EconoMonitor

Nouriel Roubini's Global EconoMonitor

Europe Will Be Hard Hit by the Recessionary Storm Now Sweeping the U.S.

The United States has now effectively entered into a serious and painful recession. The debate is not anymore on whether the economy will experience a soft landing or a hard landing; it is rather on how hard the hard landing recession will be. The factors that make the recession inevitable include the nation’s worst-ever housing recession, which is still getting worse; a severe liquidity and credit crunch in financial markets that is getting worse than when it started last summer; high oil and gasoline prices; falling capital spending by the corporate sector; a slackening labor market where few jobs are being created and the unemployment rate is sharply up; and shopped-out, savings-less and debt-burdened American consumers who — thanks to falling home prices — can no longer use their homes as ATM machines to allow them to spend more than their income. Indeed holiday sales in the US were much lower in real terms than in 2006.  As private consumption in the US is over 70% of GDP the US consumer now retrenching and cutting spending ensures that a recession is now underway.

On top of this recession there are now serious risks of a systemic financial crisis in the US as the financial losses are spreading from subprime to near prime and prime mortgages, consumer debt (credit cards, auto loans, student loans), commercial real estate loans, leveraged loans and postponed/restructured/cancelled LBO and, soon enough, sharply rising default rates on corporate bonds that will lead to a second round of large losses in credit default swaps. The total of all of these financial losses could be above $1 trillion thus triggering a massive credit crunch and a systemic financial sector crisis.

There is now some delusional hope in Europe and in the European Central Bank that this region can shelter itself – or decouple itself – from the effects of the US hard landing. But 2008 will be the year of re-coupling rather than decoupling for Europe.

Let us discuss next why, the detailed channels of transmission from the US to Europe and the other internal vulnerabilities of the European economies…
 

First, of all, the US still accounts for about 25% of global GDP. Thus, when the US sneezes the rest of the world gets the cold. But now the US will not just experience a case of common cold; rather it will be an ugly and painful case of pneumonia. Therefore the rest of the world – including Europe – cannot avoid the financial and real contagion of the US recession virus. The ECB instead – by looking at the back mirror – is ignoring the downside risks to European growth and obsessing excessively about inflationary pressures that will fade once the Eurozone growth slowdown gets into full swing. 

Certainly the US sub-prime meltdown – that has now spread to the rest of the financial and credit markets – has already led to severe financial contagion in Europe where, since August, a serious liquidity and credit crunch has emerged. Since European firms depend on bank lending more than US ones the emerging credit crunch in Europe will hit the European corporate sector and its ability to produce, hire and invest. And losses in the banking and financial system and among investors will increase as the European economy slows down in 2008, some economies experience an outright recession and a growing number of firms in the corporate sector face financial distress and defaults.

And there are now many signs in Europe of a serious economic slowdown with some economies directly at risk of an outright recession. Housing booms and bubbles were not limited to the US; similar bubbles occurred in Spain, the UK, Ireland and, in part, also in France, Portugal, Italy and Greece. Now such housing bubbles are starting to deflate in many countries, leading to mortgage delinquencies and defaults, hurting households and adding to the downside growth risks.

The relentless rise of the Euro – now close to 1.50 relative to the US – is another threat to Eurozone growth. Many countries such as Italy, Spain, Portugal and Greece had already lost competitiveness over the last few years because their wage and labor costs increased more than productivity, thus increasing unit labor cost and leading to a real appreciation of their currency. The rise of China and Asian export competitiveness was a second and further blow to these countries’ competitiveness; and now the sharp increase in the value of the Euro is a further blow to European competitiveness, not just for the “Clud Med” members of the Eurozone but now even in previously competitive Germany and other Eurozone members such as France.

In the meanwhile high and rising oil and energy and commodity prices – including now food prices – are taking a toll on European households’ incomes and purchasing power. This negative shock is likely to reduce growth further in a region that is already buffeted by a number of other negative shocks.

Moreover, European economic sentiment has continued to deteriorate according to the European Commission Business and Consumer Survey and retail sales were very weak in December in the Eurozone. Investor confidence in Germany fell to the lowest in 15 years on concern that a U.S. recession will deepen the slowdown in Europe’s largest economy.  In Spain the spectrum of housing recession and contracting private consumption are looming on the outlook and a recession looks likely. The U.K. economy appears to be following – with a few quarters lag – the path that led to a hard landing in the US: housing bubble busting and excessive leverage by the households creating financial distress and contraction in consumption. The Irish economy has similar problems and risks as the UK economy.  Italian growth is also sharply slowing down due to high oil prices, a strong euro and the deflation of and housing boom; add to this falling retail sales, weak business and consumer confidence, and a manufacturing sector close to a recession.  

In Central and South Europe credit and housing bubbles – as well as large current account deficits and other financial vulnerabilities – may lead to financial distress – if not outright economic and financial crises – in the Baltic countries, in Hungary, Romania, Bulgaria and even Turkey as the global credit crunch and a sudden stop of capital to this region may occur.  

Thus, Eurozone GDP growth will be well below its potential rate in 2008. And some economies – UK, Spain, Italy and possibly a few others including some in recent EU members – may experience an outright recession.

Moreover, in spite of these serious downside risks to growth, the room for macro policy – monetary and fiscal – easing is limited. The room for fiscal stimulus is constrained by the large structural deficits in many of the Eurozone economies; the major economies in the Eurozone exceeded the 3% fiscal limits of the Growth and Stability pact during the economic slowdown of the last few year; thus, they are now constrained by the need for fiscal retrenchment and don’t have many fiscal bullets to use to ease the economic slowdown.

As for monetary policy, while the Fed has already started to aggressively cut interest rates by 100 basis point, the ECB is deluding itself that it could raise its policy rate further once the financial crunch – that the ECB believes will be temporary – is past. What the ECB should instead to is to start cutting its policy rate now. While the Eurozone inflation rate is above the comfort zone of the ECB the slowdown in growth, the ensuing slack in labor markets and the likely fall in world oil, energy and commodity prices following the US recession and a sharp global economic slowdown will reduce such inflationary pressures in Europe.

Thus, looking ahead in the Eurozone the risks are biased towards downside growth surprises rather than upward inflation surprise. Waiting, like the ECB did in the 2001-2002 episode, will ensure that the negative financial and growth contagion from the US to Europe will be more seve
re and protracted. The time to cut policy rates and reduce the risks of a serious economic slowdown is now; but the temporizing by the ECB will ensure an even larger economic slowdown than the one that is already underway given the variety of negative and economic shocks that are now buffeting the European economies.

 

