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Rudi On Thursday

FYI | Jul 16 2008

Today I’d like to introduce you all to Nouriel Roubini, professor of economics at the NYU Stern School of Business, founder and chairman of financial information and analysis service RGE Monitor, occasional guest on financial TV stations such as CNBC and Bloomberg, but above all, Roubini is the living exception for all experts in the financial industry who, at times, try to seek solace in the fact that nobody ever saw the problems in the US housing and finance sectors coming.

Unfortunately, for these experts, some people did and Nouriel Roubini was one of them.

Two years ago already Roubini started publishing columns, blog stories and analyses about how he believed the US housing market was on the brink of a serious downturn. It was only a matter of time before the US would experience a serious banking problem to be followed up by a good old credit crunch, he predicted.

The accuracy of these analyses has now made him a lauded expert who is being asked to write contributions for print media and to voice his opinion on financial television. Further adding to his credibility is the fact that Roubini anticipated the two government sponsored entities overseeing circa half of the US mortgage market would ultimately have to be bailed out by the US government.

Now that was a pretty bold prediction to make, but as we all know now, the US government is currently being forced to do just that. Roubini has also estimated this financial crisis will ultimately cause financial losses somewhere between US$1 and US$2 trillion.

Apart from that last estimate, which has yet to be proved correct, it would seem economist Roubini has been pretty accurate in his predictions and calculations thus far. So what else has he been forecasting?

As the average small bank in the US has 67% of its assets in real estate, Roubini believes those investors hoping that California’s IndyMac will be the only one who has to be bailed out by US authorities are in for some nasty surprises. He sees hundreds of small US banks hitting the wall, not just one or two. And while most of these banks are much smaller in size than IndyMac, it is his assessment there will be about a dozen among them similar in size to IndyMac.

The reason for thess predictions is as easy and straightforward as can be: the US had become an over-leveraged society with households, businesses and the government taking on far too much debt. As a lot of this debt has a direct relationship to the US housing market, it was always only a matter of time before the bubble would burst. Now that it has, the consequences will be dire, and far-reaching, as every example in history will show us.

US banks have thrived on the bubbling housing market over the past years. This over-exposure will now come home to roost. It’s a simple numbers game, really and given that Roubini’s profile has been steadfastly on the rise over the past two years, it is almost a miracle that it took this long before investors in the US share market started to catch up on the theme.

This proves, once again, that sometimes investors simply choose to ignore certain things so they can continue buying shares and hope for better times ahead. This also shows us that ultimately we can only ignore these things for so long.

This is still not where Roubini thinks this financial crisis will end. He foresees there will be bigger fish that will need to be saved, including some major money center banks. But also, predicts Roubini, this crisis will ultimately mark the end of the independent broker dealers in the US. Their business model is irrepairably broken, he says, so they will all be forced to merge with traditional commercial banks – or go bust.

If you really want to get a grip on what this is all about stop thinking about “subprime mortgages”, says Roubini, this crisis has never been about some dodgy home loans provided by some dodgy sales teams trying to extend the good times into eternity – this crisis is all about a dodgy financial sector in a country that simply failed to realise its complete financial system was turning into “subprime”. And now that it’s too late, the consequences will be dire, very dire.

Does anyone still think US financials are offering bargains? Or that Australian banks will return to their former PE ratios anytime soon?

From Hong Kong market strategists at GaveKal report they believe there’s yet another set of bombshells to arrive for the global financial community: it has to do with the exposure of European banks to US housing and mortgages. While problems in the US are currently taking centre stage (and quite deservedly so, one might add), GaveKal fears it is only a matter of time before Europe will follow up with its own set of problems. These include the likelyhood of an outright economic recession plus similar problems for European banks as we are now witnessing in the US.

Europe has its own housing markets in crisis and GaveKal points out Spanish developer Martinsa-Fadesa filed for bankruptcy yesterday, less than one year after it listed on the stockmarket.

Also, a growing number of countries including Italy, Portugal, and Spain have now had to cancel debt issues for lack of investor demand.

This is not going to be over anytime soon, is it?

Maybe, suggests GaveKal, the next big bomb won’t be one of the European financials, but a government instead, maybe one of the emerging markets where various countries are struggling with a large current account deficit: Hungary? Poland? Turkey? India?…

I know, this week’s column is not exactly what one would label as “heartwarming” – but I continue to bank on the fact that the correct information, put into the right context, inside the correct framework will ultimately serve you all best. Those who are looking for a velvety “long term” sales pitch probably already know where else one can get those.

And oh yes, colleague Greg will again pop up on the screen as a specialist guest on Saturday’s Business View (Sky Business, 9-10am).

Till next week!

Rudi Filapek-Vandyck
your editor
(As always firmly supported by Greg, Chris, Sarah, Paula, Grahame, Joyce, George, Pat and Todd)

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