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Archive for October, 2008
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Martin Wolf “Preventing a global slump must be the priority”
From the FT: Preventing a global slump must be the priority
by Martin Wolf
. Give credit where credit is due: Nouriel Roubini of New York University’s Stern School of Business was right. On February 20 2008, I wrote a column entitled “America’s economy risks the mother of all meltdowns”, based on his analysis of the 12 steps to disaster. Alas, not only has the US taken those steps, but it has also – with help from others, including the UK – dragged the world behind it.
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Roubini Says U.S. Needs $400 Billion Stimulus Package
Bloomberg (October 27, 2008): Roubini Says US Needs $400 Billion Stimulus Package (click for video)
From Bloomberg:
U.S. Should Enact $400 Billion Stimulus, Roubini Says (Update1) By John Brinsley
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Bloomberg (October 27, 2008): Roubini Sees `Significant Downside Risk’ for Equities
Bloomberg (October 27, 2008): Roubini Sees `Significant Downside Risk’ for Equities (click for video)
From Bloomberg:
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The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation)
Last January – at a time when the consensus was starting to worry about rising global inflation – I wrote a piece titled Will the U.S. Recession be Associated with Deflation or Inflation (i.e. Stagflation)? On the Risks of “Stag-deflation” rather than “Stagflation” where I argued that the US and other economies would soon have to worry about price deflation rather than price inflation.
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Bloomberg (October 24, 2008): Roubini Says Stay Away from `Risky’ Assets, U.S. Dollar
Bloomberg: (October 24, 2008): Roubini Says Stay Away from `Risky’ Assets, U.S. Dollar (click for video)
New York University Professor Nouriel Roubini talks with Bloomberg’s Guadalupe Barriviera in Madrid about the outlook for the U.S. economy and financial markets, efforts by policy makers to stabilize credit markets and Roubini’s investment advice. (Source: Bloomberg)
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Bloomberg (October 23, 2008): Roubini Says `Panic’ May Force Market Shutdown. Friday Morning Update: Markets are becoming dysfunctional and S&P and DJIA futures trading already suspended today
Early Friday Morning Update: Yesterday Thursday I gave a speech in London (see video below) arguing that markets were in sheer panic and becoming literally dysfunctional and unhinged. I also made the point that policy makers may soon be forced to close financial markets as the panic selling accelerates. Indeed, we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. There is a free fall as most investors are rapidly deleveraging and we are on the verge of a a capitulation collapse. What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.
And while panic and destabilizing market dynamics is the driver of financial markets even economic fundamentals are awful as investors are finally realizing that a severe US and Eurozone and G7 and emerging markets and global recession is coming and will be deep and protracted. As I have argued for a while equity prices may have to fall another 30% based on fundamentals alone before they bottom out. Why so? In a severe two year US and global recession S&P 500 firms earnings per share (EPS) could realistically fall to $50 or $60. If P/E ratios fall to 12 this implies the S&P 500 index falling to a 600 to 720 range. If P/E ratios fall – as likely in a recession – to 10 then the S&P 500 index could fall as low as 500 to 600. So even based on fundamental factors alone there is another 30% or more downside risk to US equities; and now, on top of such fundamentals, thee is also an ugly and nasty panic-driven market dynamics at work.
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Latest Roubini Talks and Interviews on the Severe Financial Crisis and Recession
Earth Institute (at Columbia University), October 20, 2008: Can We Save the World Economy? A Conversation with Geroge Soros, Nouriel Roubini, and Jeffrey Sachs (click for video)
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How to prevent a financial crisis in Hungary that would lead to serious financial contagion in Emerging Europe
I recently spent a few days visiting Hungary, a country that is now at the center of financial pressures in emerging markets. In recent weeks the stock market has sharply fallen, interest rates have increased, the currency has weakened and financial institutions have suffered of shortages of liquidity. A fully fledged currency and financial crisis can still be avoided with appropriate and coherent policy actions but the financial pressures have intensified in the last week.
The macro, financial and policy weaknesses of Hungary – in many ways similar to those of many other countries in the Emerging Europe region – are not new; here at RGE we covered them as early as June 2006 in two analyses about vulnerabilities in Hungary and in Emerging Europe. But the global financial crisis has been the external trigger that has led now to a liquidity and credit crunch, the risk of a sudden stop and of a reversal of capital inflows.
The vulnerabilities of the economy include a large current account deficit, a still excessive fiscal deficit, a partially overvalued currency, serious maturity and currency mismatches in the financial system, the household sector and the corporate sector, low stock of foreign reserve and high level of short term foreign currency debt that is at risk of a roll-off. Mary Stokes, RGE’s analyst on Emerging Europe, has recently well analyzed and summarized these vulnerabilities:
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A Review of This Week of Macro and Financial Developments and My Latest Project Syndicate Column
My latest column for Project Syndicate has been just published and is reposted below. This column was written last week at the peak of the market turmoil and when the G7 had just announced its plan to avoid a systemic financial meltdown. So, how have things changed in a week since this column was written? On the positive side the G7, the EU and other economies have committed to do whatever is necessary (not allowing any systemically important bank to fail, recapitalizing banks with public capital, providing unlimited liquidity to the financial system, providing direct credit to the corporate sector, providing guarantees to most banks’ liabilities, and any other necessary policy action) to prevent a systemic financial meltdown; most of these actions are sensible and follow closely the ones that I suggested were necessary to prevent the meltdown that the financial system neared at the end of last week. Much more needs to be done including further monetary policy easing, a large fiscal stimulus program to boost demand at the time when private aggregate demand (consumption and investment) are sharply falling; and a plan to reduce the mortgage debt burden of millions of distressed households. But at least policy is going in the right direction and the probability of a systemic meltdown – that reached a peak a week ago – is now significantly lower.
But are we close to the end of the tunnel now? Not really for a number of reasons I will flesh out now…
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Interviews with Charlie Rose and CNBC: Severe Recession and Financial Crisis
October 14, 2008: Interview with Charlie Rose: Severe Recession and Financial Crisis (click for Video) October 16, 2008: CBNC/Power Lunch Length of Recession (click for video)