168 Responses to “Europe Will Be Hard Hit by the Recessionary Storm Now Sweeping the U.S.”

Octavio RichettaJanuary 15th, 2008 at 11:41 pm

Simplistic(?) analysis results in Straford’s forecasting a strong economy for 2008! I think they are totally off but it is nice to see not everyone is in the recession boat forecast. (Sorry for the long post. I got this as an email).  Stratfor’s Geopolitical Forecasts For 2008 & Beyond by Gary D. Halbert  January 15, 2008   IN THIS ISSUE:   1. How Stratfor Sees The World In 2008  2. Stratfor’s Forecast For The US & Global Economy  3. Conclusions     Introduction   Last week, I summarized The Bank Credit Analyst’s forecast for 2008 and beyond. As you will recall, BCA believes that, while the US and global economies will slow significantly this year, we will very likely avoid a recession at this point in the cycle, and that the next recession probably lies out in 2010-2011.   Stratfor, on the other hand, views the world from a “geopolitical” perspective which, while taking into account economic and financial considerations, also considers many other factors including military events, wars, terrorism, etc. and the political conditions that lead to and follow such events. With that in mind, I will review and analyze Stratfor’s forecasts for 2008 and beyond in the pages that follow.   We will first look at Stratfor’s geopolitical outlook for the new year, including what they believe will be taking place in the relationship between the US, Iraq and Iran and the likelihood that the US will be able to begin to draw down our forces in Iraq sometime late this year. Stratfor also has some encouraging thoughts on al Qaeda’s waning capabilities on the terrorism front. And Stratfor offers geopolitical analysis on numerous hotspots around the globe.   Following the geopolitical analysis in the first section, I will include Stratfor’s latest forecast for the US and global economies. You may be surprised to learn that, unlike BCA, Stratfor predicts another strong year for the US economy. Essentially, Dr. Friedman and his group believe that oil prices will moderate in 2008, and they do not believe the subprime/housing slump is as serious as many other writers maintain. You will definitely want to read Stratfor’s economic analysis in the second half of this E-Letter.   My thanks to Stratfor founder Dr. George Friedman for allowing me to share their views and forecasts with my clients and readers periodically. In light of the increasingly complex and dangerous world we live in, I recommend that you subscribe to Stratfor on your own. As a matter of fact, Stratfor is currently offering a great deal for new subscribers – their regular annual subscription price of $349 is, for a limited time, discounted to only $199. CLICK HERE to go directly to Stratfor’s latest offer. Highly recommended!   Stratfor’s Global Outlook For 2008   QUOTE: Introduction – There are three major global processes under way that will continue to work themselves out in 2008. First, the U.S.-jihadist war is entering its final phase; the destruction of al Qaeda’s strategic capabilities now allows the United States to shift its posture – which includes leveraging the Sunni world to finish the job begun in Iraq – and enables Washington to begin drawing down its Middle Eastern forces. Second, an assertive Russia is re-emerging and taking advantage of the imbalance in U.S. power resulting from the war. Third, oil at historical highs and continued Asian – particularly Chinese – exports have created a massive redistribution of financial might that is reshaping the international financial architecture. These processes intersect with each other, as well as with a fourth phenomenon: It is a presidential election year in the United States, which remains the center of gravity of the international system. These are the trends that! shape our global forecast.   Normally in an election year, U.S. attention on global affairs dwindles precipitously, allowing other powers to set the agenda. That will not be the case, however, in 2008. U.S. President George W. Bush is not up for re-election, and there is no would-be successor from the administration in the race; this frees up all of the administration’s bandwidth for whatever activities it wishes. Additionally, Bush’s unpopularity means that each of the White House’s domestic initiatives essentially will be dead on arrival in Congress. All of the Bush administration’s energy will instead be focused on foreign affairs, since such activities do not require public or congressional approval. Contrary to the conventional wisdom, 2008 will see the United States acting with the most energy and purpose it has had since the months directly after the 9/11 attack.   Such energy is not simply a result of this odd hiccup in the American political system but of a major shift in circumstance on the issue that has monopolized American foreign policy efforts since 2003: Iraq. The Iraq war was an outgrowth of the jihadist war. After the 2001 invasion of Afghanistan, the United States realized it lacked the military wherewithal to simultaneously deal with the four powers that made al Qaeda possible: Saudi Arabia, Syria, Iran and Pakistan. The first phase of the Bush solution was to procure an anchor against Afghanistan by forcing Pakistan into an alliance. The second was to invade the state that bordered the other three – Iraq – in order to intimidate the remaining trio into cooperating against al Qaeda. The final stage was to press both wars until al Qaeda – the core organization that launched the 9/11 attack and sought the creation of a pan-Islamic caliphate, not the myriad local extremists who later adopted its name – broke.   As 2008 dawns, it has become apparent that though this strategy engendered many unforeseen costs, it has proven successful at grinding al Qaeda into nonfunctionality. Put simply, the jihadist war is all but over; the United States not only is winning but also has an alliance with the entire constellation of Sunni powers that made al Qaeda possible in the first place. The United States will attempt to use this alliance to pressure the remnants of al Qaeda and its allies, as well as those in the region who are not in the alliance.   This leaves Iran, the region’s only non-Sunni power, in the uncomfortable position of needing to seek an arrangement with the United States. The year 2008 will still be about Iraq – but in a different way. Iran cares deeply about the final status of Iraq, since every united Mesopotamian government has at some point in its history attempted a Persian invasion. Yet for the United States, the details of intra-Iraqi negotiations and security in Iraqi cities now are irrelevant to its geopolitical concerns. Washington does not care what Iraq looks like, so long as the Sunni jihadists or Tehran do not attain ultimate control – and evolutions in 2007 have made both scenarios impossible in 2008.   Iran recognizes this, and as a result Washington and Tehran are ever less tentatively edging toward a deal. It is in this context – as an element of talks with Iran – that Iraq still matters to Washington, and this is now the primary rationale for continued involvement in Iraq. The United States will not completely withdraw from Iraq in 2008 – indeed, it likely will have 100,000 troops on the ground when Bush leaves office – but this will be the year in which the mission evolves from tactical overwatch to strategic overwatch. (Roughly translated from military lingo, this means shifting from patrolling the cities in order to enforce the peace to hunkering in the desert in order to ensure that Iran does not try to seize Iraq and the Arabian Peninsula beyond.)   In the aftermath of the November 2007 Annapolis, Md., conference and the declassification of a N
ational Intelligence Estimate on the nonexistence of the Iranian nuclear program, the ball is in the Iranians’ court. A U.S.-Iranian deal – no matter how beneficial it would be for both states – is not inevitable. But Stratfor finds it unlikely that Tehran would choose strategic confrontation with both the United States and the Arab world when the benefits of cooperation – and the penalties for hostility – are so potent. A framework for future relations, as well as for co-dominion of Iraq, is likely to emerge in 2008.   Still, frameworks come slowly, and crafting such a framework will require the bulk of American forces currently in Iraq to remain there for most of the year. The United States will draw forces down and eventually regain its bandwidth for other operations, but 2008 will not be the year that the United States returns to policing the world on a global scale. And considering the still-mounting costs of regenerating military capabilities after six years of conflict, manpower expansion and acquisitions, such force recovery might not even occur in 2009. The United States could have more energy and political freedom to act, but military realities will anchor the lion’s share of Washington’s attention on the Middle East for – at the very least – the year to come. And Afghanistan, and therefore Pakistan, will have to be dealt with, regardless of what happens in Iraq.   This means 2008 will be similar to 2007 in many ways: It will be a year of opportunity for those powers that would take advantage of the United States’ ongoing distraction. However, they will face a complication that was absent in 2007: a deadline. The Iraqi logjam is broken. Unlike in 2007, when Iraq appeared to be a quagmire and other powers therefore sensed endless opportunity, those hostile to U.S. interests realize that they only have a limited window in which to reshape their regions. Granted, this window will not close in 2008, since the United States will need to not only withdraw from Iraq but also rest and restructure its forces; but the United States no longer is mired in an open-ended conflict.   The state with the greatest need to take advantage of this U.S. occupation, bar none, is the Russian Federation. Moscow knows full well that when the Americans are finished with their efforts in the Middle East, the bulk of their attention will return to the former Soviet Union. When that happens, Russia will face a resurgent United States that commands alliances in Asia, Europe and the Middle East. Russia must use the ongoing U.S. entanglement in the Middle East to redefine its immediate neighborhood or risk a developing geopolitic far less benign to Russian interests than Washington’s Cold War policy of containment. Russia needs to move – and it needs to move now.   And there are a host of secondary powers that will be interacting within the matrix of American actions in 2008. Some – such as Syria and Saudi Arabia – want to be included in the U.S. Iraqi calculus and will have their chance. Others – namely South Korea, Taiwan, Australia and Japan – are looking for new ways to work with Washington as they adapt to their own domestic government transitions. All of Europe is shifting back to a power structure that has been absent for two generations: the concert of powers, with all of the instability and mistrust that implies.   Others will be pursuing bold agendas, not because of the United States’ distraction but because they are rising to prominence in their own right. Angola will rise as a major African power to rival South Africa and Nigeria. Brazil will lay the groundwork for reasserting its long-dormant role as a South American superpower. Turkey – now the strongest it has been in a century – will re-emerge as a major geopolitical weight in the eastern Mediterranean, albeit one that is somewhat confused about its priorities.   Quietly developing in the background, the global economy is undergoing a no less dramatic transformation. While we expect oil prices to retreat somewhat in 2008 after years of surges, their sustained strength continues to shove a great deal of cash into the hands of the world’s oil exporters – cash that these countries cannot process internally and that therefore will either be stored in dollars or invested in the only country with deep enough capital pools to handle it: the United States. Add in the torrent of exports from the Asian states, which generates nearly identical cash-management problems, and the result is a deep dollarization of the global system even as the U.S. dollar gives ground. The talk on the financial pages will be of dollar (implying American) weakness, even as the currency steadily shifts from the one of first resort to the true foundation of the entire system.   This will be a year in which the United States achieves more success in its foreign policies than it has since the ousting of the Taliban from Afghanistan in late 2001. But the actions of others – most notably a rising Russia – rather than U.S. achievements will determine the tenor and fury of the next major global clash. END QUOTE   Analysis: All of the above is quite interesting. Most notably is Dr. Friedman’s view that the war on terrorism has been successful, and that al Qaeda is likely on its last legs. We don’t hear that in the mainstream press, just as we rarely hear that the “surge” in Iraq has been very successful, and that US forces should be able to transition from a fighting force in the cities of Iraq to basically an oversight role from bases in the desert later this year.   Stratfor believes the US and Iran will strike some kind of deal on Iraq this year which will be beneficial to Iran, but will not cede control of Iraq to the Iranian mullahs. I doubt that such a deal will be the best outcome for the Iraqi people, but President Bush needs an “exit strategy” before the end of his term, and the Iranians have probably given up on occupying Iraq.   Dr. Friedman suggests that as the world comes to understand that the Iraq war is nearing an end, certain countries may be compelled to pursue geopolitical/military actions of their own while the US is still heavily distracted in Iraq. Most notably, Stratfor believes that Russia is the most likely candidate to initiate some sort of border enhancement with one of its neighbors.   Now let’s turn our attention to Stratfor’s outlook for the US and global economies in 2008. Unlike BCA, Stratfor predicts that the US economy will remain strong this year.   QUOTE: Global Economy – The prominent features of the global economy in 2008 will be oil and energy issues, a U.S. dollar that is weakening yet becoming more important and a strong performance by the U.S. economy.   Oil prices finally will fall in 2008. Much of the price buildup in recent years has been the result of geopolitical risk introduced by Iran war scares, the occupation of Iraq, Nigerian domestic politics, Venezuelan seizures, piracy in the Strait of Malacca, the war against al Qaeda and Russia’s energy policy.   The world has changed. Iran is moving toward an agreement with the United States on Iraq, Nigerian politics have calmed, the market has priced in Venezuelan nationalism, states in the Malacca region have managed to get piracy under control and al Qaeda’s operations have been sequestered in the Afghan-Pakistani border region. The only wild card remaining in 2008 is the Russians, who could limit their exports of oil and natural gas as part of Moscow’s struggle with the West. However, since such restrictions would impact Russia’s own exports, any geopolitical impact on energy prices in 2008 is unlikely.   The expected downward trend in oil prices will not carry over to other commodities, such as food and minerals. The price increases of these products in recent years are the result of rising and more var
ied demand – such as the new biofuels industry’s increasing need for crops. There is no reason to expect such demand to falter, and there are no new supplies of any minerals expected to come on line that might be large enough to cause prices to substantially drop. The one exception could be foodstuffs, whose supply in large part is determined by the weather (something we do not attempt to forecast).   While energy prices will moderate in 2008, there will not be a collapse. Since the declines will be relatively mild and since most oil exporters have managed to save up vast sums, very few producers will suffer any substantial financial stress. In fact, nearly all oil producers will continue to accrue near-record amounts of income, stabilizing them politically and economically despite the moderate downturn in prices. The two countries to watch are Argentina and Venezuela, which both have been spending their petroleum income as fast as it has come in, and whose lack of long-term investment in production has resulted in steady output drops in output for years.   Yet there is another aspect to this equation. Prices have been strong since 2003 and have given rise to a major trend that will surge forward in 2008: the steady deliberalization of the energy sector.   Producing states – from Venezuela to Kazakhstan – are seeking to rake in as much income from energy production as they can, regardless of how dependent they might be upon foreigners to produce that energy. On the coin’s other side, consuming states – from Malaysia to Argentina – need to assert control over their energy industries in order to head off the social and economic problems caused by sustained high prices. Some countries on both sides – such as China – are afraid of how powerful their energy firms have gotten, and they see deliberalization as a means of combating that challenge. Countries such as Russia see state control of the energy sector as a good thing – and a good thing that allows other policy options. Still, more – most notably Hungary – see such intervention as a means of preventing undue foreign influence.   Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend the following product or service. ADVERTISEMENT  Municipal Bonds/A Good Hedge  Find out how from Stoever Glass   Find Out More…   In 2008, energy deliberalization will be the game of the day, and Stratfor expects the following countries to be particularly active in asserting the role of the state: Venezuela, Ecuador, Bolivia, Thailand, Kazakhstan, Russia, Ukraine, Hungary, China, South Korea, Nigeria, Indonesia, Japan and Canada.   Meanwhile, the U.S. dollar – which has slipped by 50 percent in the past six years – will give more ground in 2008, since the trends that have shaped the past few years have not yet run their course. Unconvinced that the euro would succeed, central banks dumped European currencies when it was launched in 1998. They now are dialing back from that position, as well as purchasing more gold. Both of these trends have a negative impact on the U.S. dollar, and both have more room to run.   None of this is a vote of no confidence in the dollar; contrary to the crowing out of Venezuela, Iran and, on occasion, Russia; the dollar is in no danger of losing its status as the world’s de facto currency. In fact, contrary to conventional wisdom, the role of the U.S. dollar in the international economy is increasing.   All of the energy-producing economies sell their products in U.S. dollars. The Chinese yuan is de facto pegged to the dollar, and nearly every other economy in the western Pacific Rim is loosely pegged to it as well. Combine the dramatic increase in the size of the Chinese economy and the pileup of dollars in the Arabian Peninsula from high oil prices (Organization of the Petroleum Exporting Countries members earned more than half a trillion dollars in 2007 from oil alone) and the result is a de facto dollar bloc.   Yet none of these economies boasts sufficient size or sophistication to handle all of this inflow, and how they manage such vast sums will prove a major development of 2008.   Many of the Arab oil states have chosen to invest in economic diversification so that they will not suffer as they have in times past the next time oil prices plunge. To this end, they are investing heavily in refining and heavy chemical industry facilities, both at home and in consumer countries. In most cases, the Arabs are providing only the capital for such ventures, with either imported expatriates or foreign hosts providing both the labor and the management for the projects. The Russians, of course, are investing in their own geopolitical push and are attempting to purchase as much energy infrastructure in Europe as possible (something the Europeans are resisting fiercely), while the Chinese are hoping to use at least some of the cash to bail out those of their state-owned enterprises that are worth saving. But even this leaves the vast majority of the accrued monies untouched – in dollars or U.S.-based investments.   Beyond the tactical details, the bottom line is that most of Asia, the Arabian Peninsula and the United States have de facto merged into a single system of exchange that has become more important in purely economic terms than the U.S. relationship with Europe. Not since the heady days of the British Empire has a single currency held sway over so much of the world. Yes, these entities are diversifying their investments, which is reducing the value of the U.S. dollar vis-a-vis the euro, but the more important trend is the strengthening of the dollar’s role as the reserve currency of the world – forming the base of the reserve economy of the world.   Combine weaker energy prices (which free up resources) with a lower dollar (which boosts exports) and the U.S. economy is primed for a strong performance in 2008. A brief slowdown in early 2007 shook out some inconsistencies that built up during the post-9/11 boom, and the stage is set for another extended expansion. [Emphasis added, GDH.]   Many will mourn that the subprime lending crisis is about to cause major problems – and perhaps even a recession. Stratfor sees these fears as overblown for two reasons. First, mortgages that enter default are different from other defaulted loans in that mortgages have their own built-in collateral in the form of houses. Rather than getting back pennies on the dollar, creditors likely will recoup most of their money. This, combined with the fact that not all subprime loans will go bust, drastically reduces subprime’s impact.   Second, every so often, the Western financial sector needs a shock to remind itself that it is not Asia and that loans need to be evaluated on strict economic criteria before being granted. During the 2005-06 subprime surge, this lesson had been forgotten. Now it has been remembered, and banking institutions have forced the mortgage broker industry to rate loans more appropriately. As a result, most of those brokers have gone under, and many construction projects have lost funding. Those who have been hurt worst are those who leveraged subprime mortgage assets (and should have known better).   This rationalization of risk is bad for the housing sector in the short run but excellent for the banking sector and the wider economy in the longer run. Yes, one sector has taken hits and will take more in 2008. But the primacy of economic rationality already has reasserted itself. This is a core strength of the U.S. and Western systems; without it, these economies would look like Japan’s. The knocks resulting from the subprime crisis could indeed take some shine off of growth in 2008, but that would simply change it from a banner year
to “merely” a strong year.   The global trade agenda will be somewhat muted in 2008. Talks on the next World Trade Organization round, Doha, have been all but suspended, and no major economy will join the organization in the next year. Neither will there be any progress on other major deals among or within trade blocks – largely a result of European efforts to push through their newest treaty (an echo of the constitution that failed in 2004) and the U.S. presidential election. Trade talks will be limited to ironing out a few minor bilateral deals between the United States and small powers – deals that are now before Congress – and between the European Union and its former colonies. END QUOTE   Analysis: For most of my readers, I’m sure the most surprising forecast noted above is that Stratfor does not believe the US economy is headed for a slowdown in 2008 and perhaps beyond. Stratfor believes that a combination of lower energy prices, a falling dollar and soaring exports will result in another strong year for the US economy. I must admit that Stratfor is a bit short on the details regarding this forecast, but I expect they will have more analysis to come regarding this very positive outlook, at a time when so many – including BCA – believe we will see a year of very slow growth, and others who are convinced we are headed into a recession this year.   Obviously, Stratfor’s positive outlook for 2008 is dependent on their other view that concerns about the subprime lending debacle and the resulting credit crunch are “overblown.” Stratfor’s feeling is that because these loans are ultimately backed by homes as the collateral, the magnitude of the losses is at least somewhat limited. Clearly, this remains to be seen, what with home prices falling significantly in many areas. And the credit crunch is as much a psychological phenomenon as it is a financial one.   Stratfor’s upbeat economic outlook doesn’t necessarily mean that the stock market will be a safe place to be in 2008. As I have noted on many occasions in this E-Letter, the stock market is trading on emotion, largely based on reaction to the news. In such markets, trends are usually short, if they exist at all, and volatility is likely to be high. 2008 could prove to be quite a roller-coaster ride for the buy-and-hold investor, which is why I continue to recommend professionally managed accounts that have the ability to move to cash in uncertain markets.   Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend the following product or service. ADVERTISEMENT  Don’t Get Trampled by the Market!  Make every market a bull market! Sign up now for your Free Traders Resource CD and receive a complete trading course, a database of essential market info, and two complete trading manuals!   Find Out More…      Conclusions   Many readers, I’m sure are wondering whether I believe BCA or Stratfor will be correct in their economic forecasts for 2008. Obviously, I don’t know for sure. This economy certainly feels like it is slowing down significantly, as BCA has suggested it would. The Index of Leading Economic Indicators fell 0.4% in November, but we do not yet have the advance GDP report for the 4Q. So it remains to be seen just how much the economy slowed down in the 4Q.   Now that I have brought you the 2008 forecasts from BCA and Stratfor, I think there are some interesting parallels. Some analysts have speculated that BCA is too optimistic in its 2008 forecast in which they predict 2-3 quarters of slow growth but no recession. Thus, Stratfor’s forecast for another strong year lends additional credibility to BCA’s forecast. Both forecasts suggest the US economy will end the year on a strong note. Both forecasts suggest that the economy could be strong in 2009 as well.   Forecasts are just that – forecasts. Depending on how the housing slump/credit crunch play out, both BCA and Stratfor could be wrong. We definitely have not heard the last of the bad news for the housing market, and it remains to be seen if the Fed will be successful in calming the credit markets and getting liquidity back to normal.   Whether they are right or wrong, I tend to put more faith in organizations like BCA and Stratfor because their only product is information. They do not have financial products or brokerage services to sell, which can sometimes affect the forecasts given (remember the late 1990s when some large financial firms had rosy economic and stock market outlooks, just before the major bear market?).   Instead, major multi-national corporations and even governments pay handsome sums for the intelligence and forecasts provided by BCA and Stratfor. The bottom line is that these firms live or die by the accuracy of their forecasts. Thus, it always pays to check out exactly who’s behind any economic or stock market forecast, whether it’s optimistic or gloom-and-doom. Quite often, there’s an ulterior motive lurking behind their predictions.   At the end of the day, I think we can all agree that the first half of 2008 will almost certainly be a very dicey time in the markets. This is one reason I am glad I have the bulk of my equity portfolio in the hands of professional money managers that can move to cash, or hedge positions, should market conditions warrant.   Finally, last week I mentioned an upcoming program we are developing for very aggressive investors. For these investors, who can stomach high volatility and the potential for significant losses, volatility can be a friend rather than an enemy. While we’re still in the developmental stage, you can put your name in the hat to get information about this program as soon as it becomes available. Just click on the following link to access our online VIP Request Form.     

