ROUBINI: THE GLOBAL PERFECT STORM
Dr. Doom is back for more in the global debt crisis that never ends. And now he’s saying that the tide will sink all boats. Roubini disagrees with my notion that the US economy is decoupling from Europe and sees the recession in Europe developing into something much more than a Eurocentric phenomenon. He sees problems just about everywhere:
“In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late. A new Chinese leadership must accelerate structural reforms to reduce national savings and increase consumption’s share of GDP; but divisions within the leadership about the pace of reform, together with the likelihood of a bumpy political transition, suggest that reform will occur at a pace that simply is not fast enough.
The economic slowdown in the US, the eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the US and the European Union (that is, no “decoupling” has occurred). At the same time, the lack of structural reforms in emerging markets, together with their move towards greater state capitalism, is hampering growth and will reduce their resiliency.
Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013. The current negotiations are likely to fail, and even tightened sanctions may not stop Iran from trying to build nuclear weapons. With the US and Israel unwilling to accept containment of a nuclear Iran by deterrence, a military confrontation in 2013 would lead to a massive oil price spike and global recession.”
Read the full piece at Project Syndicate.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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29 Comments
He’s been beating this drum for a long time. When all these bears are finally right about a US recession they’ll all be worshipped by the people who forget that they were wrong for so long.
I’m not sure how they are wrong, it’s not as if the economy is in a strong and sound growth mode. It seems more the case that they are generally right, but it’s not yet as severe as they are predicting. Only time will tell if they are wrong about the severity.
The S&P 500 index is trading at 1358 right now. I’ll bet you $100 that we see 1108 in the S&P 500 before we see 1608.
I won’t take that bet as I think the same thing!
Cullen – any thoughts on the big declines in inflation expectations?
http://www.clevelandfed.org/research/data/inflation_expectations/
Looks like inflation expectations are low. For good reason. There’s very little inflation out there.
When you remove housing from the equation, inflation is about 8% in real terms.
The only way anyone can say inflation is low is to use the government lie called Hedonic Adjustments which simply says when something becomes more expensive we can just substitute something cheaper. By that line of reasoning the government will soon be assuming we are all eating dirt, as food is becoming too expensive with beef up 16% in 2 years.
“If you remove housing…” Isn’t that a bit like saying “if I remove my beer gut and my butt my body fat is only XX%!!!!”
No, the majority of benifit of the fall in home prices is going to cash investors who are the lions share of purchasers. For the average American it is not a factor.
Roubini has predicted doomsday scenarios twice a year during the past two decades; or so. So far, only one materialized, and this was one which had been forecasted by a whole lot of people, since the crash of the US housing bubble was obvious for everybody who WANTED to see.
Taking his track record of failure into account, I personally don’t give a damn about what Roubini says or not.
I wholeheartedly agree with Very Serious Sam: “don’t give a damn about what Roubini says or no”. Seems like he makes predictions (and big ones) at least 2-3 times a year. Again, I need to start a website to track all of these “expert” predictions. Nobody seems to revisit them.
That would be very interesting! Maybe you could back test what the results would have been, if an investor had followed all of the predictions from each guru for the past 10-20 years. A “Schiff index” would be mostly gold, a “Roubini index” would be mostly shorts, etc. It would be hard to work out the details, of course, but I think it could be done. You’d have to watch out for the possibility of fat-tail risk though, ie Roubini might have done poorly for the last 4 years but if he ever turns out to be right it’ll blow most everyone else out of the water.
Good points on grouping the expert picks. Maybe I should just make a list of experts, monitor their picks, and let people discern what they want from them. I could do value investors like Grantham, Einhorn, Marks, Buffett etc. (some wisely don’t make predictions though), gold bugs like Schiff, Faber etc. currency experts like Jim Rogers, Bill Gross.
The Bears have been dead wrong and they know it!
They have been so wrong. In fact we can quantify how wrong they have been. If you are a die hard Bull this is easy to do.
Go back to September of 2008 and add up every single govt. program(i.e Tarp,Talf, QE, Cash for clunkers, money market Guarantees etc.)ahhh and don’t forget(LTRO, BofJ easing, Greak bailout x10,Spain etc.). I tried to add it all up to show how wrong the bears have been with their silly analysis but the FASB changed the way they account for all this stuff so I realy couldn’t do it.
