Roubini: Economist Forecast on Economy Optimistic

Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies.

The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5 per cent.

This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6 per cent in the last two quarters, US growth will still be negative (around -1.5 to -2 per cent) in the second half of the year (compared to the bullish consensus of +2 per cent).

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End of Economic Gloom? Not as Early as You Wish. Roubini’s latest Article for Project Syndicate

End of economic gloom? Nouriel Roubini

Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies.

The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5 per cent.

Investors are talking of 'green shoots' of recovery and of positive 'second derivatives of economic activity' (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near).

As a result, stock markets have started to rally in the US and around the world. Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.

This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6 per cent in the last two quarters, US growth will still be negative (around -1.5 to -2 per cent) in the second half of the year (compared to the bullish consensus of +2 per cent).

Moreover, growth next year will be so weak (0.5 to 1 per cent, as opposed to the consensus of 2 per cent or more) and unemployment so high (above 10 per cent) that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year. China will have a more rapid recovery later this year, but growth will reach only 5 per cent this year and 7 per cent in 2010, well below the average of 10 per cent over the last decade.

Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world.

It is said that the International Monetary Fund, which earlier this year revised upward its estimate of bank losses, from $1 trillion to $2.2 trillion, will announce a new estimate of $3.1 trillion for US assets and $0.9 trillion for foreign assets, figures very close to my own.

By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses.

Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally. Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession.

But, in the last two years, the stock market has predicted six out of the last zero economic recoveries -- that is, six bear market rallies that eventually fizzled and led to new lows.

The stock market's latest 'dead cat bounce' may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects.

Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures and surging defaults on corporate bonds will limit firms' pricing power and keep profit margins low.

Third, financial shocks will be worse than expected.

At some point, investors will realise that bank losses are massive, and that some banks are insolvent. Deleveraging by highly leveraged firms -- such as hedge funds -- will lead them to sell illiquid assets in illiquid markets. And some emerging market economies -- despite massive IMF support -- will experience a severe financial crisis with contagious effects on other economies.

So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. The same is true for a sustained recovery of financial markets.

Nouriel Roubini is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor. Copyright: Project Syndicate, 2009.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bear Markets Revisited 1929-1933

This is a update of an article I put up on March 18. Since then, the current bear market rally that started on March 9, around 676 area has extended itself to about 20 percent. In the chart below you will notice that bear market rallies averaged 30 percent from 1929-1933. The bear market rallies averaged about two months in duration. It is always interesting and educational to study the past. A friend of mine pointed out that the market dropped like a lead brick many times during that period, and that the low made in 1929 was not the low of the bear market.

File this under food for thought, and looking beyond the obvious.

The following lists the bear market rallies, and the duration, from 1929-1933.


The following list the bear market rallies, and the duration, from 2007- to the present.

Good information and perspective that I picked up over on FT Alphaville.

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S and P 500 Rally Comes as Predicted (Chart)

On Saturday I wrote, S and P Monthly Chart indicates a sharp rally is coming soon. Well it didn't take long. Here is the view of the chart I included.


It was clear that the down slope of the market was too severe and could not be maintained.

I'll be back tonight with some ideas on what I see coming. I will say, an inside day, followed by a "hook" up does look interesting. Is this another two day rally in the big bear market, or something the bulls can really sink their teeth into?

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. Bob wrote more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Technician Forecasts 600 Market Bottom for S and P 500 Index

Do we have a tech "guru" in the house. How about a Gann expert?

I didn't actually hear this first hand, I read it on the Internet.

A technician at Credit Suisse is forecasting a market bottom for the S and P 500 with a target price of 600-605.

I took a look at the market and I can see where he is getting this. Back in 1995 after breaking the 600 level for the first time the S and P went back and forth against that level for about a year and a half. Looking at the chart, 650 also looks like a formidable area. We could hit either or both of these areas this week.

I can't find my tech "guru" but 603 also looks like a Fibonacci number and a possible reversal point.

Do we have a tech "guru" in the house? How about a Gann expert?

What do you think?

I picked up this thread on Across the Curve.

clipped from charts.barchart.com

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Asociate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking syndication and writing assignments.

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Doom & Gloom in 2009

An outlook for 2009, with Nouriel Roubini, Michael Spence, and Philip H. Knight.

Definitely worth your time.


Click here to watch and listen to Doom & Gloom in '09.

CNBC Bonus Bucks Trivia Answers/ Financial Meltdown Revisted

Good morning. If you are wondering why you can't get the Bonus Bucks answer here right now--the CNBC contest website is not working. When it comes back up we will have the questions and answers.

If you have the time you can take a look at my post from September 15, 2008 about the impending financial disaster. When I posted the article the S & P 500 was trading around 1200.

Financial Meltdown--Where there is Smoke, there is Fire

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Financial Meltdown--Where there is Smoke, there is Fire

This article was originally written on September 15, 2008.