GuestJanuary 15th, 2008 at 11:43 pm

Prof Roubini  Let’s consider an alternate path for the world economy. I’m not saying this is going to happen. But is it impossible?  Consider one large trading block made up on Russia, Europe, the Middle East, and Asia. This trading block contains the largest and most powerful sovereign wealth funds in the world (Saudi’s, China). If the leaders of these countries, their central banks, and the SWF’s worked together – there is a plausible argument that they could form new economies caused by problems in the USA. To be sure, this would require some bold steps and some new directions for policies.   Will the rest of the world de-couple, or allow itself to get dragged down by the US implosion? Good question. One thing is for sure. They’ve had plenty of advance warning.  PeteCA

GuestJanuary 15th, 2008 at 11:46 pm

Correction to my last post: middle sentence should have said …  “there is a plausible argument that they could form new economies and avoid the crisis caused by problems in the USA.”  PeteCA

GuestJanuary 15th, 2008 at 11:50 pm

@peteCA there is a plausible argument that they could form new economies caused by problems in the USA. To be sure, this would require some bold steps and some new directions for policies. Will the rest of the world de-couple, or allow itself to get dragged down by the US implosion?  one question Pete.. whether US will alllow that to happen??

Ryan DarwishJanuary 16th, 2008 at 12:28 am

It is quite bewildering why ordinarily astute and erudite minds such as Nouriel’s insist on framing the decoupling/ recoupling hypothesis as having a black and white resolution. In all likelihood, there has been some degree of decoupling by virtue of the internal demand created by the rapidly developing economies of regions such as Asia. I can find no hard evidence to support to support the decoupling/ recoupling hyptheses. It appears to be purely conjecture without much of a conceptually justified foundation. Consequently, the reasonableness of the assertion that there has been some degree of decoupling presents a more sound foundation for scenario analysis. Moreover, the only quantifications I’ve seen seem to pivot around an impact of a 1-2% reduction in, for example, China’s GDP in the event of a U.S. downturn. Since China has been trying to engineer a cooling down of its own economy from its torrid 10-12% growth rate, it would seem that a U.S. slowdown might help China manage its own growth. Additionally, even assuming a reduction of 3-4% growth in China’s GDP, a nation of 1.5 billion people growing at 6-7% still presents a significant demand side pull on resources. From the political side, I doubt that China will allow if growth to drop below the point where social and political instability emerge. It is more likely they would use some the their financial muscle to institute some type of works programs for infrastructure development in order to contain the political unrest.  Ryan Darwish www.investmentmegatrends.com 

London BankerJanuary 16th, 2008 at 12:37 am

The bible of fractional reserve banking and managing panics remains Bagehot’s Lombard Street. The formula prescribed there is followed more closely by the ECB than by the Fed. We will see which policy serves better as the credit deflation grinds on, but I am betting on the ECB.  The Fed, by slashing rates, is effectively driving away foreign creditors. The unproductive use of capital during previous low-interest periods in America – leading to the very bubbles deflating today – does not inspire confidence or willingness to extend even more credit against low interest now. This must over time have a disasterous effect in contracting credit and investment to America, making the existing crisis much worse.  By keeping rates reasonable – with a positive real return – the ECB and Bank of England are attracting the investors who are losing confidence in the Fed. Although the financial contagion will spread to Europe, Europe will recover faster as it will have access to credit and capital at better terms in the medium to long term and will ensure that it is invested productively to repay the creditors.  The relevant advice from Lombard Street, Chapter II, pp 47-48:  The management of the Money Market is the more difficult, because, as has been said, periods of internal panic and external demand for bullion commonly occur together. The foreign drain empties the Bank till, and that emptiness, and the resulting rise in the rate of discount, tend to frighten the market. The holders of the reserve have, therefore, to treat two opposite maladies at once—one requiring stringent remedies, and especially a rapid rise in the rate of interest; and the other, an alleviative treatment with large and ready loans.  Before we had much specific experience, it was not easy to prescribe for this compound disease; but now we know how to deal with it. We must look first to the foreign drain, and raise the rate of interest as high as may be necessary. Unless you can stop the foreign export, you cannot allay the domestic alarm. The Bank will get poorer and poorer, and its poverty will protract or renew the apprehension. And at the rate of interest so raised, the holders—one or more—of the final Bank reserve must lend freely. Very large loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain. Any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic and enhances panic to madness. But though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils.  As a foreign investor, I will shun dollar assets because I have no faith that the Fed will protect their value on my account or that bankers will ensure productive investment. As Americans do not save enough to keep the American banking system afloat otherwise, driving investors like me away must ultimately lead to a much worse contraction in credit than the US would suffer otherwise. The ECB, by contrast, gives me confidence that capital invested there will receive a good return and that the euro will hold its value. If both zones face a downturn, it is the ECB that will draw in my capital soonest and recover first.  I don’t doubt that Europe will suffer as the global bubbles deflate. But the prudence of the ECB during the bubble years and now that credit is tight again is a better policy than the continual easy credit incontinence of the Fed.

London BankerJanuary 16th, 2008 at 12:56 am

The relevant advice from Lombard Street, Chapter II, pp 47-48:    The management of the Money Market is the more difficult, because, as has been said, periods of internal panic and external demand for bullion commonly occur together. The foreign drain empties the Bank till, and that emptiness, and the resulting rise in the rate of discount, tend to frighten the market. The holders of the reserve have, therefore, to treat two opposite maladies at once—one requiring stringent remedies, and especially a rapid rise in the rate of interest; and the other, an alleviative treatment with large and ready loans.    Before we had much specific experience, it was not easy to prescribe for this compound disease; but now we know how to deal with it. We must look first to the foreign drain, and raise the rate of interest as high as may be necessary. Unless you can stop the foreign export, you cannot allay the domestic alarm. The Bank will get poorer and poorer, and its poverty will protract or renew the apprehension. And at the rate of interest so raised, the holders—one or more—of the final Bank reserve must lend freely. Very large loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain. Any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic and enhances panic to madness. But though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils.

GuestJanuary 16th, 2008 at 3:33 am

Bye Bye USD..  Feds are crazy to cut rate now  http://www.bloomberg.com/apps/news?pid=20602081&sid=a9OZTWl.0PGo&refer=benchmark_currency_rates Arab Nations May Coordinate to Revalue, Standard Chartered Says   By Shanthy Nambiar   Jan. 16 (Bloomberg) — Middle East central banks with fixed exchange rates to the dollar may opt for a “coordinated” revaluation to curb inflation should the U.S. currency weaken further, according to Standard Chartered Plc.   The Saudi riyal and the United Arab Emirates dirham may strengthen 8 percent by the end of the first quarter, Standard Chartered said in a report today. Kuwait dropped its dollar peg in May last year, whilst the other five members of the Gulf Cooperation Council continued their links with the U.S. currency.   “If we see further dollar weakness against the majors a coordinated revaluation by the GCC is possible,” wrote Callum Henderson, head of global currency strategy, and Marios Maratheftis, head of research for the Middle East.  

GSMJanuary 16th, 2008 at 3:43 am

The Governing Council of the ECB would be crazy to cut interest rates. Their mandate, quite rightly, is price stability. Not WEALTH DESTRUCTION, as some commentators seem to think.  In an IR environment with a USFed hellbent on debasing its own currency (the world’s reserve) and fueling worldwide inflation, the best and first line of defence against rising inflation is a strong currency. Calling for Euro rate cuts now is entirely irresponsible.  THE ECB governors seem to me to be educated and cultured folk well aware of their European heritage. Periods of slow growth and high unemployment have been dealt with but hyperinflation crushes nations states. I’m sure that European experience from Wiemar Germany is front and centre in their thinking.  The core inflation now growing in foods and energy MAY NOT subside in a slowing world economy. That is textbook theory and MAY NOT APPLY with a USFed systematically debasing its currency. In fact the opposite may be true- as the Fed stance increasingly dismays more and more of the world population, these very commodities , along with PM’s may be bid UP as those that can seek safer havens for their money than US paper assets. Adding to core inflation measurements. China’s (and India’s) commodity demands are tied into long term plans for dramatic infrastructure build out. They cannot just be switched off . What would happen to food and energy commodity demand should China choose to begin hoarding key basic commodities. These also are theories, but can have dramatic effects on prices.  The ECB should stick with its mandate . That is its mission. Price stability. Protection of wealth. When all is said and done, if the SHTF over inflation in Europe, it is adherence to the ECB’s mandate that will decide the fate of the Governors. Not the comments of academics. 

