Nouriel Roubini's Global EconoMonitor

First Day in Davos: 2007 Global Economic Outlook

This morning I was in the panel on the 2007 global economic outlook together with Laura Tyson, Jacob Frenkel, Min Zhu and Montek Ahluwalia.


I was the only one who expressed some concerns about a US hard landing that could take the form of a growth recession or an outright recession. However, other panel members agreed that there is complacency in financial markets and underpricing of the geopolitical and economic risks in the global economy, including the risk of a backlash against globalization. Worries about the growth of debt, credit and credit derivatives were expressed by several panel members.


The consensus, clear at the panel, was for another Goldilocks year for the US and global economy with the US achieving a soft landing.


But I pointed out that there are three bearish forces that will threaten Goldilocks in 2007 and create economic and financial vulnerabilities; they are, in my view:

1. the deepening housing recession that has not bottomed out and that is spreading to other sectors sectors of the economy;

2. the delayed effects of the Fed Funds increase and the beginning of a credit crunch in the mortgage market as 16 subprime lenders have closed shop in the last two months and as defaults and foreclosures are rising among subprime borrowers (a study suggests that 20% of them will eventually go into foreclosure);

3. the fact that oil even at $55 is still high in real terms relative to a few years ago, and that the factors that led to lower oil prices are temporary (unseasonably warm weather, temporary reduction of geostrategic risks); so oil could go back to $60 or higher this year.


A US hard landing could certainly take the form in 2007 of a growth recession (growth in the mediocre 0% to 1.5% range) from Q2 on (as the factors that boosted growth in Q4 and possibly Q1 are transitory); this hard landing in the form of a growth recession is the view recently expressed, among many others, by Munchau and Brittan in the FT.


There are still meaningful risks of an outright recession this year. However, a number of factors – some temporary – have recently reduced the risk of an outright recession: the sharp fall in oil and energy prices; the bubbly behavior of equity markets that has kept financial conditions loose; the effect of the persistent of global liquidity in spite of the Fed tightening; the still moderate income growth in spite of a looming slack in the labor market; the temporary boost to output in Q4 and possibly in Q1 from transitory factors.


Some leading indicators still suggest the risks of an outright recession: the inverted yield curve; the manufacturing ISM that is borderline recessionary; measures of business confidence; the still weakening housing and a coming credit crunch in some parts of the mortgage market. But other leading indicators suggests a reduction of outright recessionary forces: lower oil prices leading to higher consumer confidence; real income growth and still low initial claims of unemployment; bubbly equity markets; easier financial conditions with credit boom and low risk premia. 


We do indeed already have a housing recession that is not bottoming out (based on a variety of indicators); and we have the beginning of a non-residential construction slump, an auto recession, and a manufacturing slump; we also have a real investment slump with falling capital goods durable orders for two months now (as highly profitable cash-flow rich firms do not invest but are giving back their earnings to shareholders in the form of the biggest share buyback in US history).


But housing is only 6% of GDP while consumption is 70%. So any hard landing – whether a growth recession or an outright recession – will require a sharp slowdown of consumption growth. I do believe that the next leg of the US slowdown, that will lead at least to a growth recession, will be the consumer weakened by a variety of factors:


–         The job losses in housing and manufacturing will build up over 2007 and reduce job growth from 150k jobs to about 50k jobs per month over the next few months. So, labor slack will reduce income generation.

–         The negative wealth effects of falling housing values and falling mortgage equity withdrawal will slow down consumption as households with negative savings have been using their homes as their ATM machine for too long.

–    Rising reset interest rates on monster mortgages, ARMs and subprime loans will increase debt servicing ratios.

–        The coming credit crunch in the subprime sector will serious hurt subprime and other ARM borrowers.


So, while the US consumer will be the last shoe to drop it will drop this year as the consumer is at its tipping point in spite of the recent temporary factors that have boosted its consumption. So I do not believe that the economy will achieve the soft landing predicted by the economic consensus as the balance of risks and vulnerabilities suggests further economic weakness ahead. Certainly low oil prices would help and increase the chances of a softer landing; but oil prices may soon go back to levels closer to $60 and the other vulnerabilities in the economy remain serious and serious drags on growth.


