, you estimated total financial losses from subprime lending, credit cards and auto loans at $1 trillion. Has your view changed after Bear Stearns?
A. The losses that we're facing at this point — $1 trillion — is the floor, not the ceiling. Losses might be much bigger than that. Even if you believe subprime losses might be in the order of $300 billion to $400 billion, more losses are going to be derived from commercial real estate, credit cards, auto loans, student loans and leverage loans, as well as from corporate defaults and losses from city assets.
Eventually the monolines will be downgraded, which means we'll see another round of write-downs on the things that they insured.
Q. Where are home prices going?
A. Two years ago, I predicted home prices would fall cumulatively 20%, but now I believe it will be at least 30%.
With a 20% fall in home prices, about 16 million households are under water. They have negative equity, which means the value of their homes is below the value of their mortgages. With a 30% drop in prices, you have 21 million households that are in negative equity. And since the mortgages are no-recourse loans, essentially they can walk away.
Even if only half of the 16 million households were to walk away, that alone could lead to losses for the financial system of $1 trillion. Even a 20% drop in home values may imply losses of $1 trillion that are not priced into the market today. So that's the floor. Again, it could be higher — as much as $2 trillion — if prices fall 30% and more people walk.
Q. You are predicting problems in commercial real estate, which we haven't seen yet. When do you expect the crisis to hit?
A. The same kind of reckless lending practices that occurred in subprime also occurred in commercial real estate — things like really high loan-to-value ratios and inflated estimations of how much rent would increase. If you look at the CMBX index (which tracks bonds backed by real estate loans), the spreads imply a huge number of defaults on existing commercial real estate loans. More important, the market for new commercial real estate loans is totally frozen, like the one for subprime new originations.
Q. But when will this happen?
A. That shoe has not dropped yet. But I expect the severe recession in residential housing will lead to a severe recession in commercial real estate. The reason is simple: If you go west, you have entire ghost towns outside of Phoenix, Las Vegas and throughout California. Who is going to be building new shopping centers, shopping malls, offices and stores where you have ghost towns? Also, there has been a lot of commercial real estate activity in the last couple of years, including a huge increase in retail capacity at a time of consumer-led recession. So, I expect [a commercial real estate] collapse will occur in the next few quarters.
Q. How bad will things get?
A. I would argue this is the worst financial crisis the U.S. has had since the Great Depression. We haven't seen this type of real financial turmoil for the last 70 years. Of course, it's not going to be as bad as the Great Depression. But this isn't your typical run-of-the-mill recession that in the last two episodes lasted only eight months with a minor contraction in output. This is going to last at least 12 months and more likely 18 months, which is something we haven't seen in decades.
Q. So you expect the economy to start turning around in mid-2009?
A. The real economic activity, yes. But some parts of the system are going to be in a severe contraction for much longer; home prices are going to keep falling for another three years, in my view. And the financial mess is going to take years to clean up.
E-mail Janet Morrissey at jmorrissey@investmentnews.com.
Since I gave that interview a few days ago the flow of the latest macro news has been utterly dismal: consumer confidence falling sharply, new and existing home prices falling at an accelerated rate, new home sales down, existing home sales up only because of sharply falling prices, building permits in free fall, durable goods orders sharply down, defaults and foreclosures on mortgages sharply up, estimates of financial losses and writedowns rising, jobless claim sharply up, etc.
Thus, the new conventional wisdom that this will be a short and shallow recession lasting only six months is rapidly losing its credibility. This will be a much longer, deeper and more severe recession, lasting at least 12 months and as much as 18 months. Thus, expect that the latest equity market suckers' rally following the Bear Stearns bailout will soon fizzle away as the onslaught of lousy macro and financial news will dominate any hope that the Fed can rescue the economy and the markets.
In the meanwhile it was good to hear that Secretary Paulson is now agreeing with my view that, after the Bear Stearns rescue and the extension of the Fed's safety net to systemically important non bank primary dealers, it is time to supervise and regulate such systemically important primary delalers on the same terms as banks.http://www.rgemonitor.com/blog/roubini/251661
and
In an era of globalization, no country is immune when the United States falls onto hard times. Here’s a look at how economies elsewhere will fare.