GuestJanuary 16th, 2008 at 3:50 am

I have now lost somewhere between too much and way too much. Thanks global stock markets. How unseasonal too. What happened to the january effect, abatement of tax loss selling, and 401k and IRA contributions?! What happened to the concept of rewarding savings and investment? Maybe I’ll trade one month bills from every central bank from now on? Maybe I should thank George Bush for crowding out investment, crowding out borrowing, and directly causing the credit crunch and the past two recessions (this one and the last one). Pathetic congressmen/congresswomen that approved of his red ink, red neck, MBA budgets (I have little respect for MBA types anymore). Funny thing is— I could have told you on inaugruation day in 2000 that Bush would cause a deep recession (or two). Why didn’t I take my own advice and buy treasuries and inflation linked bonds?! Pretty soon it will be the lost decade for US Equities, just like Japan, since 1989 (nearly 2 decades now!) I guess maybe I should blame myself. Anyone in hog heaven from shorting the markets, or purchasing puts? Call sellers anyone, anyone? The net short position traders must be laughing it up quite a bit as of late. Why I didn’t roll out of the Nasdaq Composite at 5,150 and into foreign currency (maybe the euro) denominated fixed income is beyond me.

GSMJanuary 16th, 2008 at 4:15 am

And to underscore my point above concerning the outlook for commodity inflation, this from Deutche Bank today;  “The current upswing in commodity prices is proving to be either the strongest or the longest-lasting on record, according to Michael Lewis, head of commodities research at Deutsche Bank.  “The current rally in many agricultural commodity prices is still only close to historical averages in both magnitude and duration, Mr Lewis notes. But inventories in a number of agricultural products have fallen to critically low levels at a time when global demand for food, cattle feed and biofuels is rapidly increasing.”  The ECB is forward looking and they no doubt see in prospect a much weaker dollar and a US financial system in crisis. Given that scanario, what safe havens are available to those who want to protect their wealth? Commodities? What ones? Food and energy have built in growing fundamental demand – these are THE big inflation drivers confronting the ECB today and tomorrow.  http://ftalphaville.ft.com/blog/2008/01/16/10213/view-of-the-day-commodities-rally-still-in-its-infancy/

Jason BJanuary 16th, 2008 at 4:41 am

It seems that commodoties speculation may overpower slack demand that should occur during a recession and keep the cost for essentials high for consumers in the US. The combination of a weak dollar, strong commodities prices, falling home values, a recession and a credit crunch are dire. Frightening.

GSMJanuary 16th, 2008 at 5:30 am

@Jason B,  “frightening”  …… my sentiments exactly.  Unless the US changes its stance on its currency. If not, its uncharted waters.

ACJanuary 16th, 2008 at 5:32 am

Re — London Banker on 2008-01-16 00:37:49  What you say about the ECB and FED is very reasonable, but don’t forget about China. China is and will be willing to pour a lot of money into the US in order to keep the current system of global economy working, as long as possible. Because for them the current system is the smoothest and easiest way to economic power. I don’t think that they care much about the losses they suffer by keeping the US on life support. They will be paid out not by the money they keep in US papers, but by economic growth and power. Compared to the growth and economic power they can reach, any loss on their dollar-assets will be peanut money.

ACJanuary 16th, 2008 at 5:39 am

A few months ago, someone on these pages mentioned several times, that he beleived that the US stocks follow the acbq index by 6 months. And this is because the small banks are the most sensitive to consumer sentiment, thus they are good indicators of what comes in the future. If this were true, than we would have a 10% drop in the stocks this January (we are haf way there), and then by March stocks would go back up to their value at the begining of the year, and after that there would be a 20-30% drop in a few months. Let’s see if this will happen.

London BankerJanuary 16th, 2008 at 6:28 am

@ AC  I appreciate your point about China’s willingness to fund the trade deficit for the sake of stability and future economic power, but that doesn’t really change the debilitating harm done by negative real interest rates as a Fed policy.   By keeping rates too low, the Fed distorts investment choices. First, rates too low encourages use of borrowed funds for less productive/unproductive investment (and there can’t be anything less productive than a 4000sf MacMansion in exburbia). Second, rates too low encourages domestic dis-saving and capital flight to foreign investments (and Brad has shown some signs of this in graphs from time to time).  Also, China’s funding doesn’t reach deep into the economy, more or less funding just government and agency borrowing. China isn’t a substitute for a well-managed banking sector which recycles domestic savings at a reasonable velocity through the commercial and retail economy.  The crisis would have come sooner and been more severe without Chinese support, but the crisis will come all the same because American economic and fiscal and monetary policies are unsustainable.

London BankerJanuary 16th, 2008 at 6:42 am

@ Shorts  Be careful today. All the markets I’ve been watching in Asia have shown the old, familiar upward spike at the close from very depressed levels. It might just be shorts taking their profits, but we could see the PPT-type move toward the close, which will set us up nicely for a rebound on JP Morgan results and Bernanke testimony tomorrow.

London BankerJanuary 16th, 2008 at 6:44 am

@ Shorts  Be careful today. All the markets I’ve been watching in Asia have shown the old, familiar upward spike toward the close from very depressed levels. We could see the PPT-type move toward the close, which will set us up nicely for a rebound on JP Morgan results and Bernanke testimony tomorrow.

DanJanuary 16th, 2008 at 6:51 am

London Banker   I agree with your comment on China’s capability to help the US situation. On top of it, since they will not be able to fully (or partially) decouple, they will suffer certain degree of slowdown and they will need to prop up their own possibly deteriorating employment situation.  Also, I would suggest that as always the politics will play significant roll. If you can gradually and systematically erode the opposing empire by not going out of your way to bail it out, and in the process you do not harm yourself, then it wouldn’t be surprising that China holds back its helping hand. 

GuestJanuary 16th, 2008 at 7:48 am

London Banker and AC,  “China is and will be willing to pour a lot of money into the US…” “By keeping rates too low, the Fed distorts investment choices….”   I am not sure if i get what you guys mean..   it’s my understanding that the credit bubble has popped (the so called minsky moment)… and regardless of new capital from china or sovereign funds, credit will continue to shrink.. thus, i dont understand why china’s money will help… perhaps just to soften the “hard” landing…  also, if china diverts some of the capital to the US, it will start to destabilise its own internal bubbleS.. no?    the banking industry now really needs to raise interest margins to recapitalise… thus, a low fed funds target rate does not really imply lower cost of borrowing/capital…   in citicorp’s conference call, they in fact plan to increase interest rates for loans and tighten underwriting…      mrskeptical

JLarkinJanuary 16th, 2008 at 8:17 am

Fears about the US market are driving Asia markets down, and a vicious cycle may be starting. Long positions on margin have to sell or cover, futures down, etc. as noted below.  Some technology P/E ratios starting to look attractive now. Trying to be patient…  http://www.marketwatch.com/news/story/wave-negative-sentiment-sweeps-fearful/story.aspx?guid=%7B8C0377C2%2DF564%2D468B%2D93E3%2D4790B0D241A7%7D&dist=morenews_ts  RBC’s Takeda said people with long positions were “being squeezed and having to liquidate their positions.” Furthermore, margin calls were triggered in the falling market, as the value of stock held by investors with leveraged positions fell sharply.  Futures market also added to the selling pressure, after some “knock-out options,” or options that expire worthless when stocks fall below a pre-specified price level, were triggered, added Takeda.  “The knock-out options got triggered a couple of times… I think it is oversold, but there is a wave of negative sentiment,” he said.  

GuestJanuary 16th, 2008 at 8:40 am

I told you yesterday, there is no way they let 1380 on the S&P go under no matter how bad the news gets. You are now wittnessing the PPT in action, they won’t stop every bad day but they will defend key levels like a tiger gaurding a fresh kill. You can’t have the markets trading at fresh new lows for Big Bens talk tomorrow. Watch for a 250 point rally today…

GuestJanuary 16th, 2008 at 8:52 am

Guest: “Will the rest of the world de-couple, or allow itself to get dragged down by the US implosion?    one question Pete.. whether US will alllow that to happen?? ”  I’ll tell you two things …  First, if I were a bank manager in Europe (London, Zurich or Hamburg), I’d be hoping that the ECB keeps its rates constant … and my office would be empty. EMPTY. I would make sure that every staff member I had was on travel – looking for new accounts from the Middle East, Asia, South America. And my message would be as simple as can be. What’s the most fundamental thing you need with a bank: “honesty, trust, integrity. “. The great challenge for America’s Wall St banks is that they have shot themselves in the foot on the fundamental issues. It’s not just about maximizing return on investment.  Also, as I look at the forwards earnings estimates for US companies this year I can honestly say … I’ve never seen so much bunk in my entire life. Someone better take a reality pill very fast, and start working hard to provide realistic estimates of future earnings for 2008. For those professionals working in the investment field in the USA, that may be one of the most important steps they could take in the next few weeks.  PeteCA 

GuestJanuary 16th, 2008 at 8:56 am

Re the specter of falling demand and rising or stable commodity prices. It seems that, despite assertions in the press to the contrary, that current commodity prices are not based on physical demand, but speculative demand. I am constantly reading press reports that oil prices are rising because of tight supply and rising demand. Speaking frankly, I don’t believe them. I suspect the opposite is true.  Is there any monitoring of such activity? The sort of questions I would ask are:  -What is the value of current oil futures contracts?  -How much is traded each day?  -What percentage is sold by producers?  -What rate of return are these capital investments returning?  -Who owns the money that is invested? Ditto for natural gas, electricity, grains, metals etc, We know that commodities don’t pay dividends, so it can only yield a return, unless you are shorting, when the commodity price rises. At what point do we decide these are no longer free markets, that is, no longer responding to physical demand? What is the effect when a market no longer responds to demand? Aren’t such markets liable to misdirect resources like those that are subsidized or have floor prices?  It is interesting that biofuel demand is given as the principal reason for rising grain prices, but the ideal biofuel source, sugar, was near historic lows last time I checked. Why is this an orphan? Assets and commodities rising, incomes left in the dust, one side of the triangle is broken.

GuestJanuary 16th, 2008 at 8:57 am

looks like no inflation- I think I’m going to buy me some stocks today…..  =============================  Inflation pressures ease  Reading on consumer prices show slower increases in overall and core prices than in November, and are close to forecasts.  January 16 2008: 8:37 AM EST  NEW YORK (CNNMoney.com) — The pace of inflation slowed in December, according to a closely watched government report Wednesday that showed price pressures basically in line with Wall Street expectations.  The Consumer Price Index, the government’s key inflation reading, rose 0.3 percent in the month after a 0.8 percent jump in November. Economists surveyed by Briefing.com had forecast a 0.2 percent rise in December.  The more closely watched core CPI, which strips out volatile food and energy prices, rose 0.2 percent, which matched economists’ forecasts after a 0.3  percent rise the previous month.  The inflation report is of particular interest for investors looking for steep rate cut by the Federal Reserve. Investors buying fed funds options have increased their bets that the central bank will cut rates ahead of its Jan. 30 meeting and again at that meeting.    

GuestJanuary 16th, 2008 at 9:17 am

“looks like no inflation- I think I’m going to buy me some stocks today….. ”  Better check more news before you spend your hard earned cash. Looks like stagflation to me.  News/Jan 16’th, 2008 WASHINGTON – Higher costs for energy and food last year pushed the inflation rate up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas. Meanwhile, industrial output was flat in December, more evidence of a significant slowdown in the economy.   PeteCA  

JMaJanuary 16th, 2008 at 9:20 am

Asias indices down 3-4% and US NEVER down 3-4% under any circumstance ever…  Equity markets handled by PPT, to Jason B’s comment about commodities speculation keeping prices high: why no intervention by the government on behalf of the people / fighting inflation in the commodities markets to quell the speculation ? When the Amaranth story broke last year and the market moved accordingly in natural gas as his massive positions were forced to be unwound, I had the conversation with a co-worker how someone can not pay their bill due to high prices and may freeze to death literally while big money players toy around with energy prices in the market place blowing each other out so they can earn their bonuses to increase their net worth from 20 million to 23 million this year…   “not here to make friends, just here to make money”  when Chavez nationalized oil check the charts for yourself, “they” took oil down to $50 – Chavez commented markets are “scandalous.” He is right about this for sure. It was ok when commodities prices were not altering the economic reality of all of the planet. Perhaps, it is time for some “soft friendly intervention” in the market place of commodities ? It has been the number one priority of the empire daily for years in the equities. Let’s be consistent now “W”, Ben and Hank !

GuestJanuary 16th, 2008 at 9:32 am

“looks like no inflation- I think I’m going to buy me some stocks today….. ”  was being facetious- cannot believe CNNMoney printed such an idiotic headline.

