Roubini Is Right: Recovery Will Be Slow 15 comments
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He's as blind as he can be,
just sees what he wants to see,
Nowhere Man can you see me at all?– John Lennon / Paul McCartney
Noted NYU professor of economics Nouriel Roubini published an article in the Financial Times explaining why, in his opinion, the U.S. economic recovery will be lengthy and gradual. Immediately, the bulls and equity market cheerleaders (stock jockeys) attempted to discredit Professor Roubini.
I take umbrage (on Professor Roubini’s behalf) at the attempts to discredit and, in some instances, belittle his opinion. Judging by the statements I have heard on the opposite side of Mr. Roubini’s argument, I believe that many market bulls are “Nowhere Men”, seeing just what they want to see.
If it appears as though I give more credence to Professor Roubini’s arguments than to certain CNBC pundits and their guests it is because Mr. Roubini presents well thought out arguments to state is opinion. Many on the opposite side of the spectrum (predicting a V-shaped recovery) state that the economy has to recover sharply because of government stimulus, pent up demand, leading indicators say so or (I love this one) because it always has been this way. Of the arguments for a V-shaped recovery, only leading indicators make a rational case.
However, when one considers inventory replacement which is currently under way, strength as reported by leading indicators could evaporate once inventories have been built up to levels in line with consumer demand.
My biggest concern is that consumer demand will be at levels which are far below to what we have become accustomed. Remember, demand we experienced during the past to recoveries was mostly due to cheap, easy to obtain credit and the resulting rising real estate values. Although credit is currently historically cheap, the demand from credit from those who qualify to obtain credit is relatively low. For a credit-fueled recovery to materialize, banks would have to once again lower their lending standards. That is not going to happen.
Why won’t the banks take the risk and open the credit gates? After all, doing so could be a self-fulfilling prophecy. Banks open the credit spigot, consumers borrow, spend and create jobs and push wages higher, making everyone more credit worthy. Sounds good, right? Wrong.
The truth is that banks never thought they were taking such risks before and they are not going to take such risks now.
If you have read Mr. Roubini’s article you may have noted that he stated:
Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.
The so-called shadow banking system (securitization) was very important for economic growth during the past two economic expansions. The ability to package loans and sell them to investors in the form of asset-backed securities, collateralized debt obligations and various conduits permitted than banks to open the credit spigots and lend to consumers who could not repay their debts.
Once it was off their balance sheets the banks were insulated from any potential credit problems, or so they thought. Some actually believed their own, often manipulated, models and began holding some of these toxic loans on their balance sheets.
With no way to move newly-created subprime loans off of their balance sheets and no desire to hold onto such loans, banks are not going to give credit to those whose ability to repay is suspect. That removes a substantial amount of consumer activity (pent up demand) from the equation.
Mr. Roubini is also correct about banks being seriously undercapitalized. Even traditional bank bull, Dick Bove’ is warning that approximately 200 banks (mostly regional banks) could fail in the near future. Mr. Bove’ is correct.
There is at least one large bank which was technically insolvent if not for a government backstop and the charade of solvency put forth by moving Tier-1 capital to tangible common equity, but not raising a penny more of new equity capital.
The U.S. economy will recover; there is no economy which is as dynamic and has such creative participants. But head winds created by deleveraging, a weaker dollar (resulting in higher food and energy prices) and anti-growth tax and labor policies will buffet U.S. economic growth.
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How come that Roubini didn’t make any money having had such accurate predictions in the past? The answer is quite simple, he himself is totally unsure about his opinions. He sure would not bet his money on it. We all have opinions and his are as good as ours. What he is saying could happen. But asteroid could hit us too.
If consumer spending makes up 70% of our economy,
and half of them are either unemployed, underemployed
or underwater on their mortgage, "recovery" should be replaced by treading water.
In my book he got only the initial call right. It is very rare for economists or market analysts to continue to be correct in their prognostications. They tend to stay in whatever "camp" got them the fame and they miss the turn. It happens to both bulls and bears. Remember perenial bull Abby Joseph Cohen.
At this point Roubini is capitalizing on his recent fame, but his predictions at the beginning of this year completely failed to predict where we are right now and chances are that his current predictions will be wrong too.
Analyst Bove sees 150-200 more U.S. bank failures
Sun Aug 23, 2009 5:04pm EDT
Email | Print | Share| Reprints | Single Page[-] Text [+] NEW YORK (Reuters) - A prominent banking analyst said on Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, and the industry's payments to keep the Federal Deposit Insurance Corp afloat could eat up 25 percent of pretax income in 2010.
Richard Bove of Rochdale Securities said this will likely force the FDIC, which insures deposits, to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.
"The difficulty at the moment is finding enough healthy banks to buy the failing banks," Bove wrote.
The FDIC is expected on August 26 to vote on relaxed guidelines for private equity firms to invest in failed banks, after critics said previously proposed rules were too harsh and would actually dissuade firms from making investments.
Bove said "perhaps another 150 to 200 banks will fail," on top of 81 so far in 2009, adding stress to the FDIC's deposit insurance fund.
Three large failures this year -- BankUnited Financial Corp in May, and Colonial BancGroup Inc, Guaranty Financial Group Inc in August -- collectively cost the fund roughly $10.7 billion.
The fund had $13 billion at the end of March.
