Indeed, this morning I was again - like last year - a speaker in the main session at the Davos WEF on the global economic outlook. This year - in addition to myself - Steve Roach also presented a very bearish outlook for the US and global economy.
In summary here are the main points I made at this session:The US has already entered into a recession and this recession will be much uglier than the mild recessions of 1990-91 and 2001 as a shopped out, saving less and debt burdened consumer is on the ropes and faltering.
The world will not decouple from the US hard landing; there will be significant recoupling and a sharp global economic slowdown. When the US sneezes the rest of the world catches the cold; and today the US will not experience just a simple common cold but rather a protracted and severe case of pneumonia; thus, the real and financial contagion to other economies will be severe.
Whatever the Fed does now is too little too late; the Fed had a wrong diagnosis of the economy and was behind the curve for over a year. The Fed claimed that the housing slump would bottom out a year ago; instead we have the worst housing recession in US history still getting much worse now. The Fed claimed that the subprime would be a niche and contained problem; instead we have had massive contagion to the entire financial system as a credit bubble and excessive debt and leverage occurred throughout the economy and the financial system. The Fed claimed that the housing problems would not spread to the rest of the economy; instead we had had real and financial spillovers and now a fall of most components of aggregate demand: housing, capex spending, commerical real estate investment and now, ominously, private consumption that represents 70% of demand.
The US stock market is now entering in a seriously bearish territory and will fall much more sharply throughout the year as earnings sharply drop in the recession; the Bernanke put and the aggressive Fed easing will not rescue the stock market or the financial markets as a severe recession is unavoidable regardless of what the Fed does. Fed easing cannot resolve severe insolvency problems among consumers, mortgage lenders, home builders, highly leveraged financial institutions and, soon, enough among over indebted corporate firms.
Equity markets around the world are now plunging and will plunge much more as investors are realizing that a severe US recession will lead to a sharp global economic slowdown and a significant fall in profits across the world. In an integrated global economy both economic growth rates and markets are highly correlated.
Many risky assets will face downward pressure in 2008, not just US and global equities: junk bond yield spreads will widen as bankruptcies spread; corporations will default in great number; housing bubbles will pop in many countries and lead to falls in home prices; securitized products - in housing, real estate and otherwise, will experience further massive losses.
Losses in the financial system will be greater than $1 trillion; thus there is a serious risk of a systemic banking and financial crisis. The credit crunch will become much more severe as capital of financial institutions is eroded and reintermediation of financial flows into the banking system occurs.
Certainly the audience this morning was much more receptive to my arguments than they were a year ago. And certainly the stock markets reaction to the Fed desperate 75bps easing shows that even investors now realize that the Fed will not be able to rescue the US and the global economy from a severe economic downturn.
And here's some analysis of his comments from no less than the Wall St. Journal:
Last year, Nouriel Roubini was the lone pessimist on Davos’ five-person opening economics panel. His colleagues predicted the world economy would continue to grow strongly without overheating, a rosy scenario economists dubbed “Goldilocks.” Mr. Roubini, chairman of Roubini Global Economics and a New York University economics professor, demurred. “Goldilocks is threatened by three ugly bears,” he said, predicting a subprime meltdown, an end to cheap credit and rising oil prices would bring U.S. consumer spending to a halt. At the time, Mr. Roubini’s “ugly bears” provoked more laughter than concern.
But Goldilocks has already met two of those bears and signs are mounting that the third — in the form of a sharp falloff in U.S. consumer spending — could show up soon. “Sometimes people say about me that even a broken clock can be right twice a day,” says Mr. Roubini, who contends his habitually gloomy outlook has been, over the years, more nuanced than he’s given credit for.Now, though, he’s unabashedly glum. “2008 will be an ugly year,” he says. The question of whether the U.S. will fall into recession is stale: “Now the debate is, how bad will it be? I think it will be extremely severe.” Financial-market conditions will get much worse: “When you add all the losses, not just subprime but also soon enough on auto loans, credit cards, student loans, leveraged loans and corporate bonds, we’re looking at $1 trillion of losses in the financial system.” These massive losses, he contends, mean “there’s a serious risk of a systemic financial crisis. Not just in the U.S., but globally.”
He laments that his colleagues are still getting it wrong. “The consensus is behind the curve” on a host of topics, including the severity of the U.S. recession, the extent to which the rest of the world can continue growing as the U.S. slows, and the depth of the problems in the financial system. Global central banks’ massive liquidity injections last year helped grease money-market wheels but can’t tackle “fundamental issues of insolvency and regulation. [These problems are] systemic. They take much more than liquidity to resolve.”
Pointing out that he’s been forecasting a global stock-market fall and that global markets slid sharply on fears of a U.S. recession this Monday, he predicts: “This is just the beginning of a serious bearish market in equities. Things will get much worse before they get better. I was right a year ago and I think I’ll be right again.”
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