GuestJanuary 16th, 2008 at 9:41 am

“was being facetious- cannot believe CNNMoney printed such an idiotic headline. ”  Got it. I agree with you. I sure hope one of the things that comes out of this credit crunch is that we see a good bye to the financial drivel that’s being peddled on major US news outlets.  BTW, Prof Roubini. You want an idea for a money-making proposition in 2008? Start a non-profit economic organization that delivers accurate economic data for the USA. Things like figures on GDP, CPI, unemployment rate etc. Americans have pretty much had their fill with the rubbish being spewed forth from official sources in this country. People would pay for good solid data that was objective and untainted.  PeteCA 

Octavio RichettaJanuary 16th, 2008 at 9:54 am

Looks like “magic” 1380 is not holding. But you never know. Benny may turn things around on a dime…. Let’s wait for the close…. 

Octavio RichettaJanuary 16th, 2008 at 9:59 am

Chavez is in part responsible for the pickup in oil prices. I have heard that in an OPEP meeting he showed a bunch of ppt slides comparing the price of a barrel of oil, a barrel of shampoo (yes shampoo) a barrel of beer, a barrel of Perrier and they were all way more expensive that oil. The Arabs liked that and went along… He rallied quite a bit to get the prices up…

AnonymousJanuary 16th, 2008 at 10:21 am

London Banker was nice enough to put on his conspiracy hat on yesterday! He Mused whether it is possible that a global collapse could be engineered to drive investors to recapitalize the USA in a flight to safety! This subject was discussed in a book “Financial Derivatives and the Globalization of Risk” by Edward Li Puma. The book discussed the concept that if propietary trading programs of the “financial circulation”, were using the same assumptions of political risk, and  emerging market risk;then, the programs could trade in unison and cause money to migrate from the periphery into the “Metropole”. I would be very interested in commentary from London Banker about the book and/or concept. He seems to have come to the same conclusions as the author.  

GuestJanuary 16th, 2008 at 10:34 am

Funny…the 2X levered ETFs are trading at different levels than the indexes they are tied to would suggest.

GuestJanuary 16th, 2008 at 10:35 am

To those worried about the minute to minute machinations of various indices: Unless you’re heavily on margin and can get hurt by (ab)normal fluctuations, you should relax. We’re in the early stages of a recession (I believe NR on this point), and the correction still has a ways to go. The market forces cannot be resisted by real or imaginary players like PPT, etc.

GuestJanuary 16th, 2008 at 11:09 am

CEO confidence plunged from 44 in Q3 to 39 in Q4 according to The Conference Board and is now at a level that has been seen at the beggining of EVERY recession! The level is also consistant with around a 20% drop in earnings growth a quarter ahead! The street is still looking for 15.75% growth in Q1 of 2008. The markets have a lot of negative pricing in to do.

GustoJanuary 16th, 2008 at 11:36 am

Well, it seems like the Fed REALLY doesn’t want to make an emergency cut. But no, they did not trigger this bounce singlehandedly. That was a beautifully coordinated effort.   

GuestJanuary 16th, 2008 at 11:39 am

January 16, 2008 5:38 AM Yale economist Robert Shiller, who predicted the 2000 stock market crash and the current real estate crash has news for Manhattan: You’re not immune. In a lengthy Observer interview, the professor scoffs at the idea that, while the rest of the country implodes, Manhattan real estate will just keep jumping 10% a year. Shiller likens the city to ancient Rome before the fall and says the crash is only a matter of time.

GuestJanuary 16th, 2008 at 12:20 pm

LOLOL. The headline fjuffing is incredible! Home builders index cam out at 19, and the headline says homebuilders “less gloomy” than last month. THE ONLY REASON IS BECAUSE THEY REVISED LAST MONTH DOWN TO A NEW RECORD LOW OF 18!!! Spindoctors, ya gotta love ’em….

GuestJanuary 16th, 2008 at 12:37 pm

Magic-Fitch ups MBIA to “stable” and removes from negative credit watch. It also reaffirmsed AAA rating becuase the BORROWED $1 billion. Yeah, a company needing to borrow $1 billion sounds like they are really in good shape ‘eh!?

GuestJanuary 16th, 2008 at 1:01 pm

2:00 Beige Book: Demand for nonbank services ‘robust’ 2:00 Beige Book: Manufacturing mixed, with exports growing 2:00 Beige Book: Retail ‘disappointing,’ housing ‘quite weak’ 2:00 Beige Book: Labor markets ‘relatively tight’ 2:00 Beige Book: 5 regions slow, 5 growing modestly, 2 mixed

GloomJanuary 16th, 2008 at 2:16 pm

Would someone care to comment on whether the monolines will make it through the year? They seem to have no problem finding fools willing to finance them.

GloomJanuary 16th, 2008 at 2:25 pm

From FT Alphaville, something to warm my gloomy heart!!  Late last night, rating agency Standard & Poor’s did some quiet housekeeping.  In a late press release, S&P announced it was adjusting its cumulative loss measure on 2006 subprime collateral to 19 per cent – up from 14 per cent:  We revised our expected losses for the 2006 vintage subprime collateral to 19% from 14%, as delinquencies continue to rise, and we will recalculate lifetime loss expectations for all vintages of U.S. RMBS. Additional losses are projected to result directly for the additional delinquencies and defaults. The press release is somewhat anodyne, but the implications of that tweak are disturbing:  It will mean huge new downgrades on CDO tranches from the 2005 vintage through to 2007.  We suspect this will push hundreds more CDOs through “events of default” and a significant number into liquidation – a likely repeat of the disastrous events in November and December, when CDOs went into meltdown and banks were forced to admit further humiliating writedowns. The last time S&P tweaked their loss-curves was at the end of October.  S&P are also altering their metrics; RMBS rating models will now apply the adjusted cumulative loss measure over the lifetime of the structures they rate – not just (as has hitherto been the case) over a 36-month period. That will likely make senior CDO investors more keen to liquidate deals: super senior swap holders, or AAA note holders in many CDOs have thus far been keen to accelerate but not liquidate the transactions on the basis that things will inevitably improve. The new model suggests they wont: controlling note holders now have every incentive to exit fast.  The crisis won’t just be restricted to CDOs – or subprime. Any structure containing RMBS will suffer; SIVs, ABCP conduits, even plain old securitisations.  And it might be the final nail in the coffin for the monolines – MBIA and Ambac. Both have maintained their crucial AAA issuer ratings by the skin of their teeth, having raised $2bn each in emergency capital to act as collateral. S&P’s metric readjustment means that the monoline stress-test they performed is now outmoded and over-optimistic. More defaults mean more insurance calls.  What remains to be seen now is when those calculations will feed through into a cataract of rating actions. http://ftalphaville.ft.com/blog/2008/01/16/10220/lunch-wrap-158/  

GuestJanuary 16th, 2008 at 3:33 pm

“4th time in 6 months 1380 has held. Bears just can’t compete against a printing press… ”  There! Are you happy now? It closed under 1380! And the Dow is under 12,500. For those numerologists, this can’t be a good sign!

GuestJanuary 16th, 2008 at 4:12 pm

it feels like we are at the same place tonight as we were last night at least in the DOW anyways – the S&P got slightly worse technically… yet another interesting day on tap for tomorrow – this so far has been a controlled demolition in the averages (there have been many individual atomic equity implosions already too many to name)

AlessandroJanuary 16th, 2008 at 4:51 pm

Well the “margin calls” news search suggested by London Banker is starting to trigger interesting results.  1 – http://www.guardian.co.uk/feedarticle?id=7231876  “Precious and base metals declined from about 1.25 percent to more than 2 percent, with gold down 3 percent at one point. Crude oil ended down more than 1 percent, trimming earlier declines of twice that, and wheat, corn and soybeans all lost ground. “Today was the day traders, because of the significant move in gold, had to answer margin calls. And it spread to other commodities. Nothing was immune from long liquidation today,” said George Nickas, precious metals broker with FC Stone, adding that he thought selling may be renewed on Thursday.”  2 – http://www.hindustantimes.com/StoryPage/StoryPage.aspx?id=30752ed4-c483-4fc0-88d7-0e303fb402a1&ParentID=4af48692-57da-467f-ad3d-5ad5dfa5c6c9&MatchID1=4627&TeamID1=1&TeamID2=6&MatchType1=1&SeriesID1=1165&PrimaryID=4627&Headline=Sensex+slides+382+pts+on+weak+global+cues  “Worries of more sub-prime losses for US banks and those of a possible recession in the US triggered this fall. On top of this leveraged investors faced margin calls and had to sell, which accentuated the fall. If US markets do not recover today, there could be more downside tomorrow morning,” said Arun Kejriwal, director of Kejriwal Investment Services.”  3 – http://www.fxstreet.com/futures/news/article.aspx?StoryId=850334fa-8c78-409d-a878-37766b8519ab  “A lot of equities were down – the Nikkei (in Tokyo), the FTSE (in London,)” said a trader. And U.S. stocks initially extended their recent decline, before bouncing off of the lows.  “A lot of hedge funds will start to get margin calls, so it becomes a cash grab – whatever they can get their hands on to generate cash,” the trader said. “Right now, everybody is fully aware that they are very long in metals, so that is the ideal one to start selling and taking profits to raise cash.”  Here is the URL for your bookmark pleasure:  http://news.google.com/news?ned=us&q=%22margin+calls%22&scoring=n 

GuestJanuary 16th, 2008 at 6:35 pm

oil is rising again despite concern for US econ growth they have to let the boom/bust cycle take its course or commodities will further rise 

GuestJanuary 16th, 2008 at 7:00 pm

 Consumers are buckling under-pressure… but am abit surprised we have not heard any bad news from the corporate debt and commercial real-estate mortgages…   Does anyone have any updates on their status?    mrskeptical

GuestJanuary 16th, 2008 at 7:57 pm

the recent rise in price of gold i think, was caused by the expectation of traders that FED will lower rates the price droppped as the cut didnt materialize  maybe thats a future “scenario” where gold price is heading to 

Aurora BorealisJanuary 16th, 2008 at 9:00 pm

Shouldn’t one be more interested in common man’s real income in the USA rather than making him indebted beggar? Negative savings rate gives birth to beggars.  The oil-rich Russia and the Arab nations create the chance of decoupling. Thus no “zero rate Europe”?

London BankerJanuary 16th, 2008 at 9:33 pm

@ Alessandro  I was just about to post the Guardian margin call story. Glad to see you paying attention!  Recall that RH said that “they” know the hedge fund positions and exposures (e.g., “they” are prime brokers). It’s almost as if the first two shakedowns chased the hedgies into Asia and commodities, and now those markets are the shake down targets facing big margin calls. Interesting, isn’t it?

London BankerJanuary 16th, 2008 at 9:49 pm

Interesting how the oil stock data can fluctuate so much, influencing the oil price so dramatically in the markets, at a time when a GAO audit of the management of US strategic petroleum reserves finds 308,000 barrels “missing”.  Given that the Department of the Interior is historically one of the most corrupt departments of the US government, and that Bush and Cheney are oil men, and that statistical rigour has suffered somewhat under the Bush administration, one might wonder whether the “missing” oil had been sold secretly at the record high prices engineered by their wars. One might also wonder whether the weekly statistics are massaged according to expedience, particularly if a well-connected shakedown ring had influence in the administration . . .

GuestJanuary 16th, 2008 at 10:34 pm

“Those poor, poor Hedgies. If you can’t run with the Big Dogs, then stay home on the porch.”  Don’t feel too sorry for them. The experienced “global macro” guys at the hedge funds are amongst the best traders in the world. You can be sure that some of those guys went short on the stocks of the prime brokers. That was a natural move for them.  PeteCA

ES TraderJanuary 16th, 2008 at 10:56 pm

Oh Yes, No Doubt. Those Hedge Funds don’t have anyone on the payroll who’s smart enough to figure out what’s going on??? You would think  that they would just position themselves Delta Neutral?? No??

GSMJanuary 17th, 2008 at 1:11 am

@ mrskeptical.    Those that can, do.  Those that can’t, teach.   Wise words in there.   A lot of what passes for trading banter here is hot air from those who have never attempted it or are inadequate to take it on. More armchair pontifications from the so called “academics”?

Anonymous ibid.January 17th, 2008 at 1:53 am

Octavio Richetta, I would say that Stratfor is completely delusional about the situation of conflict in the Middle East.   Violence in Iraq has ratcheted down to 2005 levels– which were completely unacceptable. There has been a flight of professional like doctors and engineers essential to reconstruction. Millions of people have been displaced internally or externally. Meanwhile, trouble is developing in Pakistan and Afghanistan. Our troops are exhausted and, more ominously, families that have had generation after generation of service are questioning the military as a career path. Al Qaida may be weakened– it would certainly be nice to have bin Laden and Zarqawi in custody to prove that that’s true– but other groups have sprung up.   Just before the Tet offensive, we were told that we had won the Vietnam war. We fought on hard for four more years and failed to gain victory. Take a victory out of Stratfor’s analysis and re-run the economic estimate for a sensitivity analysis.   My advice is to take Stratfor with a tablespoon of salt.