Finally, as Larry Summers recently put it, the biggest fear is the current lack of fear in financial markets. These markets are priced for perfection and blissfully ignoring the coming risks, geopolitical and economic. But any geopolitical and/or economic shock may surprise markets and, given the current house of cards of leverage, credit growth, asset bubbles and opaque and mushrooming credit derivatives, the repricing of risk could get painful once a variety of geopolitical and/or economic shocks do occur this year.


41 Responses to “First Day in Davos: 2007 Global Economic Outlook”

JoshuaJanuary 24th, 2007 at 12:49 pm

“the deepening housing recession that has not bottomed out and that is spreading to other sectors sectors of the economy;”  Ambrose Evans-Pritchard at the Daily Telegraph writes:  ‘The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned.  “Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.  “We believe that housing will soon become the proverbial ‘straw that breaks the camel’s back’,” said David Kostin, the investment bank’s US strategist.’

JCAJanuary 24th, 2007 at 12:53 pm

There is not much of a difference between a hard landing with growth recession or an outright recession. They will be both painful for jobs, wages, workers and the economy.

Low ProbJanuary 24th, 2007 at 1:27 pm

There is a reason why you are the only one, Nouriel. You are consistently attracted to lowe probability hard landing and crisis events. I don’t know why. Maybe you are negative, maybe you like attention.  Fresh highs on many major stock indices all around the world today.  Sucker rally?

AnonymousJanuary 24th, 2007 at 1:38 pm

Professor you make a point about going against consensus of the Davos crowd. There are a lot of bright minds there. Can you please list times when you have gone against consensus of the Davos crowd and have been right?

jsJanuary 24th, 2007 at 1:59 pm

Why is it a black and white “The Professor has been proved wrong.”  I think the combination of 1) lower interest rates (85 bp on the 10 yr) 2) lower energy prices 3) warm weather might have produced good growth recently. Does not mean economy is completely out of the woods yet. Or inflation for that matter.  Is it possible that Professor’s writings (and others’) helped push the interest rate down and help buffer the economy producing such hate mail for him?

AnonymousJanuary 24th, 2007 at 2:07 pm  that’s a good book for the readers of this blog. it’s called the great depression of the 1990s and how to protect yourself. a lot of the points are similar to the ones that people make here. if you followed the advice about the depression that just had to happen you ended up losing a ton of opportunity cost.

AnonymousJanuary 24th, 2007 at 2:14 pm

i meant to say incurring opportunity cost. you missed a great bull market. maybe this one will be better. no one knows. there were certainly a bunch of valid points that book highlighted as to why stocks were not a good investment. that book was “out-of-consensus” too.

GuestJanuary 24th, 2007 at 2:43 pm

this is from cbs marketwatch. you can hear the clip re housing by going to news stories and matching the time.  Vitner: Housing pain to last for several months 3:25 PM ET, Jan 24, 2007 – By Tracy Johnke – 9 minutes ago

AnonymousJanuary 24th, 2007 at 2:44 pm

The thing is, lower energy prices are raising interest rates, the key behind this poorly thought out expansion(they don’t end well either).   Here is the deal, if Oil for example dropped back to 13$, the petro-dollar would collapse and the 10 year for example would sky as the Oil producing countries completely sell off its dollar reserves(we already saw the beginning of this Monday).   NR, you simply don’t get it. The way Bretton Woods II is constructed, Oil NEEDS to rise to artificially lower US interest rates. Even if China doesn’t sell off a wink. A complete petro-dollar collapse would lift US rates far upwards and the FED couldn’t do anything about it.   The fact is, what was bad before it good now, what was good before is bad now. A Brave New World it is.

