Start Looking for a Bottom?

Well, maybe next year.

However, when the doomsters and perma-bears start being venerated by mainstream thinking - as Nouriel Roubini is beginning to be - then the Zeitgeist of the market is shifting to excessive pessimism. 

Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things.

Roubini makes an interesting observation.

The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

And

But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Great observation.

 

Comments

[User 244491:]

What you wanted to say with your article?

2008 Aug 16 06:03 PM

[mkreisel:]

The author wants to say: "It's almost time to buy!"

2008 Aug 17 03:21 AM

[Angelo George:]

The sky is not falling!! This economy has been tested & retested. With the S&L Crisis many sent their house keys to their lender instead of their mortgage payment. 2008 wil be remembered as a great equity buying opportunity.

2008 Aug 17 08:35 AM

[Delegal:]

It says the US and global markets are headed lower until another $500 Billion is written out of the system and stability is re-established in the credit markets. PE's are still too high in the US and will return to the mean. I expect another 20% down on the Dow.

2008 Aug 17 08:42 AM

[User 31013:]

Did you notice that every one of the '90s crashed economies recovered as a tiger in the 2000's? It gives us something to look forward to.

2008 Aug 17 10:35 AM

[TheSnail:]

Thanks for mentioning my brother.

Richard Geist

2008 Aug 17 10:50 AM

[Concord:]

The real question is: does this guy have any skin in the game to back his assertions?

2008 Aug 17 12:22 PM

[Toro:]

Concord

Yes. I am positioned for a bounce, then expect the market to roll over. I am looking for an ultimate bottom next year.

2008 Aug 17 03:38 PM

[irondoor91:]

Post links to your brokerage statements, please. Does anyone ever see posts on these pages from the likes of Buffett, Soros, Jones, Paulson (not the Treas Sec), or other fund managers who have made Billions $? No, of course not. They are full of posters who are full of useless opinion they can't act upon. They have no cash, no skin in any game and will be up in the morning commuting in to punch the clock for a paycheck.

2008 Aug 17 08:29 PM

[Steven Hansen:]

This was a good post, thanks. Do I think economic doomsday is here? No. But this post provided information which you can decide is applicable or not in today's market. The USA has more economic power and resilience than the economies referenced.

2008 Aug 17 09:54 PM

[goldenhinde:]

while I appreciat the post - there is little new here. That said, one has to be impressed with just how well the US economy seems to hold up -even in the face of some God aweful news for the past year. Perhaps we simply have gotten as bad as it will get YET. I have room for that to be true. The resiliency of the US is nonetheless astounding.

2008 Aug 18 12:19 AM

[investor88:]

Market bottom next year is possible so we have to observe events carefully. Some say 2h 2010 based on US presidential cycle analysis.

2008 Aug 18 12:57 AM

[Lou Thomas:]

A very large piece of this post is lifted without attribution from the recent NY Times article on Roubini. Article is here: www.nytimes.com/2008/0...

2008 Aug 19 02:25 AM