FYI | Jan 09 2009
By Rudi Filapek-Vandyck
When we first picked up on Nouriel Roubini, in early 2006 if my memory is correct, virtually no-one had ever heard of him, certainly not outside the US.
Things have changed a lot since then and the name Roubini is now featuring regularly on Bloomberg television, in the Wall Street Journal and the Financial Times, and that’s not even mentioning the numerous stories that have been published worldwide containing his gloomy, but nevertheless accurate predictions about the US economy and financial sector.
Long before the world woke up to the fact there was a problem brewing in the US that seemed to have something to do with lower-documented mortgages Roubini had already started to predict carnage was to follow in the US housing and finance industries. And long before investors realised there was no survival option left for US investment bankers, Roubini had already stated their business model had been nullified by irreversible market changes.
Nouriel Roubini rightly deserves the title of our modern day Dr Gloom and Doom (sorry Marc Faber), a title he is probably to dismiss instantly because, as stated above, his predictions have been accurate.
So what does Roubini think will happen in the new year that is 2009?
He has just released his outlook for the year via his subscription based information and analysis/blog service RGE Monitor. Some of the key take-away items are:
– US GDP will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last up to two years (the longest and most severe in the post war period)
– Following on from the above, Roubini sees the real GDP growth contraction playing out through the year as follows: Q1 2009 -5%; Q2 2009 -4%; Q3 2009. -2.5%; Q4 2009 -1%, adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009
- Negative wealth effects from falling home prices and equity prices will cause personal consumption to retrench by over $600bn
- The 4th year of housing recession is well on course. In this economy-wide recession, weakness on the demand side of the housing market is bound to persist and supply will have to fall further. Home starts are predicted to fall another 20% from current (low) levels
– US home prices will not bottom out until the middle of 2010. Roubini’s target is a 38% peak to trough, but given the worsening conditions on the real side of the economy, he believes there is a meaningful chance for over-correction that would bring prices down 44% from the peak reached in the first half of 2006
– Monthly job losses will continue in the 400-600k range in the first two quarters of 2009, bringing the unemployment rate to 8% by mid-2009. The severe contraction in private demand until early 2010 will keep the unemployment rate elevated over 8%. The unemployment rate is expected to peak at 9% in Q1 2010 with further downside risks given cost-cutting by firms during the recovery period. (It is interesting to note that in the light of today’s unemployment data release in the US the market’s expectation has shifted towards job losses of 700,000 – well above what Roubini has pencilled in thus far).
– Annual US inflation, as measured by official producer and consumer price indices, is likely to slow in 2009 and even fall into technical deflation despite increases in the monetary base and fiscal measures to boost spending power. The average annual headline CPI inflation rate is anticipated to write a negative 2%
– Combine all of the above and it is not difficult to see why Roubini believes another 25% slide in US stock prices throughout 2009 is not inconceivable
- Total loan losses will reach about US$1.6 trillion out of US$12.4 trillion of unsecuritized loans alone, implying an aggregate default rate of over 13%
– Fiscal policy and monetary policy will make the recession less severe than what it could have been. However, the US economy cannot avoid a severe contraction that has already started and the policy response will have only a limited and delayed effect that will be felt more in 2010 than 2009.