ursel doranJanuary 24th, 2007 at 2:59 pm

Dr. R., To all bloggers, The professor has been proved wrong cause he is early. Many of the folks in this world, on this blog and round the world have been totally brainwashed that the stock market IS the economy, which of course is true for all the financial services entities. Debt sellers resellers and re resellers.  When Kerkorian did a magnificent job of jamming GM stock from below twenty to over thirty, did that change the bankruptcy nature of their situation? Not a whit.  It merely enabled him to get ALL his paper off over $30. Did that change the fact that GM is massively leveraged into sub prime mtgs in DiTech, and massively leveraged into car mtgs, BOTH at the mega cyclical peak of both mkts?  The boys that bought 51% of GMAC had to buy it on terms to get it done at a price that BM had to sell for so it would pay for itself.   Here is a good take on conventional wisdom, Bill Gross talking his book for his sales staff, etc.   No worries professor, Lowes is opening stores in Mexico to try to make up for the ones they and Home Depot will be closing here. When? Dunno, as the Banksters are already starting to change the rules on foreclosures to slow the process of owning to many houses at almost the top.   IMHO i believe your real estate bust job losses are way optimistic.  UD 

Guest guessesJanuary 24th, 2007 at 3:08 pm

China officially plan to invest their foreign reserves worldwide in lieu of only parking in T Bonds and with with Euro as a reserve currency looking good, then maybe US Bonds hike to 10% or more; even with a hard landing. AS a large China investment in US housing is good for America and China. Our guess some weeks ago that China could use Hedge funds for foreign investments now reasonable.

JGUJanuary 24th, 2007 at 4:05 pm

The professor softened his stance, no doubt. But, I think we still have a chance for a recession. Watch the sub-prime loans, that is the key.  

StephenJanuary 24th, 2007 at 5:29 pm

Nice job on the meeting in Davos. I share all the view points you brought up for the bear case on the U.S.

GuestJanuary 24th, 2007 at 7:31 pm

  Looks like they are going to try to balloon the Tech/Telcom /internet sector again, anyway that would be good for me and I hope it happens, Somehow I don’t see it happening, but hope I am wrong.  Create bubble, bubble bursts, create new bubble, new bubble bursts, recreate old bubble —- repeat.   Lets see how the CNBC Stock pumpers do it this time around. 

SJanuary 24th, 2007 at 7:37 pm

The proffesor is right. I own a contracting business and we haven’t worked all January. This hasn’t happened in 6 years. We work and live in the Baltimore, MD area. All around me this Bubble is bursting. My brother-in-law and his girlfriend worked for Wells Fargo and were laid off last month because the entire department couldn’t sell loans because of “tightened standards.”   An investor bought 6 houses in my partners neighborhood 4 years ago and the bank took them back because he could no longer cover the mortgages. He couldn’t charge the full rents so he would suck out equity of his houses to cover them. Now that values are 20% less then what they were going for a year ago, he gave up. We saw the realtor today taking pictures and asked her what it was going for and said they have no idea yet. She said the bank gave her “64” foreclosures today in baltimore. Her office was in fairfax, VA. Seems the realtors in Baltimore have enoupg foreclosures to deal with.   My brother-in-law also does title work at night. I saw him this evening and he said the title company that he works for said this was the slowest january they ever had. They have only been doing title work for 85 years in DC/Baltimore. I wish I could be in Devos with you (snowboarding), but our dollar is too weak for me to afford that. I’m stuck going to the local western maryland mountains. My buddy sells real estate in Deep Creek resort in western maryland and he said last year at this time there were over 1100 properties in that resort area for sale. Today there are over 6400 and he hasn’t sold a thing in ten months. But at least the inentory it up.  I’m not an economist but I know there are lags in capital flows and how they effect the economy. Most of all of my income in the last few years were the direct results of home equity withdrawals. If our (US) growth in the last few years was caused by the housing bubble then we are in trouble. I’m Sorry that I don’t have any charts, just real stories from real people that are directly involved.   I hope the FED didn’t ship all the hilocopters over with that new round of troops to Iraq. 

GuestJanuary 24th, 2007 at 8:26 pm

Sounds like Boycott R has softened his stance too – guess the lashing from NR put him in his place. ‘Good post. Valid points’. That must have taken hours to come up with – thanks for the contribution.

