Here’s Dr. Doom himself, the great Nouriel Roubini, in Forbes early last year:
"For the last six months, I have been arguing that, in spite of the sharp fall in U.S. and global equities, there were significant downside risks to stock markets. Thus, repeated bear market rallies would fizzle out under the onslaught of worse than expected macro news, earnings news and financial markets/firms shocks.
"Put simply: If you take a macro approach, earnings per share of S&P 500 firms will be--quite realistically in 2009--in the $50 to $60 range. (Some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple . . . will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession.
"Then, even in the best scenario (earnings at $60 and P/E at 12), the S&P index would be at 720. If either earnings are closer to $50 or the P/E ratio is lower, at 10, then the S&P could fall to 600 (12 times 50 or 10 times 60) or even to 500 (10 times 50). . . . And using a similar logic, I have argued that global equities--following the U.S.-- had another 20%-plus downside risk."
Nice timing! Roubini wrote that when the S&P 500 was at around 750, just days after it hit its cyclical low of 666. In the fullness of time, we now know his comments were a sort of Grand Slam of wrong calls. S&P 500 earnings in 2009 came in at $56.47, the far upper end of the broad, $40-to-$60 range Roubini had in mind. And (since the recession wasn’t U-shaped, as Roubini said it would be) the right multiple to put on those earnings wasn’t 10 or 12, but something quite a bit higher. So instead of falling by 20% as Roubini predicted, stock prices have risen by 49% over the subsequent twelve months—one of the greatest one-year rallies in the history of publicly traded equities. Roubini’s clients must have been pleased with his advice.
I don’t mean to be cherry-picking poor old Nouriel’s stock market prognostications. Lord knows I’ve had my share of goofs.
Then again, that Forbes column last year wasn’t just a one-off bad day. In reviewing the Roubinian oeuvre of the past year or so, one can’t help but get the impression that the Doctor has taken obsessive gloom to new heights (or, if you prefer, depths). Here’s a sampling of some of the headlines of his Forbes columns from the first quarter of last year:
- January 08, 2009: 2009 Will Be Very, Very Bleak
- January 22, 2009: The Worst Is Yet To Come
- February 12, 2009: Nationalize Insolvent Banks
- February 19, 2009: Laissez-Faire Capitalism Has Failed
- March 05, 2009: The U.S. Financial System Is Effectively Insolvent
- March 12, 2009: How Low Can The Stock Markets Go?
Yowp! It’s a wonder he didn’t stockpile bottled water and shotgun shells.
You don’t need to be a 24/7 CNBC news junkie to know that the headlines above turned out to be wrong, wrong, wrong. Instead, a normal cyclical recovery of impressive strength has begun, more or less on schedule. And given the economic and fiscal stimulus that’s been unleashed, what has happened is precisely what one should have expected. But Roubini missed all of it.
I admit to having a special spot in my heart for Nouriel Roubini, which I developed after I read his ludicrous assessment of the banking system last year. Do you remember what he told The Wall Street Journal last February?
"Six months from now, even firms that today look solvent are going to look insolvent. Most of the major banks--almost all of them--are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness."
Six months came and went . . . then a year . . . and Roubini turned out to be completely off base. “Almost all” the banks weren’t insolvent. Essentially none were insolvent. The banking industry earned $12.5 billion in 2009 and (thanks to that misbegotten stress test) added additional tens of billions in additional capital via equity raises. The industry is now materially overcapitalized. Roubini had things precisely backwards.
And while his big-picture view of the banks was mistaken, so was his line-by-line take on the business’s outlook. Here’s what he told the Guardian in the UK last January:
"The losses now are mostly in mortgages; wait until it hits commercial real estate, the credit card companies, the auto loans, the student loans, the corporate bonds. There's a whole pile of stuff. The financial system is insolvent. It's technically bankrupt."
Except that the credit dominos lined up in Roubini’s mind never fell. Delinquencies on all classes of debt did indeed rise last year, as one would expect in a recession. But the deterioration never came close to triggering the mass insolvency Roubini expected. Corporate debt in particular was never remotely stressed. Most recently, card, auto, and mortgages have all shown clear signs of improvement—exactly what you’d expect at the start of an economic recovery. Commercial real estate remains a challenge, but doesn’t figure to be a rerun of subprime. Roubini got it all wrong.
Meanwhile, can you imagine what would have happened if the government had taken Roubini’s advice and nationalized the big banks? The TARP experience provides a taste of how disruptive even peripheral government involvement in the banking business can be. A full-on takeover of the entire industry would have paralyzed the system and caused private capital to flee and not come back. It would have been an economic disaster.
One would think that by now, Roubini, having been so wrong about so much for so long, would rethink his approach from top to bottom. No chance. Even with the beginnings of an apparently robust recovery underway (GDP grew at a 5.9% real annual rate last quarter), he just pushes out his prediction of when the Bad Times will resume. But his bearishness doesn’t seem to stem from any unique insight. “I see a pullback first of economic growth,” he told Forbes in late January, “because the effects of the stimulus, and the restocking and the census, and the other temporary parts, these effects are going to fizzle, so growth close to 3% in the U.S. in the first half might close at 1.5% in the second half.”
Of course. At the start of every recovery, the doubters always argue growth will soon fizzle because the stimulus, inventory restocking, and “other temporary parts” can’t last. (It never seems to, though.) Roubini’s M.O. is to put an especially bearish extrapolation on the conventional wisdom.
More than a few critics of mine have accused me through the years of being a perma-bull. They have a point. I happen to believe (not unreasonably, if I may say so) that the path of least resistance of American commerce, and America in general, is up, up, up, and that the default position of U.S. equity investors should be to be long. That bias has served me well through my investment career—though not without some serious bumps.
By contrast, Nouriel Roubini by all appearances prefers to be a perma-bear. That doesn’t make him intellectually dishonest, or even a bad guy. Given the inevitable ups and downs of the business and economic cycles, he will be occasionally right in his predictions, sometimes spectacularly so. But as we’ve seen, investors who take his advice over the entire economic cycle do so at their own risk.