At dinner he described the situation to me. He said, “Where there is smoke there is fire”. He went on to explain that any time a major financial institution gets in trouble you could draw a circle around its location and expect the problem to spread to any other financial institution in a 150 mile radius (keep in mind this was the 1980s and before the Internet). He went on to explain the interconnectivity of financial institutions in a geographic proximity....His trip and fact finding mission convinced him that there was going to be a real financial crisis in Texas and that it would likely devastate the major banks and savings and loans. This was a very unpopular stance that cost him his job....It also was the catalyst of a stock market crash in 1987....I am reminded of other sayings that I heard early in my career on Wall Street—“never try and catch a falling knife”. I find myself thinking right now—“Cash is King”.

Financial Meltdown--Where there is Smoke, there is Fire

Back in the 1980s I learned an important lesson. At the time, I was with Bear Stearns and working in their Dallas, Texas office. The head of credit came to Texas to visit the state’s major banks and Savings and Loans to discuss their financial statements. Specifically he was trying to get a handle on their financial viability. There was a growing concern about the quality of credit and soundness of financial institutions in the southwest and California. The head of credit spent a couple of days in Dallas and Houston talking to the CFOs of these banks. Late in day, at the end of the trip, I saw him sitting alone in the office and asked him what he was doing. He informed me he was done but was not scheduled to fly out until the next morning. I saw this as an opportunity to “pick” his brain and learn something. So, I invited him out to dinner.

At dinner he described the situation to me. He said, “Where there is smoke there is fire”. He went on to explain that any time a major financial institution gets in trouble you could draw a circle around its location and expect the problem to spread to any other financial institution in a 150 mile radius (keep in mind this was the 1980s and before the Internet). He went on to explain the inter connectivity of financial institution is a geographic proximity. His trip and fact finding mission convinced him that there was going to be a real financial crisis in Texas and that it would likely devastate the major banks and savings and loans. This was a very unpopular stance that cost him his job. At the end of the day he was right. Both of the major banks in Dallas failed (Republic and First Interstate) and all of the major S and L’s in Texas failed (Sunbelt and Bright Bank to name two). This resulted in the formation of the Resolution Trust Corporation a government agency set up to dispose of the massive amount of defaulted loans owned by these financial institutions. It also was the catalyst of a stock market crash in 1987.

For years I have been telling my friends that the derivatives and swaps markets would turn out to be the equivalent of the savings and loan fiasco but on a scale that could never be imagined. Let me ask you, do you know anyone that predicted Bear Stearns, Lehman Brothers and AIG would go up in smoke? That Merrill Lynch would be offered at a fire sale? Have you heard prior discussions about the inter connectivity of all these financial institutions? Are they within a 150 mile radius?

AIG, the next to go, is a good example of the direness of the current situation. AIG has been racking up enormous profits for a very long time. Just last week they were considered to be solvent. They are loaded with cash. They are claiming $1,000,000,000,000 in assets (Trillion). They operate world wide. Now if you ask AIG they will tell you their problem is not a solvency issue it’s a liquidity issue. It seems that the financial community is no longer buying this argument and no one is willing to stand up and throw money at the problem. AIG does not have the necessary assets to collateralize the $75 billion in loans it needs right now to keep operating. If they go down someone will be on the hook for the insurance side of the business. I bet you thought as an insurance company there were being regulated. Partially true but this does not include the part of the business that is all wrapped up in the credit default swaps market and other derivatives designed to leverage the balance sheet and create “monster” profits. It appears the Fed and government regulators have finally decided that bailouts aren’t working and decided to say no to Lehman and AIG. Lehman is bankrupt and it appears that AIG will declare bankruptcy soon. The too big fail rule is no longer in effect.

It would be foolish to believe that once AIG goes over the cliff it will bring an end to the financial crisis we are seeing today. You should be thinking of the inter connectivity of AIG and all the counterparties they are doing business with AIG worldwide. Companies doing business with them will get wounded, maybe mortally wounded. What looked like a US problem is now a global problem. This will spill into financial markets world wide.

It appears it is finally being recognized that this is not smoke, it’s a FIRE. It appears that “too big to fail” is no longer a workable strategy to fix the problem. It appears the reality of the credit swaps derivatives market is finally being recognized. It’s likely that much of this paper is worthless or only worth cents on the dollar. This financial crisis is not likely to go away over night. There is more to come before all this “paper” can get unwound or find a home. In the interim there is an enormous risk in the stock and other financial markets.

The Fed will address this issue by adding massive liquidity to the markets. The world’s central banks will do the same. It is the right thing to do. But, it is a short term fix that is like prescribing an aspirin for a major infection. It might lower your fever but it won’t cure your illness.

In closing, I am reminded of other sayings that I heard early in my career on Wall Street—“never try and catch a falling knife”. But, right now I find myself thinking—“Cash is King”.