CPRJanuary 24th, 2007 at 8:27 pm

NR,  I think that Swiss air has cleared your thoughts. You are starting to lean away from your hardcore recession call. It’s okay to admit you were wrong. Just follow the data.  The mistake you made was in not realizing how much the financial services sector has taken over the real economy. The financial services cart is pulling the real economy horse. You should have realized this back in August when Treasuries took off and Wall Street was emboldened to new speculative excesses.  To understand why you were wrong you need to look at your call on interest rates. Interest rates need to go up, not down. The Ponzi has become the real economy, therefore to kill the real economy you must kill the Ponzi. To do that the liquidity punch bowl has to be taken away from the alcoholic.   This game won’t end until rates go up to 6%. Summer will be a crucial time. Global warming is concentrating oil demand into the summer months. Winters are being spared. So oil might be back above 70 dollars in July. Iran will make its moves when oil profits are up. A repeat of summer ’06 is not out of the question.  For the bulls…  Enjoy the rally (tomorrow should be good). Try to make as much money as you can. But set your stops and keep an open eye. There is no way anyone can argue that a net debtor nation going on its fourth year of a economic bull market is not at risk of reversal. Remember how fast things turned in 2001.   For the bears…  There’s still a chance this thing could turn down by the end of the year. If it does it will be fast. Fear is so much more powerful than hope. What the market takes years to gain, it can give back in months, even days. There are still a lot of negative structural dynamics in your favor.  To all…  Keep a little perspective. It’s just money and time. Two things that come and go faster than Greenspan’s train of thoughts.      

HVHJanuary 24th, 2007 at 9:12 pm

“I’m not an economist but I know there are lags in capital flows and how they effect the economy… I’m Sorry that I don’t have any charts, just real stories from real people that are directly involved.” No need to apologize, S. I was wondering when someone was going to mention lags, which can lead to overcapacity in manufacturing as well as real estate. I hope you come out of this OK. Having been a principal in a small spec builder briefly (a decade ago), I too know people who are directly involved–most of them are prepared to sit out the next few years.    CPR, I was going to disagree with your assertion that “The Ponzi has become the real economy…” but it’s a useful exaggeration. I’d say the Ponzi has real effects, and that the bad effects are lagged. But they will come, so your advice to both Bulls and Bears is good.

AnonymousJanuary 24th, 2007 at 10:31 pm

NR shouldn’t change his stance at all. Economy only grew at 1.5% in Q4………..about at NR’s Q3 prediction. You knows what will happen in Q1 2007? Recession begins in fall 2007. Count on it. When the US economy has said it has peeked, the rest of the world follows in 24 months.   Q4 2006 output measures don’t support 3% real GDP forecasts. Goods, Services and Structures suggest nominal output in Q4. Manufacturers’ shipments and inventories declined 4.5%, Construction Spending fell 3%, while Services rose 6%. Imports didn’t rise in the fourth quarter, and inventories rose at a slower rate than in the third quarter.  GDP is often measured from the expenditure side (consumption + investment + government spending + exports – imports). But, “consumption is not GDP. It’s where output is directed. If the U.S. economy didn’t produce the goods and services it consumed in any given period, either inventory investment has to fall or imports have to rise or some combination of both.”   

AnonymousJanuary 24th, 2007 at 10:41 pm

Hello  Doc, you right the first time. I’m blue collar in Cal. and here it’s coming to an end. The blinders are on and it won’t happen to me, is what every one is saying. The fun is only beginnig for those are smartest to see. Good Luck jo6pac