Regulators closed Guaranty's banking unit on Friday and sold assets of the Texas-based lender to Banco Bilbao Vizcaya Argentaria SA. The FDIC agreed to share in losses with the Spanish bank.
Bove said the FDIC will likely levy special assessments against banks in the fourth quarter of this year and second quarter of 2010.
He said these assessments could total $11 billion in 2010, on top of the same amount of regular assessments. "FDIC premiums could be 25 percent of the industry's pretax income," he wrote
To address Rick Urban's comments. I think a V-shaped recovery would be more akin to a meteor hitting us than Mr. Roubini's scenario. Someone please tell me how the consumer will pull us upward or what will replace consumer activity. I have been asking this for weeks and all I have heard are crickets.
On Aug 25 09:47 AM Dr. Roberts wrote:
> A broken clock is right more often than Dr. Doom. Once the media
> latches on to an academic, the masses are force fed large doses no
> matter how unpredictable the subject matter may be.
www.portfolio.com/busi.../
www.cnbc.com/id/32551478
Economy In Much Worse Shape Than Expected: White House
Published: Tuesday, 25 Aug 2009 | 10:16 AM ET Text Size By: CNBC.com with AP
The US economy will shrink far more than expected this year and will rebound much more slowly than forecast after that, according to a bleak new assessment by the White House Budget Office.
Th federal government also faces exploding deficits and mounting debt over the next decade, far worse than what the Obama administration had estimated just a few months ago.
The revised estimates project that the economy will contract by 2.8 percent this year, more than twice what the White House predicted earlier this year.
Obama economic adviser Christina Romer projected that the economy would expand in 2010, but by 2 percent instead of the 3.2 percent growth the White House predicted in May. By 2011, Romer estimated, the economy would be humming at 3.6 percent growth.
Figures released by the White House budget office foresee a cumulative $9 trillion deficit from 2010-2019, $2 trillion more than the administration estimated in May.
Slideshow: Biggest Holders of US Government Debt
Moreover, the figures show the public debt doubling by 2019 and reaching three-quarters the size of the entire national economy. Romer predicted unemployment could reach 10 percent this year and begin a slow decline next year.
Still, she said, the average unemployment will be 9.3 in 2009 and 9.8 percent in 2010.
"This recession was simply worse than the information that we and other forecasters had back in last fall and early this winter," Romer said.
The grim administration projections came on a day of competing economic news.
The Congressional Budget Office, which has predicted less economic growth than the White House in the past, was also scheduled to announce revised budget projections on Tuesday.
Obama himself may have drowned out the rising deficit news with the announcement Tuesday that he will nominate Ben Bernanke to a second term as chairman of the Federal Reserve.
The Bernanke news could neutralize any disturbance in the financial markets caused by the high deficit projections.
The deeper red ink and the gloomy unemployment forecast present President Barack Obama with an enormous challenge.
The new numbers come as he prods Congress to enact a major overhaul of the health care system—one that could cost $1 trillion or more over 10 years.
Obama has said he doesn't want the measure to add to the deficit, but lawmakers have been unable to agree on revenues that cover the cost.
What's more, the high unemployment could last well into the congressional election campaign next year, turning the contests into a referendum on Obama's economic policies.
Republicans were ready to pounce.
Slideshow: A History of US Government Spending
"The alarm bells on our nation's fiscal condition have now become a siren," Senate Minority Leader Mitch McConnell, R-Ky., said. "If anyone had any doubts that this burden on future generations is unsustainable, they're gone—spending, borrowing and debt are out of control."
Both Romer and budget director Peter Orszag said this year's contraction would have been far worse without money from the $787 billion economic stimulus package that Obama pushed through Congress as one of his first major acts as president.
At the same time, the continuing stresses on the economy have, in effect, increased the size of the stimulus package because the government will have to spend more in unemployment insurance and food stamps, Orszag said.
He said the cost of the stimulus package—which spends most of its money in fiscal year 2010—will grow by tens of billions of dollars above the original $787 billion.
For now, while the country tries to come out of a recession, neither spending cuts nor broad tax increases would be prudent deficit-fighting measures.
But Obama is likely to face those choices once the economy shows signs of a steady recovery, and it could test his vow to only raise taxes on individuals making more than $200,000.
Still, 10-year budget projections can be "wildly inaccurate," said Stan Collender, a partner at Qorvis Communications and a former congressional budget official.
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Collender notes that there will be five congressional elections over the next 10 years and any number of foreign and domestic challenges that will make actual deficit figures very different from the estimates.
The Obama administration did tout one number in its budget review: The 2009 deficit was expected to be $1.58 trillion, $263 billion less than projected in May.
That's largely because the White House removed a $250 billion item that it had inserted as a "place holder" in case banks needed another bailout.
Orszag, anticipating backlash over the deficit numbers, conceded that the long-term deficits are "higher than desirable." The annual negative balances amount to about 4 percent of the gross domestic product, a number that many economists say is unsustainable.
But Orszag also argued that overhauling the health system would reduce health care costs and address the biggest contributor to higher deficits.
"I know there are going to be some who say that this report proves that we can't afford health reform," he said. "I think that has it backwards."
© 2009 CNBC
CNBC and its pundits are doing a good job talking up the markets. FYI: 100 share prints are now the most common execution size. That is a sign that things may be over done or at least trading on emotion rather than fact.