Then go back and look at what the Bulls estimated the 10yr. to be 6/2012 back on 1/2010. Also take an estimate of where the SPX was supposed to be, unemployment, GDP and housing.
Yes those silly Bears. so dumb. How could they not know that money would flow to the Bulls like a father would give money to his youngest son who blows it on gambling, whores and drugs. Only an idiot would assume all that money would go back into the real economy, education, infrastructure and long term investment.
Idiots…how could they not assume that we would do exactly what we did that got us in this mess in the first place. Because all bull markets start right here.
I just want to be the first one to ask this question. Do you think the fed will do QE4?
The Fed will be forced to do QE4. Obviously, the balance sheet recession/ liquidity trap economy won’t respond to yet another dose. Will just cause grandma to remain or add money to the risk asset market via equities rather than the CD at the local bank where she should put her money. My guess is we are very close or already in a recession. China hard landing + Euro crisis + slow growth in U.S.= global recession= multiple rounds of Bernanke induced QE.
QE4, 5, 6, 7 and 8 …
Look at the entitlement bills that are coming due, then factor in long-delayed infrastructure costs, throw in a few more trillion for defense when Iran gets the bomb and the Brothers take over in Egypt and Saudi Arabia.
The Fed is going to be very busy creating money.
“Will just cause grandma to remain or add money to the risk asset market via equities rather than the CD at the local bank where she should put her mone”
That can’t happen- One can not change the risk profile of an 80 year old simply because the Fed has given her poor choices. Unless the economists in the ivory towers decide to re-write MPT and other Prize winning Wall St. Strategies by their own accord Wall Streets compliance departments won’t allow custormers to move up on the CPQ two or three notches.
It’s a myth to think older persons would move into equities. It can’t happen through conventional Retail accounts. Even if the grandparent signed off on a more aggressive strategy the advisor or firm must now deal with the litigation of the heirs should grandma lose money between now and the date the heirs receive the accounts. It can’t happen. They are stuck!
Will grandma go open up an online account and allow herself to be more agressive. Doubt it. Why would an elderly person who does not understand the concept of giving money to poor stewards think this is the way to go. Our elderly grew up in a time when those who failed-failed. They do not understand rewarding the failures and punishing the wise.(NOR DO I)
All conjecture from here on out on what happens with the market. BUT- my point above hopefully was not lost. I would rather a conversation about…what did your account do in 2012. Was it up 5%, 15% or -5%? I think that is all that matters. Watching the SPX get set up to correct and then see more money added to protect it as though that is the logical next step now can get old. But what is more frustrating is believing one actually has to point this out to the bulls. That they trully believe this was the market they predicted. Really..they were able to fortell policies that have never been done with such alacrity.
Does it matter in the end? How you win or lose? No and Yes.
No it doesn’t matter that the U.S lost in 1972 to USSR in Munich.
And YES..it matters that the U.S lost in 1972 to USSR in Munich.
Unless you are willing to give up the world to any authority to decide what is and isn’t in the best interest of a group of people I still hold the belief the skills to do your analysis and move to cash or protect your investments should be encouraged. NOT punished by adding more QE so that any analysis as to what is expensive or risky no longer matters. All that matters is how much money and how long will the market get.
I like free markets. Maybe this is what we should expect for some period. Just part of the evolution of markets. Heck…1972 helped usher in 1992 right?
I’ll take the corruption if this is what it takes to get to the dream team.
Ok. Not necessarily Grandma but there are plenty of people that are in search of yield through equities. Their rationale is that CD’s, savings bonds don’t yield anything. Pensions (who manage a lot of money for the older generation) also are forces out on the risk curve through equities, commodities etc. Their 8% return assumptions will not be satisfied in a ZIRP environment. Therefore, there are plenty of managers and even near retirees that are seeking higher yield thus pushing up the stock market and riskier assets.
Although it is likely that the Fed will eventually do a full-blown QE4, they will do something lesser than that this week. At Wednesday’s meeting they will simply announce that Operation Twist has been extended. It will be far less than shock and awe level. A mere 4 or 5 month extension of O.T. that will carry us up to the election. My guess is that the FOMC is pretty divided, almost as divided as the whole country.