GuestJanuary 24th, 2007 at 11:46 pm

Default notices in state double in 4th quarter Marni Leff Kottle, Chronicle Staff Writer  Thursday, January 25, 2007  The number of California homeowners who fell behind on mortgage payments more than doubled during the last three months of 2006, pushing defaults higher than at any other time in the past eight years, according to a report issued Wednesday.   Despite the jump, the number of default notices is well below historic highs. Housing experts blame the increase in part on rising interest rates and adjustable-rate mortgages. It’s unclear whether the increase portends a further weakening of the market.   Statewide, lenders sent 37,273 notices of default in the fourth quarter, up 145 percent from the same period a year earlier, according to DataQuick Information Systems. The trend was more pronounced in Southern California and the Central Valley.   The Bay Area has weathered the downturn better than other parts of the state, protected in part by a short supply, economists said. Default notices rose 134 percent in the area, below the 141 percent jump in Southern California and the 168 percent increase in the Central Valley.   The Bay Area had less new construction and a tighter housing supply, making the market less volatile, experts said.   “In some places, the builders got a little bit ahead of themselves and the speculators got a little bit ahead of themselves and now they’re feeling the foreclosure pain,” said Scott Anderson, senior economist for Wells Fargo. “The Bay Area’s home values in terms of supply and demand are much better balanced and that’s keeping the foreclosure rates more manageable.”   The fourth quarter saw the most default notices in any three-month period since the third quarter of 1998. A notice of default is the first step in the foreclosure process. Many who receive such notices avoid having their homes repossessed. About one-third of homeowners who received a notice of default in the fourth quarter of 2005 had lost their homes a year later, above historical averages, DataQuick said.   California is experiencing a rise in defaults because so many people took out adjustable-rate mortgages, economists say. About 28 percent of loans in California are adjustable, more than in any other state, according to First American LoanPerformance, which tracks mortgage risk. Borrowers with such loans have seen their monthly payments increase at the same time that home price appreciation has slowed, making it more difficult to sell or refinance.   “The state of California has been tremendously dependent on adjustable-rate mortgage products,” said Anderson.   Homeowners in Marin, San Francisco and Santa Clara counties were the least likely to go into default, the report found. In the Bay Area, some of the biggest increases in default notices came in Contra Costa and Solano counties, where the most new construction has occurred. Economists point out that the five-year housing boom pushed the number of defaults to record lows, making increases seem particularly dramatic.   “The … percentage looks a bit more dramatic than it should because we are comparing it to such a low base,” said Keitaro Matsuda, senior economist with Union Bank of California.   Although the number of default notices sent out last quarter is above the 33,615 average for the 14-year period in which DataQuick has tracked foreclosures, it’s still below historic highs. The number of default notices peaked in the first quarter of 1996 at 61,541.   “For a long period of time, California had some of best credit quality in the country,” said Anderson of Wells Fargo. “We’re now starting to see some of that unwind.”   The report also found that the number of homes sold in foreclosure sales rose to 6,078 during the quarter from 874 in the fourth quarter of 2005. That compares with a record high of 15,418 in 1996 and a low of 637 in 2005.   Anderson and Matsuda disagreed about whether the state will continue to see a dramatic climb in foreclosure and default rates.   Matsuda said that as long as interest rates remain where they are, the number of foreclosures is unlikely to continue its rapid rise.   “I believe that the fourth-quarter pop will be the worst quarter in terms of foreclosures,” Matsuda said.   But Anderson said that, even with the improvement in the housing market, it will take some time before the number of default notices returns to low levels.   “We expect it to play out over a number of years,” Anderson said. “It’s not something that’s going to go away next quarter, even if the housing market starts to stabilize.”  

GuestJanuary 25th, 2007 at 5:24 am

“Operating conditions remained extremely challenging for the housing industry during our first quarter of fiscal 2007,” said President and Chief Executive Officer, Ian J. McCarthy. “Most markets across the country continue to experience lower levels of demand for new homes, high cancellation rates and significant levels of discounting. At this point, we have yet to see any meaningful evidence of a sustainable recovery in the housing market, although we would expect to gain a better read on the market as the traditional spring selling season gets underway.” 

GuestJanuary 25th, 2007 at 5:35 am

Another lender down, couldn’t sell it so they shut it down;  “. Charles Maddy, III, President and Chief Executive Officer, commented, “2006 was a difficult year for Summit as we came to terms with a difficult business model in an unforgiving economy. Although we had recognized that Summit Mortgage was not performing up to expectations, we were hopeful that conditions would permit more time to realign these activities. Ultimately, however the continuing uncertainty for performance improvement dictated that it was in the best interest of our shareholders to exit the mortgage business, which we have done. ”

gmdJanuary 25th, 2007 at 7:18 am

Good post NR.  Sooner or later, Joe6pack will realize that his monthly budget is in shambles. The ATM machine in the living room is broken. When this happens, the new pick-up will be sold and the big-screen TV will be put on craigs list.  Americans expect to live at the same (or higher) standard of living as their parents. But look what they have to do to acheive that goal. First it was two incomes, now it’s living on credit cards and perpetual refinacing of their home. This can’t be sustainable! On the other hand, those that repackage the sub-prime loans into other securites are doing great!  This thing is unraveling slowly, but I believe reality will show its face in 2007. Consumer spending has to decline at some point.  just my two cents worth….  gmd

JGUJanuary 25th, 2007 at 9:26 am

Are we seeing more housing impact on the labor market? Or is it just a blip? Would be interesting to watch. I somewhat still feel the professor can be right in this recession call.

