Skip to main content

Reassessing Roubini's Predictions

Unfortunately for Roubini, there is no Nobel Prize in Economic for being the best predictor of global financial markets. Nouriel Roubini warns that the worst in markets and economies is yet to come. On October 23rd, Nouriel predicted the potential shutdown of financial markets. A day later U.S. stock futures suspended trading after declines of more than 6% at opening tripped the circuit breakers. Nonetheless, Nouriel does not expect another Great Depression, but states that policymakers must act quickly and wisely.

Here are the main elements of Nouriel’s outlook:

Tsunami of corporate defaults (I see some defaults in third tier companies not being able to roll over or secure new funding, but I doubt very much this tsunami of corporate defaults will happen as I still see this being largely concentrated in property, lending and banking. Yes, we are already seeing secondary effects on the broader markets but its not as debilitating as Roubini paints it out to be)

2-year U-shaped U.S. recession that threatens to turn into an L-shaped one if policymakers do not regain control of the financial system (Wow, L-shaped, I don't believe I have come across L-shaped recession recovery graphs in my economics textbooks ... if its not in textbooks, it should not exist, right... though the Japanese economy in 1990s looked very L shaped to me)

global re-coupling to the U.S. will advance from non-U.S. markets to non-U.S. real economies – not even the strongest emerging markets such as Brazil and China will escape global re-coupling (Why is Roubini talking of re-coupling, when there was no de-coupling in the first place? Mind you, all BRICs and Asian markets fell earlier and more severe than the US markets. If that's not evidence of markets NEVER ever having decoupled, I don't know what is?)

vicious cycle of deflation in goods markets, labor markets, commodity markets, financial markets, corporate and household earnings, and aggregate demand (Agree to an extent, but not a prolonged period. The basic roubini's thesis is de-leveraging = deflation, not true. De-leveraging has almost been completed, hedge funds are falling like a ton of bricks, the majority of the weak ones have closed shops already. Good thing about hedge funds, when things are bleak, they close shop very quickly... because no more 20% performance kicker, might as well close and lay low for a while, then reopen a new fund later)

de-leveraging to reduce excess debt in municipalities, households and some firms (As above)

U.S. stock markets declining another 20%-30%, bottoming fall 2009 at the earliest, then moving sideways for years post-recession if growth remains anemic as it did in Japan after its 1990s real estate and equities bust (Again being right for the first part of the call does not mean Roubini will get it right again, I think success has gone to his head. The Japanese experience was due to "inaction", banks were very slow to recapitalise, restructure or allowed to fail. Thats why it took them 15 years and growth is still flat. What the Japanese took 15 years to do, the US and European financial markets did it in 3 month. Roubini losing track of events)

U.S. unemployment rise to reach 8-9% (That is probable but not a prolonged phase because at that unemployment rate, the discount rate may very well go to zero, and we know what happens when there is negative real interest rates)

According to Nouriel, USD assets, commodities, U.S. and international equities, housing, and the USD are quite risky right now. Seek safety in cash or cash-like instruments such as T-bills and bonds of safe, large governments. Though he believes the U.S. dollar will retain its reserve currency status for decades, its status will gradually erode.

Given the size of the expected contraction in private aggregate demand (likely to be about $450 billion in 2009 relative to 2008), Nouriel argues that a fiscal stimulus to the order of $300 billion minimum (and possibly as large as $400 billion) will be necessary to partially compensate for the sharp fall in private aggregate demand.

I like Roubini a lot and he was brave enough to call and defend his views way before they came to fruition. But we should not be blinkered as well, I see some blind spots in his current predictions, as he seems almost "one-tracked-minded" on the whole shebang unfolding to the worst of his nightmares. But, what do I know, I am not a professor or an economist.

p/s photos: Im Ji Hye


easystar said…
"the discount rate may very well go to zero, and we know what happens when there is negative real interest rates"

I don't think we can be sure what happens when real rates are negative. US/Europe and Japan real rates have been negative (inflation-policy discount rates) for a good while and yet unemployment still rose.

Further, we are facing a world where 0% discount rates go into banks, but it does not come out at the loan rates. (Unless Fed allows corporation/consumer to borrow directly from itself..haha)

I am certainly no where as pessimistic as Dr Doom. The old adage said that the bear will eventually be right, but market can remain irrational for longer that one can remain solvent.

Also, Dr Doom seemed to have failed to see that Gold Prices would fall in this deleveraging cycle (he was telling people to buy gold)

One can also keep predicting that, say Maybank will disappear and I am sure one day it will disappear and the predictor will be eventually right.
Han Qiang said…
he mentioned 2 important points which i think you might have missed out. The spread between corporate bonds and treasuries remain elevated. CDS indices for investment grade remains high despite falling libor-ois and ted spread.

I verified his statement and realise that bonds spread remain high even for AAA-rated corporate bonds. This is significant because this suggest not only the third tier companies will be defaulting.

my 2 cent worth
Kris said…
The most important of all for Dr.Doom is that did he made serious money shorting the market when he predicted the October 2008 fall?

Talking is one thing..doing is :P

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…