GuestJanuary 17th, 2008 at 2:27 am

hmmm?…  asia just rallied… europe jumped as well…  dow future up…  insider info?  ben bernanke going to make a surprise move?  or ppt in action?  or just masses bargain hunting?    mrskeptical

AntilopeJanuary 17th, 2008 at 2:59 am

I disagree with your analysis professor Roubini. The ECB should in no circumstances cut rates. If anything, they should be raised, and the economy contracted. I take stock by Stephen Roach who has advocated a Fed tightening since 2001. Loose monetary policy only feeds this monster bubble. Recent Central Bank coordination acknowledges the international nature of this bubble. Sarkozy’s calls to Berlin for an impromptu bilateral renegotiation of the ECB mandate are not the initiatives of a de-coupling scenario. Decision makers accross the atlantic are all too aware of the possible consequences of the US isolvency fall-out. What needs to be kept in mind, is what Roach pointed out, insolvency crises are not solved with liquidity prescriptions.   Sacrifices needed to be made years ago; if they postponed for another few years, the eventual “readjustment” they enjoin, will make 1929 look like a picnic.

GuestJanuary 17th, 2008 at 3:19 am

sick isnt it  indices are up on the news of a rate cut = weaken USD = would appreciate price of commodities = would affect the consumers spending = lower profit forecast for companies = slowing of an economy = Rate Cut????  im sick..

GMCJanuary 17th, 2008 at 3:19 am

For those doubting the benefits of a sound and dare I say RESPONSIBLE monetary policy, read this below on Germany from the FT today. Quick and expedient fixes look sexxy and daring at the time but they don’t have the legs. Johnny come latelys like the show pony Sarkozy should be given short shrift by those with runs on the board, as evidenced by Germany’s sound performance.  “Germany grows Published: January 16 2008 20:14 | Last updated: January 16 2008 20:14  Hard as it was to imagine during the 1990s, as unemployment soared and unification sucked money out of the federal coffers, Germany’s budget is now balanced and the enduring virtues of its economic model are shining through. The progress has been impressive. The mistake would be to reverse or abandon important reforms.  The German state collected as much in tax as it spent in 2007. Despite doom-laden predictions of consumer woe, the rise in value-added tax at the start of 2007 has not only increased revenues, it has also produced a helpful structural shift towards indirect taxation. But more important was 2.5 per cent economic growth, which created 650,000 jobs. Corporate and income tax revenues went up; the cost of unemployment benefits went down.”    

peau de culJanuary 17th, 2008 at 4:14 am

Long term bond rates are not going up that much; one would expect they would in the face of higher inflation. So what does the gold market know that the bond market does not? Or are the bong vigilantes piling up into gold now knowing that bond rates will go up latter trying to do some bond market timing ??? 

GSMJanuary 17th, 2008 at 4:53 am

For those contemplating purchasing value in US banks, you might want to read this from todays FT. The essence is, there isn’t value just yet. No wonder UBS cannot guestimate the size of its toxic exposure.  Bottom line is : The SIVilous plague is still growing and contamination accross non subcrime paper accelerates and much more to come .   SIVS’S DONT ROLL OVER-THEY JUST DIE.  “A quick update on the troubled SIV sector. The average NAV (net asset value – a ratio of asset-worth to notes after leverage) for SIVs is now hovering just above the 50 per cent mark. According to Moody’s: (Chart here showing a swan dive in SIV NAV’s.) An average NAV that low is very worrying – since in generic SIV structuring terms, a fall below 50 per cent triggers a mandatory and immediate liquidation of the portfolio. Most SIVs are already in defeasance – having broken their “early warning” triggers Moody’s again: NAVs vary from SIV to SIV primarily as a function of portfolio composition. While SIVs and SIV-lites with relatively large concentrations of Non-Prime US RMBS and ABS CDOs show NAVs below 50%, vehicles with no subprime or ABS CDO exposures have NAVs that are closer to 77% as shown in Table 3.  …. thus, vehicles with currently high NAVs may also see sharp declines as contagion spreads across different segments of the credit markets. (It’s disturbing to note that Moody’s are expecting contagion to spread with some certainty.) For some SIVs, even a NAV at 53 per cent looks attractive (again via Moody’s): Today’s rating action is prompted by the decline of Duke Funding’s capital net asset value from 21% on November 23rd 2007 to below zero on January 11th 2008. This followed the declaration of an Event of Default by Duke Funding on December 6th, 2007. As a consequence of both the NAV decline and the occurrence of an Event of Default, one of the counterparties to the repurchase agreements, holding 8% of the portfolio, has exercised its right to liquidate assets. The remaining four counterparties, holding 92% of the portfolio, have agreed to forebear such liquidation rights on a temporary basis. We’re now looking at a swift – and potentially market wide – liquidation of SIV portfolios. Possibly along Duke Funding lines. Low NAVs coupled with a spike in maturing SIV debt this January will likely make SIV sponsors – mostly banks – cave into the inevitable and call time. Banks simply can’t afford to keep on rolling-over SIV debt.”  http://ftalphaville.ft.com/blog/2008/01/17/10251/sivs-dont-rollover-they-die/   

London BankerJanuary 17th, 2008 at 5:19 am

Rich H would appreciate this analogy:  Wall Street’s error-oids era   What investor and baseball fan hasn’t felt an eerily similar sick feeling when considering what artificial performance enhancing has done to our national pastime and our national banking system? The only difference is that baseball is a game, and the damage among the banks is spelled out painfully in quarterly results and huge write-downs.  Like Barry Bonds smashing 73 home runs in a single season after only hitting 49 the previous year, Merrill Lynch earning $7.4 billion in 2006 after earning $5.1 billion the year earlier felt suspicious.  Baseball players used steroids and human growth hormone to beat the limits of their bodies. Banks used collateralized debt obligations and merger growth strategies to bulk up and post results they couldn’t otherwise attain.

London BankerJanuary 17th, 2008 at 5:28 am

@ RH fans  Now that the Dow has moved solidly through 12475 for a 10 percent downswing, as per RH’s suggestion, we can expect the rally on Bernanke’s testimony later today and hints through next week about FOMC rate cuts and tax breaks in the SOTU.   I’m expecting the SOTU to give another big break/amnesty on taxes for repatriated corporate profits to encourage a “flight to quality” stock boom in US assets and the appearance of appetite for US debt. US companies will be racking up huge foreign currency earnings overseas against the depreciated dollar, and Bush loves to help his “base” save on their taxes. He’ll also spin the usual guff about diverting Social Security into non-government investments. Shorts might want to review their stop losses.  Your crash will continue after the rally . . .

Indian BankerJanuary 17th, 2008 at 6:12 am

LB, What about Asia ? Will it Rally and then crash too ?  Looking at the US Inflation figures, I doubt if Uncle ben will cut too much (as much as Mr. Feldstein wants) …will that not cause panic in the market place (if the cut isnt too big ) ?  

Octavio RichettaJanuary 17th, 2008 at 6:32 am

I had to re-register for the fourth time! Using my wife’s email this time. I tried deleting cookies and using any of my three old user names/passwords but this did not work.   This is getting to be a pain in the neck. I love this blog but if this happens again I will desist trying to get into this blog.  Professor: Please talk to your IT people. The website is totally screwed up!

DDJanuary 17th, 2008 at 6:56 am

Yes, this registration is driving people away. I wonder why this sudden change.  FORCE IS BAD , Mr. Roubini.  

Octavio RichettaJanuary 17th, 2008 at 7:15 am

Anonymous ibid. on 2008-01-17 01:53:43  Thanks for your reply. I fully agree with you. I wonder what these guys are smoking!

MJJanuary 17th, 2008 at 7:37 am

I have a hard time logging in and posting sometimes too. Quite frustrating and leads me to read elsewhere.

tutterfrutJanuary 17th, 2008 at 7:47 am

AP Home Construction Drops 25 Percent Thursday January 17, 8:42 am ET By Martin Crutsinger, AP Economics Writer Construction of New Homes Falls 24.8 Percent in 2007, the Largest Amount in 27 Years  WASHINGTON (AP) — The prolonged slump in housing pushed construction of new homes in 2007 down by the largest amount in 27 years with the expectation that the downturn has further to go.  http://biz.yahoo.com/ap/080117/economy.html

suecrisJanuary 17th, 2008 at 7:58 am

I have also had great trouble logging in some days since this “new regime” on this blog. I have not had to create a new account, though. Clicking on the link in the original e-mail which sent your password seems to work – it logs you in.

hazletonJanuary 17th, 2008 at 8:03 am

I have had trouble logging in also. Clicking on the link did not work for me. The only thing that worked for me was pasting my password. It would not accept my typing it in.

tutterfrutJanuary 17th, 2008 at 8:06 am

U.S. Initial Jobless Claims Unexpectedly Decline (Update1)  By Courtney Schlisserman  Jan. 17 (Bloomberg) — The number of Americans filing first-time claims for unemployment benefits unexpectedly fell to a three-month low last week, in a period when figures are typically distorted by holidays.  Initial jobless claims decreased by 21,000 to 301,000 in the week ended Jan. 12, the lowest since September, from 322,000 a week earlier, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, fell to a two-month low of 328,500, from 340,250.  http://www.bloomberg.com/apps/news?pid=20601087&sid=a_0hnIL_zkXE&refer=home

UKJanuary 17th, 2008 at 8:13 am

Looks like half of Americans don’t know to LOGIN the other half is trying to make money by making them LOGIN

SeanJanuary 17th, 2008 at 8:23 am

Prof, do you have any explanation why the jobless claims have been moving down consistently for 3 weeks already?? The latest initial jobless claim drop much lower to 301K, and the seasonaility (X-mas and New year) excuse does not explain it.   Any thoughts, or any historical graph of jobless claims to do a comparison? Thanks

SeanJanuary 17th, 2008 at 8:25 am

Maybe the continue claim is a better gauge.   “Compared with the same time last year, initial claims are up about 5%, while continuing claims are up about 11%”  “Initial claims represent job destruction, while the level of continuing claims indicates how hard or easy it is for displaced workers to find new jobs.  Initial claims ranging from about 300,000 to 325,000 are consistent with healthy job growth, economists say. Readings consistently higher than 350,000 would signal significant weakening in the labor market”    http://www.marketwatch.com/News/Story/us-initial-jobless-claims-down/story.aspx?guid=%7BEFF8EDED%2D59DA%2D4C53%2DB65A%2D5FE15186BB94%7D

GuestJanuary 17th, 2008 at 9:26 am

Money Making Ideas for 2008  Here are three ideas that could just generate real income in 2008. Not about investments. Instead, about supplying useful economic data – that people will pay for. I mentioned two yesterday.  * For investment professionals (e.g. those who post on FinancialSense.com).  It would be good to start providing some realistic estimates for future  earnings for US companies. This might include data on relative valuations  and history of sector valuations. I have a sneaking suspicion that more  investors will be moving back to strategies based on fundamental analysis  in 2008. Wouldn’t that be nice!  * Start a service for providing unbiased economic data for the USA. For example,  unemployment, GDP, CPI etc. Right Now John Williams has one at shadowstats.com,  but the basis for his analysis may need more debate (IMHO). There’s a pretty big  difference between the official figures and the shadowstats data. Someone needs  to dig into all of this in more detial, and make it more transparent.  Here’s the third idea. This one would work for a knowledgeable individual (two ideas above are more suitable for professional invesmtent and economics folks).  * Someone needs to open a Web site (subscription-based) that gives a very good  analysis of Fed actions. Currently the banking actions in the USA are shrouded  in a cloak of mystery, and quite frankly there is more misinformation (and disinformation)  about Fed moves than anything else I can think of. A knowledgeable person needs to  break down the Fed moves, show charts of trends in money supply, discuss background  of Fed operations, and plot trends in foreign investment in US Treasuries. It would be  an enormously helpful activity, and would shine a lot of light on an area that needs  a lot more clarity. Right now a lot of people (myself included) go to John Hussman’s  Web site seeking insights that clarify Fed actions. But this service could really pay  for itself if done well. BUt – it needs to be done by a knowledgeable person familiar  with Fed operations and banking.  There you go. Shine some light on US finances – and make an honest buck in 2008!  PeteCA

RedCreekJanuary 17th, 2008 at 9:32 am

Watching Bernanke’s speech – has black circles under his eyes and seems to be very nervous. voice trembling sometimes. still seems to outrule a recession!?!?!?