GuestJanuary 25th, 2007 at 9:30 am

he didnt soften his stance, he changed it from outright recession to growth recession.  courtesy of  DAVOS, Switzerland (MarketWatch) — The world economy is less beholden to the U.S. as an engine of growth, but a “hard landing” in America could still spell trouble for global prospects, according to a panel of high-profile international economists. In a discussion that drew a standing-room crowd as the annual meeting of the World Economic Forum got fully under way Wednesday, American International Group Vice Chairman Jacob A. Frenkel argued that 2006 will go down as the “year of things that did not happen,” with the global economy largely riding out a surge in energy prices and a housing-related slowdown in U.S. growth.  Meanwhile, China’s efforts to trim its reliance on export-led growth and reforms by other emerging economies could have positive long-term effects, said Laura D. Tyson, professor of economics at the University of California, Berkeley. She noted that emerging economies for the first time accounted for more than 50% of the global economy.  Also, strong overall European growth after years of sluggish performance shows that despite the U.S. slowdown, the rest of the world is in “significant growth mode,” underscoring something of a decoupling, she said. “The world is no longer dependent on a single locomotive.”  The power of emerging economies and the relative strength of the U.S. and other developed countries in the world economy, particularly over coming decades, is a key question for the corporate and political elite attending the exclusive annual gathering in the Swiss ski resort of Davos, which has been loosely organized around a theme entitled: “The Shifting Power Equation.” See related story.  But economist Nouriel Roubini, chairman of Roubini Global Economics, argued that while the U.S. appears likely to avoid a textbook recession — two consecutive quarters of negative growth — the U.S. economy could still experience a “hard landing.”  Roubini says he’s not convinced the U.S. housing slowdown has bottomed out. Moreover, there are signs that housing-related woes are beginning to weigh on commercial construction. The economist also warned of the beginnings of a credit crunch and a possible rebound in oil prices, all of which could begin to undermine consumer spending.  If the United States achieves a “soft landing,” the rest of the world can decouple, Roubini said. But a hard landing that features a “growth recession” — quarters in which the economy posts flat to meager growth of around 1% or less — would inevitably impact the rest of the world, including emerging economies, as a result of the weaker dollar, reduced exports to the U.S. and other factors.  Montek S. Ahluwalia, deputy chairman of India’s Planning Commission, said only time would tell whether such a decoupling was “structural or a flash in the pan.” See more global markets coverage.  Meanwhile, Zhu Min, group executive vice president of the Bank of China, one of the country’s largest banks, told the audience that China was poised for another year of strong growth.  “China will have an even better year this year,” Zhu said, citing last year’s efforts in the second half of 2006 to re-balance the economy by slowing export-led growth and encouraging domestic consumption. 

stuart millsJanuary 25th, 2007 at 9:49 am

Existing home sales drop 0.8%. Prices are flat. NAR calls a bottom (hah).  While NR has lowered his chance of recession I have increased mine for the 2nd half of 2007.  Manuf employment is going to get slammed – housing related, autos, tech (mot, sunw), even meds (pfe).  Savings rate is going to jump – you actually need a down payment to buy a house, you need equity to borrow, and even then you will need a good credit rating to get a few bucks. Add in a dash of heightened fear, and declining home values, and we could easily see the savings rate swing by 3%.  Add in sharply lower job growth, increased drops in domestic investment (residential, non-residential, and inventory all down) and you get to two quarters of < 0% real growth pretty easy.  And of course there is the increasing chance of a blow up that will freeze up the credit markets – then no one knows how far down we could go. 

CCJanuary 26th, 2007 at 2:28 am

Jobless claims see biggest rise in 16 months! Interesting: a mild winter is said to be helpful for the construction business – wouldn’t that mean workers should be busy on their job site instead of being laid off? Hmmmm…so the jobless claims could be even bigger! The implosion of mortgage lenders has just become lauder and more frequent.