Nailed it Larry.
@VII, Maybe I didn’t nail it. ” Bank of America Merrill Lynch said the FOMC will most likely reiterate that all options are on the table but not pull the easing trigger just yet”. from Barrons.com,
See link: http://blogs.barrons.com/incomeinvesting/2012/06/18/bofa-ml-brace-for-an-fomc-disappointment/?mod=BOL_hps_blog_ii
If B of A is right, then the market will most likely sell off on this news that disappoints a lot of people. But I know that you, VII, will be happy, and happier if by some miracle the Fed swears off all future QE’s.
I think he’s more likely right than not. This is a credit bubble bursting in many countries around the world in many different forms, and there will be some lag (for example, Latin America had record inflows last year), but I don’t believe it realistic to think that any large economy is going to be able to “decouple” from the rest of the world slowing down. At least not in the short- to medium term. History shows the producers always suffer the most when the consumers run out of money. They’ll be the last ones hit. It’s only once money has fled back to the “core(s)” that credit expansion will begin again on a sustainable basis.
I think Roubini correctly sums up the real economy. Stock market does not reflect real economy. It’s a straw used to suck up money from bottom (people like me) to top. I missed out on all run ups due to QEs and twists because I was busy reading Roubini. Don’t want to miss QE4 run up. So will Fed announce QE4/lite on Wed? Is it already priced in by the market? What about Eurozone? Soros says Euro has only three months to either form a fiscal union or go bust. FT Alphaville says there’s a rise in dollar scarcity. So does that portend a Lehman moment or Euro equivelnt of Lehman?
This is a recent very interesting post by the brilliant Izabella Kaminska which may help you focusing on China a little better. Go backward thru the many links for a broader picture. Everything is getting ugly and at the same time everything is connected so deeply. I’m living many months/year in Asia, I’ve sold ALL my Asia related assets (that is also western assets whose value depends on continous growing of the BRICS)… and even if I’ve not made a fortune I’ve never lost a cent in the last 8 years. Dreaming of decoupling in a heavily connected and convoluted world economy is a huge mistake.
http://ftalphaville.ft.com/blog/2012/05/16/1002681/why-chinas-rmb-exodus-is-the-story/
Actually, there could be a silver lining in China. It could be the biggest NGDP targeting experiment in history.
People are more or less hard wired to be a bear or a bull, it is hard to change this view on life. Don’t worry about it. Make your own mind up based on your preference.
CCV,
The only reason the bears have been wrong for several years is that between Obama spending $1.5 trillion every year that we don’t have, and Bernanke pumping in several trillion more we have managed to keep the economy from totally crashing. And still we have 20 % unemployed ( if we counted as was done pre 1993 and during the Great Depression) and the economy can’t break 2% GDP. What we have done is the same as was done during the Great depression, we have spent a huge amount of stimulus money to try and reflate our economy. It did not work then, and it will not work this time. The debt burdens are too big and until they are restructured ( as in bankruptcy) there can be no real forward progress. We are just like a fish hooked on a line; we will fight and spend all we have until every last person understands that there is no way out. Then we will go through default just as many other countries in history before us have. I am sure you have read Richard Russell’s writings on this site a few times, and he has said many times that the secular bear market will have its way in the end.
Rational, well-argued doomsaying has it’s place. I think Cullen and Roubini can both be right, in a way. Maybe it’s my physicist background, but I view the economy sort of like a probabilistic superposition of states. The probability of a perfect storm catastrophic event is still “low” by most people’s standards. However, they are very high by historical standards. A event like the one Roubini proposes, that in more normal times might have a probability of 0.00001%, may now be 5%. That’s a huge jump. It’s still not “likely” to happen (that’s the essence of tail risk) but the chances are high enough that you have to be mindful of it in preparing for your contingencies, hedging strategies, and basic life plans. I don’t know about you, but when it comes to absolute catastrophes, even a 1% chance is too high for me to bet completely against it. If I knew there was only a 1% chance we’d be wiped out by an asteroid in 2012, I’d retire and spend more time on remote islands having sex than making my nestegg even bigger.
Prediction: Israel won’t lift a finger on Iran. Euro will survive debt storm. China will be twice the size of U.S economy by 2050.