GuestJanuary 17th, 2008 at 9:42 am

Bernanke not sounding comfortable …  Given that the Philly Fed index came in at -20.9, it’s probably not surprising. Mr Bernanke obviously knew that data in advance. It’s pretty hard to put spin on that kind of result.   BTW, I’m in agreement that this blog design is getting difficult to deal with. The continuous bombardment with ads and sign-ins is frustrating. Did anybody find a decent alternative?  PeteCA

London BankerJanuary 17th, 2008 at 9:57 am

Margin calls are beginning to bite in Australia:  Australian margin calls rise sharply: The Australian Financial Review reports that Macquarie Margin Lending expects to make 300 margin calls today, after making 72 yesterday. Up to yesterday the bank was making about 60 a day. CommSec made 500 margin calls yesterday and Adelaide Bank made 282, beating a record 131 made last Tuesday. Up to then it had been making between 20 and 50 a day.  And in India:  “The decline has been largely driven by unwinding of positions to pay for margin calls because of a sharp drop during this week,” said Deven Choksey, chief executive officer at K.R. Choksey Shares & Securities, which manages $550 million in assets. “A correction is always welcome, but speed like this brings nervousness.”  If margin calls are happening in other markets with sharp declines, then we are going to see some serious fallout among the hedge funds, private equity and weaker corporates – not to mention some really angry retail investors who’ve staked the daughters’ dowry on stock speculation.  @ Indian Banker  India will certainly have a market collapse. When is the question, as it’s been predicted by many pundits for the past year already. I’ll admit I’ve done well shorting the Nifty this week, but I’m wary that we’re coming to the end of this shakedown. I’ll be cautious next week with the SOTU and FOMC potentially framing the upside.

AchesonJanuary 17th, 2008 at 10:13 am

  @Pete CA and others:  Noticing that the posts here appear to be dwindling over the past week, and being a long-time Roubini blog-addict, I invite all to freely discuss and post at my Sidetalk blog:  http://acheson.wordpress.com  The blog is set up mainly for comments to be posted and to encourage discussion and analysis. Although I was an Econ major years ago, I’ve been an attorney for 20+ years and thus won’t purport to analyze the macros myself. 

JMaJanuary 17th, 2008 at 10:29 am

are we oversold ? yes  is there risk of a short squeeze ? yes has a short squeeze come at this juncture at each and every turn of this market over the past year and a half ? yes technically – charts only – despite all of this – we should extend substantially from here to the downside immediately MRK and MCD latest pillars to go down in the DOW JNJ and MO the only two legs left supporting the table… i own some Feb calls in case they surprise, some cash to be ready after the eventual BS rally and mostly Feb puts with a few jan puts…  interesting times – i listened to some CNBC this AM for about 5 minutes before work and i have a real issue with Jim Cramer – I wish they would put a gag order on him – he is disruptive to policy, a self-serving equity bull who holds a microphone nightly and referenced Fathers and children when arguing for rate cuts (they are going to lose their home). He wants equities “juiced” – i suppose a hit is great at the time, but shortly afterwards it is not so good. It is annoying how Cramer ignores “real inflation.”

GuestJanuary 17th, 2008 at 10:35 am

Acheson  Thanks. I’ll definitely check that out. I’m not sure that the blog needs to have detailed economic discussions by the blog leader. So long as the forum is moderated to encourage a thoughtful approach, and vicious attacks against people are discouraged, I think you’ve got the basis for a  successful recipe.  PeteCA

GuestJanuary 17th, 2008 at 10:45 am

  @Pete CA and all re  http://acheson.wordpress.com  If you post a comment to kick it off, and a couple of others post reaction, it could turn interesting….but somebody needs to lead off and then others follow through. I’d enjoy a free flow of comment!

London BankerJanuary 17th, 2008 at 10:51 am

@ Acheson  Yours is a kind offer, but unfortunately doesn’t solve the problem that those regulars who can’t get into this site can’t be made aware of the alternate venue. I’ve had a couple e-mails from folks who haven’t managed to crack the code for getting past the registration page.

ES TraderJanuary 17th, 2008 at 10:56 am

@Trouble Logging In????   Click on the link in the original e-mail. It’s been working for me for days now.

RedCreekJanuary 17th, 2008 at 11:00 am

@Trouble Logging In  I have no problems with the website. Registered, let the website remember me and do not log in from other computers. All’s working well here.

GustoJanuary 17th, 2008 at 11:11 am

Market slipping on MBI, AMBAC. I wonder why…not. Might do a rally if those two end up being the next CFC.  Ben needs to learn how to sound a lot more self-assured than he feels. Market watching like a hawk, his appearance didn’t inspire confidence.  We are definitely in bearish category now, any rally will be short lived with lower highs and lower lows, until it doesn’t.

London BankerJanuary 17th, 2008 at 11:14 am

@ All Mutineers  I’m going to trust the Professor to address the technical issues affecting the site. I hope he will recognise the contribution made by the participants on this thread and other parts of the site that used to be open without registration. I am sympathetic to the frustration levels here, but will be patient for a bit longer.  As ES Trader said, if you click (or copy and paste) the link from the registration confirmation e-mail, the site should work fine for you (assuming you’ve allowed cookies and scripts to run).  I’m grateful to the Professor for giving us this forum which has fostered a great community of commenters here. I hope he will see the value we bring, as we see it in each other.

AnonymousJanuary 17th, 2008 at 11:21 am

To you all,  One more to say that I utterly disagree with our dear professor push for lower rates. That said as a european citizen.  The dump-the-currency-dump-the-bill attitude will just worsen the situation.  Of course, I understand the temptation by central banks of all major industrial countries to dump their currency and bills.  I do run a significant part of my portfolio in gold. And I’m just an average EURO-based investor. Imagine the behaviour of private USD-based investors in the coming years. A nightmare is beeing prepared.  As you say “fool me once…”  

tutterfrutJanuary 17th, 2008 at 11:25 am

Strikes and work interruptions here in Belgium(Europe) popping up everywhere. All asking payraises, because some have become them. This is what Trichet has been warning of. Interesting times ahead indeed… 

GuestJanuary 17th, 2008 at 11:34 am

London Banker  I respect your patience for the looming closure of this site. My concern is that if we wait to Jan 31, we will not be able to find each other any more.   As a contingency I think it would be good idea that a site be determined and most if not all the people from this site are made aware of it.  What do you think?  PeteCA gave good starting criteria. Someone will have to lead. Maybe Acheson can do it? 

tutterfrutJanuary 17th, 2008 at 11:35 am

For what it’s worth…  Cramer Rages on Banks: ‘Where’s the SEC?!’  “It’s all fiction!” he declared during a forceful exchange (see it in full in the accompanying video) on CNBC’s “Squawk Box.”  “How can we have these levels of fiction in financials after Sarbanes-Oxley? How do people get away with this? How do they live with themselves?”http://www.cnbc.com/id/22706231

Octavio RichettaJanuary 17th, 2008 at 11:46 am

Guest on 2008-01-17 11:34:23  Be patient. I am sure the Professor will fix things, perhaps by getting rid of the requirement of registering to post…  You will not find a top economist that devotes the kind of attention to a Blog Professor Roubini does.  Most people are just not willing to devote this much effort. e.g., check Krugman’s blog. 

ACJanuary 17th, 2008 at 11:49 am

Re — Anonymous on 2008-01-17 11:21:10  “Of course, I understand the temptation by central banks of all major industrial countries to dump their currency and bills.”  When the GDP must increase all the time and 2/3rd of the GDP comes from consumption, you must keep the level of consumption at all cost. Ex treasury secretary Summers said a few days ago, that everything must be done in order to ensure that consumption won’t fall. This is in a country where the consumers have no savings but have a lot of debt.

AchesonJanuary 17th, 2008 at 11:51 am

Hello all – no mutiny intended here don’t get me wrong. Just another spot to post comments and start discussions as you wish. As mentioned, it’s no substitute for RGE because I have no independent analysis, more of a community and an aggregation of sources and views. Indeed it’d be an honor to have additional commentary from all of you.  

London BankerJanuary 17th, 2008 at 12:07 pm

@ Guest on 2008-01-17 11:34:23  My concern is that if we wait to Jan 31, we will not be able to find each other any more.   I don’t have the answers as I’m not sure what exactly the policy will be here after the 31st.  What I can offer is to compile an e-mail address book for the site. If you want to be included, send me an e-mail. I can make this available to Professor Roubini with a request for “freebies” to those of us who have made the running here over the long term. I can also forward requests/invitations to the blind list for alternative venues, if necessary.  I will hold all details confidential.  Feel free to respond here or e-mail me if you have a better idea.

BKJanuary 17th, 2008 at 12:23 pm

Bernanke looked uncomfortable any time he was asked any specific, meaningful question. He would use lots of crutch words (ah, um, well, etc.) he would also move more. This was especially evident when the senator with gap in his front teeth, wearing the lighter gray suit was questioning him. Forgive me for not knowing the senator’s name.  The rest of the time he looked comfortable, but he was just regurgitating information that we have heard him say over and over again.

BKJanuary 17th, 2008 at 12:29 pm

I also wondered why none of the senators asked him about what impact he feels the Fed has on saving, when it cuts rates. There was discussion about the need for greater saving in this country to combate our deficit and debt, but that can only happen if there is incentive to save. All of our incentive (as US citizens) is to spend. I know it is an incredibly complicated issue, but he left himself totally open for that question when he stated that we needed more savings to combate the deficit and debt.  That was my only major commment on what he said. All the rest as pretty much business as usual.  I may be totally off base…please correct me if I am wrong.

Nouriel RoubiniJanuary 17th, 2008 at 12:37 pm

To clarify some confusion: after January 31st the content of this blog – and the ability to comment on it –  will remain free subject to a quick registration process; so those of you who are registered already and anyone else will have full access to this blog. The blog will not become a paid service. Best Nouriel 

London BankerJanuary 17th, 2008 at 12:41 pm

@ Nouriel  Many thanks, Professor! What a relief!   You had us scared here, and not about the economy this time! What would we bears do without you?

DanJanuary 17th, 2008 at 12:50 pm

Thanks Professor,  Frankly I was both sad and scared. I said once before, I have learned a lot here and I know that there is a lot more left to learn.

hazletonJanuary 17th, 2008 at 1:54 pm

  When I couldn’t log on for 2 days, I had major “Roubini Blog Withdrawl Symptoms.” Feelings of isolation, jitteriness,and confusion.  

MaunderminJanuary 17th, 2008 at 2:03 pm

Whatever happened to the constant rehashing that, “the stocks would go to the moon”, that, “recession doesn’t matter”, and that “stocks would go green any minute as the PPT came in and saved the day.”  Where is the PPT now guest?

GloomyJanuary 17th, 2008 at 2:12 pm

Dr. Roubini,  I am in the health care field and have never taken an economics or business course. I read a few quotes from you in the NY Times in early Dec. and what you said made a great deal of sense to me. I then started reading your blog daily. I wanted to thank you on behalf of myself and my family (including my parents in their 80’s) for saving us from the debacle which is now unfolding. What you say has mattered greatly to small investors such as myself.

Europ a bad steerJanuary 17th, 2008 at 2:25 pm

Why is U.S. savings rate so poor?  Because investments of all ranges and scales of risk offer a superior return. We are sourcing foreign savings from the unsophisticated and hardworking poor and middleclass of the world to borrow short and lend long.   I used to be a great laissez-faire free enterprise advocate, but I now see that serious new rules and regulations need to be imposed on the financial community. An American Revolutionary Financial Constitution must be constructed and imposed on this wild west behavior. They have literally, with these RMBS and CMBS etc. financial instruments, leveraged America out to foreigners. With our futures on loan, capital has been very inefficiently allocated to building structures with little likelihood of measurable returns now that the Ponzi ruse has been discovered. Additionally, the commission-drunk wallstreeters have JAMMED (thanks Cramer) this structured fixed income product into dumb money funnels. Unfortunately that dumb money administrates over our muni bonds, pension funds, money markets etc. It was a calculated wealth transfer (as opposed to wealth creation) to slippery salesman who did nothing to create any value or strenghten our nation. Call it what it is THEFT!  Oil has been manipulated and penetrates our every industry jamming inflation. Now toxic derivatives penetrate much of our fixed income investment structures and will jam our infrastructure, retirees, and cash liquidity. Our currency is devalued, our investments are devalued, our sense of security devalued. Why?, conscienceless men have become devalued. Very wise but nefarious men have long known this: Create scarcity where none exists or perceptions of Wealth where none exists and profit from the dumb money acting as counterparty. Wall Street is great at pushing their neighbors into ditches and snaring our feet while stealing our wallets. Other than allocating capital to useful enterprises (less and less part of their business model), their chief aim is THEFT!  We can correct this with a protracted recession and go back to business afterward, or bind the money men down with new regulation. We need hard prosecution and long prison sentences for malefactors to send a signal.