CharlesJanuary 26th, 2007 at 10:40 am

What I see here could be called economists vs. day traders. Economists know where things are likely to go eventually, but they can’t say when. Day traders don’t care where things go eventually as long as they guess right for today.   The odds of the US suffering a recession are overwhelming because: (1) the government is borrowing lots of money, (2) consumers have borrowed lots of money, and (3) the country wants to consume a lot more than it produces. At some point, demand has to correct downward. But there’s money to be made right up until the day of judgment.  The day traders seem to resent Nouriel’s reminding them that there’s going to be a day of judgment. They would do better to figure out what elements of his analysis are useful to position against a recession, while not necessarily going 100% gold bullion or otherwise assuming that all economic activity except currency adjustment is going to cease.   As the saying goes, “Pigs get fat. Hogs get slaughtered.” My guess is that the rude ones around here are hogs.   Charles of MercuryRising   

Grzegorz Tarasakiewicz-SirockiJanuary 27th, 2007 at 7:02 am

For last few months significant divergance of S&P500 and it’s MACD is being built. Lot’s of people with trading experience know it is one of most serious signals in the world of technical analysis. Now it says we should face a big S&P500 sell-off within days or weeks.  I would not mention it there if:  1. it would not support prof’s view (which I like) 2. I did not realize how serious signal it was taking into consideration my own experience (never seen markets where tripple divergence did not cause a big move)  Markets now completly ignorrig any global risks. ‘Savings glut’ is their opium.   I stressed in my previus post that there is trend of shifting to ‘no landing’ in some comercial bank’s analysis while investment banks become more and more ‘hard landers’.   Think commercial banks ‘talking their positions’ as no landing tales support confidence of their customers what supports their profits glut.   regards,  

Professor PanglossJanuary 30th, 2007 at 12:48 pm

The no-landing” scenario is clearly the most likely at this point, with real GDP decelerating to the 2-2.5% annualized rate for the foreseeable future.   The MACD divergence for the SPX has been underway since Oct. ’06. The index is due a 7-10% correction to around the 200 DMA at SPX 1320s (or typically 2-4% below the 200 DMA in a cyclical bull market, which would put the next correction low slightly below SPX 1300).   It also bears watching the 30-yr. T-bond yield. The 5% area is significant technical resistance. If the yield breaks above this level, the target is 6-6.75% in the next 16-18 months, which implies accelerating inflation. However, a failure at 5% implies a test of 4.25% and then below 4% to perhaps the 3.5-3.75% range by summer ’08.   The Fed officials have been busy “talking up” inflation for a year or so for fear that the yield curve will remain inverted at lower long yields, and businesses and consumers will increasingly adopt a deflationary mindset, that is, postpone investment and discretionary spending, and begin to pare down debt (voluntarily or otherwise).   My personal bet is for rates to top out and begin a decline with decelerating trend real GDP for the foreseeable future, including at least a 7-10% correction to equity indices. The precedent of the secular bear market, however, implies that the correction will not hold the upper 1200s for the SPX but eventually reach the mid- to upper 1100s before a reflex rally back to the (lower) 200 DMA. I suspect that the Fed will be cutting rates and pumping up the monetary base in response, with deflation decelerating to the 0%-1% area hereafter.   The one caveat that could be the catalyst for higher rates, much higher oil and import prices, accelerating inflation, and outright recession is if Bush/Cheney react and the Middle East blows up with an attack by the US-Israel on Iran and/or Syria. All bets are off in this scenario.

Claus ChristensenFebruary 1st, 2007 at 2:37 am

I think that the reason, many economist are optimistic is, that they rely on false indicators.   The unemployment rate is low because of low wages.  The causes of GDP growth are huge public and private debts, gowernment spending (the war in Irac), over-consumption, maybe more bureaucracy, maybe more lawsuits, over decades: over-exploration of energy resources, rebuilding after hurricanes etc. A lot of more or less usefull activities, which doesn’t put the US in a better situation.   How will unemployment develop in the service sector during a recession? You can do without many services (haircuts, restaurant visits etc).  What are the future possibilities of extra govenment spending to avoid the effect of a recession?