The Losers:
Mexico and Canada: Living next door to world’s biggest economy has its advantages, but it has big drawbacks, too. Exports to the United States represent about a quarter of each country’s GDP, so direct trade links will bear the brunt of a slowdown. Expect the manufacturing sectors of both countries to feel the pinch.
China: The world’s fastest-growing economy can’t help but be affected when the world’s largest economy slows down, since China relies on exports to the United States as one of its main sources of growth. In recent years, China has boasted double-digit growth. Officially, Chinese economists expect growth to slow down to 9 percent in the wake of a U.S. recession, but only if such a recession is mild, lasting two quarters. If the U.S. recession is severe—four quarters or more—and is centered on a faltering U.S. consumer who buys fewer Chinese goods, then China’s growth is likely to slow to 6 or 7 percent, a hard landing, indeed.
Indonesia, Malaysia, Taiwan, and South Korea: China gets raw materials such as timber and rubber from Southeast Asian countries like Indonesia and Malaysia. Other East Asian countries, like Taiwan and South Korea, send component parts to the mainland, which are then assembled into finished products that are shipped to the United States. Both groups of exporters are likely to fall—and fall hard—if a drop in Chinese exports to the United States leads to less Chinese demand for these goods and raw materials throughout Asia. Keep an eye on metals, coal, and food products in particular.
Latin America: Chile’s got copper; Brazil’s got minerals; Argentina’s got livestock and feed. They’ll have to scrounge to sell these and other commodities elsewhere if the United States and China isn’t buying as much as before. Prices of commodities could fall by 20 to 30 percent in a U.S. recession followed by a sharp economic slowdown.
Estonia, Latvia, Lithuania, Hungary, Bulgaria, Romania: They all run large deficits, are experiencing excessive credit booms and housing bubbles, and have an overvalued currency. If capital dries up because of the global credit crunch, it could lead to deep financial woes for these smaller European economies: Households that borrowed Swiss francs or Euros to finance their mortgages could go bankrupt and, in turn, local banks could go belly up.
Britain, France, and Germany: As a recession in the United States takes hold, the fall in U.S. demand will mean lower exports by European companies, as well as lower sales and profits for European firms—such as BMW, Unilever, and others—that produce everything from cars to consumer products in the United States. A weaker dollar means that the value—in euros—of European investments in the United States will suffer a major capital loss. High oil prices won’t help, either. And the deflation of housing bubbles in Britain, France, Spain, and elsewhere will slow down growth across the continent.
Japan: The Japanese economy is perpetually anemic, always on the borderline between growth and recession, between inflation and deflation. A deep U.S. recession will likely tip Japan over the edge, and into a recession of its own. Most of Japan’s economic growth in the last few years has been driven by external demand for its goods (such as consumer electronics, cars, etc.), net exports with a weak yen. Domestic private consumption has been weak, as incomes and wage growth have remained flat. And, as one of the world’s largest energy importers, oil hovering at $100 a barrel will make it hard for Tokyo to shake off its economic malaise any time soon.
And a Few Winners:
The United States: Ironically, some parts of the U.S. economy will be the biggest winner. For example, a weaker dollar means that the export competitiveness of American trade partners will be reduced while U.S. competitiveness will receive a boost. American firms will benefit from more exports to the rest of the world. Sharply lower home prices are bad news for current home owners but good news to those renters who will now find buying a house more affordable.
Importers in Europe, Japan, and China: A U.S. recession and global economic slowdown will eventually lead to a sharp fall in the price of oil, energy, and other commodities. So expect the heavy importers in these areas—particularly Europe, Japan, and China—to find a silver lining amidst the storm.
European Shoppers: American goods may have never been so cheap for people with euros in their pockets. If you have visited New York City recently, you may have noticed the swarm of European tourists hunting for bargains from a weak dollar. Expect these European crowds to grow even larger as the savings on luxury goods, clothes, and shoes climbs higher and higher. It may also put a smile on the face of a few American retailers, too.
Nouriel Roubini is chairman of RGE Monitor and professor of economics at New York University’s Stern School of Business.http://www.foreignpolicy.com/story/cms.php?story_id=4196