GwendolynJanuary 17th, 2008 at 2:29 pm

I’m here watching the carnage in the markets and the somewhat impressive spike on VIX, but thanks to Professor Roubini it is no surprise. The time spent reading here has been a great investment. Thank you.

JMaJanuary 17th, 2008 at 2:49 pm

IMHO i think too many people expect rate cut, and many expect a bounce… i am trying hard to assign money to :calls in case he does/ we bounce, puts short term as in jan one day left in equities, cash and feb puts. assign a probability to each and allocate accordingly… got to go…

GuestJanuary 17th, 2008 at 2:50 pm

…stimulus…hum … what would happen if they created a fixed rate mortgage that will go 15 years@ 5%

GuestJanuary 17th, 2008 at 3:00 pm

Can anyone get into cnnmoney.com? It seems to have went down and I haven’t been able to get into it for more than an hour…  CNN’s regular website is fine.  I just thought that was strange…

Octavio RichettaJanuary 17th, 2008 at 3:11 pm

The teflon/house of cards market was rigged for too long. Thus, the rational thing to expect is for the market to continue a steady correction towards valuations that reflect current fundamentals. Will I have to eat my words?:-)

London BankerJanuary 17th, 2008 at 3:15 pm

Well, that was interesting. I skyped my dad about an hour ago. He is a pensioner with no savings, so I knew he would enjoy watching the crash with me. As we talked, the market tanked 200 points. He’ll be telling all the seniors down at the diner about it in the morning over coffee as if it were an epic battle. Lots of builders around his part of the world are unloading property and/or don’t have work. There won’t be much sympathy for Wall Street.

End of EuropJanuary 17th, 2008 at 3:18 pm

Tomorrow expect a huge rally underscored with calls that everything is oversold, or some finding value where sellers have thrown out the baby with bathwater. Shorts are going to be fried in batter. Look for a squeeze for the next 7-10 days, then we’ll eke out another minor downturn, a modest month-end rate cut for a modest rally, and then sometime in February a huge downturn. 24-40 months of sideways trading and muddling, then another slow growing bull market. Japan will be the model. We may even call the otts (’08-’10) or beyond our “lost decade”.

GuestJanuary 17th, 2008 at 3:23 pm

I find it most interesting that the institutional regulators, and stewards (“experts”)of the global and national economies of this World are just only NOW recognizing (accepting) that the global economies are in crisis’ – at a time when it is ‘far too late’ to do anything to stop the coming er imminent collapse:  whilst a few of us, foretold of this event, which now is on our doorstep, er many years ago.  So true to form, the current “experts” will insist that they ride this phenomena into the ground just so that they will remain “blameless” (conditionally) a priori (Benanke) and where after all, it will be the future generations of the grassroots er people that will foot the bill for the “leisure classes” (read: predatory class) – as it is so written. Nothing new here.  The keyword to now examine is “stimulus”, where we will soon find to actually mean “bailout”, adequately camouflaged as a Cause to create an Effect of transfer of resources rather than to create global economic growth through stimulation.   At best I predict that it will be a test of either applied ignorance or alternatively, criminality – I wonder if there is any difference under Law?. “Ignorance is no excuse of the Law” or, words to that effect.  PeterJB

GuestJanuary 17th, 2008 at 3:23 pm

After tomorrows release of horrible consumer sentiment and of an LEI number that confirms the US is ALREADY IN RECESSION, the Fed will ease tomorrow. 50 on the disco and 25 on the Funds with antoher 50 on each at the Jan 30 meeting.

PassaconawayJanuary 17th, 2008 at 3:39 pm

@ Nouriel    Thanks, Professor!   I discovered this blog many months ago. It’s been an invaluable learning tool for someone without the slightest education in economics.  Passaconaway   

London BankerJanuary 17th, 2008 at 3:41 pm

When the margin calls start to roll through Asia, expect it to get ugly – big downswings on margin and panic selling. A lot of people scrimped and saved and did without to put their money in the markets. As you’ve seen here with Indian Banker, they take each point in the market as a very personal gain or loss.   It is dangerous to forget the political instability that can be caused by either inflation or deflation. Both are justly feared by those in power, because those are two of the very few things that can depose them of power.  (Apologies, Indian Banker, but I will be shorting the Nifty at 04:25 GMT tomorrow morning.)

Octavio RichettaJanuary 17th, 2008 at 3:45 pm

Nasdaq already down over 10% YTD. S&P500 -9.2%, DOW -8.3% http://biz.yahoo.com/ap/080117/wall_street.html  The Dow is now off 8.33 percent for the year; there have been just 12 trading days so far in 2008, but the index’s frequent triple-digit losses have now forced it to give back its 2007 gains. The Dow had its lowest close since it ended the March 16, 2007, session at 12,110.41.  The broader market indicators also plummeted. The S&P 500 index lost 39.95, or 2.91 percent, closing at 1,333.25, and leaving it was a year-to-date loss of 9.2 percent, while the Nasdaq dropped 47.69, or 1.99 percent, to 2,346.90, giving it a 2008 deficit of 11.51 percnet.  

Octavio RichettaJanuary 17th, 2008 at 3:52 pm

London Banker on 2008-01-17 15:41:19  I am eager to see how equity market players (or should I say casino junkies) in China will respond. Perhaps the crash there will make the South Sea Bubble seem like a walk in the park.  http://www.stock-market-crash.net/southsea.htm  …Isaac Newton lost over 20,000 pounds of his fortune. As a result of this crisis, he stated “I can calculate the motions of heavenly bodies, but not the madness of people”. Jonathan Swift, who also lost a fortune, was inspired to write Gulliver’s Travels, which is a satire about British society. The British government avoided a banking crisis due to its standing as the financial powerhouse of the world. The government worked to stabilize the banking industry. The issuing of shares was outlawed to prevent any future bubbles. This law was in effect until 1825. Despite all of the efforts of the government, Britain’s economy was in shambles. The economy didn’t fully recover until one century later. Several generations were adversely affected by the stock market crash. The corporate management con artists fled to other countries with their fortunes…  

SeanJanuary 17th, 2008 at 4:14 pm

Careful Bears! IBM is jumping up big time after hours. I really do not understand what’s the excitement about the earning, if you back out all the currency gains due to lower dollar.  However, I think we are fastly approaching the center of credit crunch — ABK and MBI are both expected to be downgraded. Imagine all those Trillion (Yes Trillion) of bonds going down with them.  Also, the CMBX interest rate spread is spiking up BIG time today . Looks like an earthquake is coming. No wonder the banking index BKX is breaking down its support.  http://www.markit.com/information/products/cmbx.html

AnonymousJanuary 17th, 2008 at 4:19 pm

The British government avoided a banking crisis due to its standing as the financial powerhouse of the world. The government worked to stabilize the banking industry. The issuing of shares was outlawed to prevent any future bubbles.  Is America a financial powerhouse? Can Bernanke and Paulson stabilise the banking industry? Will Goldman Sachs allow us to outlaw off-exchange derivatives?   Bush already has his bolt hole of 98,000 acres in Paraguay. I wonder if he’ll take Bernanke, Greenspan and Paulson with him?

ABCJanuary 17th, 2008 at 4:54 pm

 @ What Does Goldman Know That We [idiots] Don’t?: Michael Lewis (Correct)  Commentary by Michael Lewis  http://www.bloomberg.com/apps/news?pid=20601039&sid=aEXlKAu61sYU&refer=home   Written by Octavio Richetta on 2008-01-17 07:45:53  “Even more surprising is how little Wall Street seems to have dwelled on how and why Goldman Sachs made its killing. There are insane conspiracy theories — for instance, that former Goldman chief executive officer and current U.S. Treasury Secretary Henry Paulson tipped his old pals….”  Insane conspiracy theory my foot. Why do you think O’Neill had to go? Paulson belongs in jail along with the rest of the Bush looters.  

MarkJanuary 17th, 2008 at 5:00 pm

Bond insurers plunge on Moody’s warning  Late Wednesday, Moody’s said that it placed the AAA ratings of Ambac’s bond-insurance subsidiaries under review for possible downgrade. That means the ratings agency will take another look at Ambac’s assets and liabilities and will decide to either cut the rating or not within 60 days. 

Concerned-CitizenJanuary 17th, 2008 at 7:33 pm

Posted On: Thursday, January 17, 2008, 5:45:00 PM EST  The Panic Starts   Author: Jim Sinclair            Anyone see this today? Whooh..  http://www.jsmineset.com/     Dear CIGAs,  There is no doubt the Fed and the PPT are meeting right now. A drop of over 300 points on the Dow after the Chairman of the Federal Reserve speaks publicly presages a $1000 break in gold coming quite quickly, if not tomorrow.  Unless the equity markets can be calmed, a panic is about to happen, making the statement “This is it” a horrible reality.     If the equity markets cannot be calmed then:  Recognize this is the Formula happening like everything else much sooner and much bigger in its implications than anticipated.  Gold will rise to $1650 as an almost immediate effect of what will be done to attempt to fend off a total panic starting to take place in general equities, therein threatening to be followed by all credit markets of all kinds.  The funds and hotshot short term traders in gold shares will be killed by the upward explosion of the gold price about to occur.  The PPT and the Fed will step out of gold’s way because gold is one of the tools used in 1930 by Roosevelt and in 2000 by Bush. It will be used again now on the upside.  Gold is the only insurance there is against what all this means because a panic in equities will blow the financial system, already coming apart, to smithereens.  All country funds would shut down on any further investments in “at the wall” financial institutions.  The rollover in credit and default derivatives would exceed the entire foreign debt of the USA.  The rest of the $450 trillion dollar mountain of derivatives would start a disintegration like nothing you have every seen in your lifetime.  Consumer demand would slam shut.  The auto industry might as well go into liquidation this coming Monday, avoiding the June 2008 rush.  The US dollar would burn a hole in the floor going directly to .5200 or lower.  As the dollar disintegrates gold would rocket to and through $1650 in days.  The markets for general equities would all have to institute total trading halts every 100 points on the downside for 30 minutes each.  All commercial call loans would be called.  All debtors one day late on any payment, lacking grace period, would be liquidated. All debtors over one day of the grace period would be liquidated.  It is clearly visible to anyone with eyes or a mind to think that the PPT has lost all semblance of control in the equity markets and will soon in all remaining markets.  The commercial paper credit market which is almost dead will die totally.  Should no emergency action take place soon, you will see an old fashioned panic of the 1929 variety.  Just as emotional fools sell gold and gold shares, be assured that more emotional general equity fools will unload and bring the averages down more than ever in history in one day.  Recognize this is the Formula happening like everything else much sooner and much bigger in its implications than anticipated.  Emergency action will be all splash and theatrics but truthfully the cat is out of the bag. It buys some time but corrects nothing. It makes the Formula 100% correct.  There now must be EMERGENCY ACTION because the Chairman of the Fed has BOMBED OUT PUBLICLY and a PANIC is about to occur. Expect EMERGENCY ACTION in days, not weeks.    If you have not protected yourself, you may only have days to do so now.    

JozefMJanuary 19th, 2008 at 10:53 am

I was wondering if someone knows about where to get a real time chart for interest rate yield difeerentials.  Thank you!

AnonymousFebruary 17th, 2008 at 7:03 am

I don’t buy the story that the ECB is ‘dillusional’ or suffering from some other form of mental decease as Prof. Roubini argues. Instead, I think it is the policy of the Fed which history will judge to be irresponsible. The ECB has to keep inflation pressures contained. At the moment they are faced with near record high business sentiment, super strong manufacturing orders intake, a sharply improving labor market and a wage negotiation round in Germany which is promising to produce high wage deals. Surely sentiment has deteriorated, especially in services, which is not surprising given the finanical market and housing market troubles (created originally by the Fed). Yet, ECB rates are at neutral levels. They don’t hamper economic activity at all. Changing them either way risks making a policy error, while 4% is hardly going to derail anything. Thus, it is only logical that they keep rates unchanged for now, while trying to gain some more room for movement if things deteriorate rapidly.   Also, the 4Q GDP report was not all bad either. In France, the deceleration was due to massive destocking, while components of domestic demand remained strong. In Germany the weaker growth was owing to weaker consumption. Again, this is normal as the economy is experiencing an inflation spike and financial market turbulence. We know that the inflation spike will soon be over, while labor market conditions are still improving. Hence, there is good reason to believe that consumer spending will pick up again. In addition, German consumers are not threatened by a housing market crash in Germany and are not particularly dependent on banking lending, if standards are being tightened. The same is true for German firms, which have a near 100% internal financing rate.

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