Archive for November, 2008
(Nov. 28, 2008) Bloomberg: Roubini Sees Oil Falling Further 20%, Hurting Russia (click for Video)
The current U.S. and global economic conditions, remain at the very least quite challenging. The good news is that President-elect Barack Obama has unveiled a first rate economic team to drive the economy towards the recovery. Larry Summers, Tim Geithner and Christina Romer are certainly top rated experts and excellent choices to address this most severe financial and economic crisis. The bad news is that the recovery is not in sight yet and won’t be for some time.
Norway’s fund had the worst quarter ever in Q3 – the assets under management fell 7.7% in the quarter – in its basket of currencies (lots of details in the Norges Bank Investment management report). Returns in USD are much lower given Norway’s heavy exposure to European markets (around 55-60%). The dollar’s surge reduced the value of their Euro and pound assets. With assets under management of about $359 billion at the end of Q3, Norway’s assets were practically identical to levels of September 2007, despite receiving about $74 billion in new capital the fund over that period.
Desperate Measures by Desperate Policy Makers in Desperate Times: the Fed Moves to Radically Unorthodox Policies as Economy Is in Free Fall and Stag-Deflation Deepens
Another batch of worse than awful news greeted today Americans getting ready for the Thanksgiving holiday: free falling consumption spending, collapsing new homes sales, falling consumer confidence, very high initial claims for unemployment benefits, collapsing orders for durable goods. It is hard to get any worse than this but the next few months will serve even worse macro news. At this rate of contraction as revealed by the latest data it would not be surprising if fourth quarter GDP were to fall at an annualized rate of 5-6%.
Let us discuss next the financial consequences of such desperate news and the desperate policy actions undertaken to stem this nasty stag-deflation…
Renowned economic pessimist Nouriel Roubini approves of Obama’s picks, but they face grave challenges ahead.
Daniel Stone, Newsweek Web Exclusive
Nov 24, 2008 | Updated: 7:49 p.m. ET
President-elect Barack Obama’s administration’s reaction to the current economy would have to be, in his words, “swift and bold.” At a press conference Monday in Chicago, he unveiled his economic team, which will be led by Tim Geithner as secretary of the Treasury and Larry Summers as director of the National Economic Council. The two come with unique experience: The former is the president of the New York Federal Reserve, and the latter was secretary of the Treasury in the Clinton administration, before sitting in the president’s office at Harvard.
Markets rallied upon word of the appointments, which also included two other senior advisers, Christina Romer (to be chair of the Council of Economic Advisers) and Melody Barnes (to be director of the Domestic Policy Council). But with the extreme fluctuations global markets are currently seeing—Obama and his new appointees will be looking for solutions to both the short-term rockiness and the longer-term economic problems—the president-elect continues to describe the crisis as “historic.” Infamously pessimistic economist Nouriel Roubini, a professor at New York University, spoke to NEWSWEEK’s Daniel Stone about what wise decisions must be made early on, his thoughts on Obama’s economic team, and how they can they stop the bleeding. Excerpts:
NEWSWEEK: What are your thoughts on the team Obama assembled? Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.
What are the first things they need to tackle? First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.
The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy? We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We’re going to have to think larger, but I don’t think you can pass most of it until January when [Obama] comes to power. We’re going to have to wait, because nothing seems possible for the time being. But I expect most of his plans towill pass once the new administration is in power.
Obama is largely powerless for the next two months. What’s your outlook from now through January? The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It’s really the most we can do for now.
Your view of the economic future is often a bit less than optimistic. What does Obama’s team signal about what could be coming? Look, he wants to get things done, so he’s choosing a really terrific team. To me, it says that he’s choosing people who have great experience. He’s choosing people who are pragmatic and who realize the severity of the national problem we’re facing. They’re knowledgeable about markets, about the economy and the political process in Washington. These are the very best people he could have chosen. I can’t look too far, but it’s a very good signal of what he wants to do.
A few additional caveats on this interview:
The Deadly Dirty D-Words: “Deflation”, “Debt Deflation” and “Defaults”. And How Central Banks Will Have to Resort to “Crazy” Policies as We Have Reached Such Bermuda Triangle of a “Liquidity Trap”
I have been warning since January 2008 that the biggest risk ahead for the US and the global economy is one of a stag-deflation, the deadly combination of an economic stagnation/recession and deflation.
Let me discuss the details of this toxic mixture of deflation, liquidity trap, debt deflation and rising household and corporate defaults:
With major US equity indices free falling over 6% today Wednesday, ending below their October lows and now being back to 2003 levels the latest bear market sucker’s rally is now officially over. A cacophony of delusional bulls – including allegedly savvy investors such as the Sage of Omaha and other luminaries – were spinning for the last month the fairy tale that markets – especially equity markets – had fallen so much that a bottom had been reached and that this was the time to start buying equities. Some of us never believed this self-serving spin and warned repeatedly that both equity markets and credit markets had further severe downside risks (20% to 30% lower for equities).
Let’s flesh out the details of this bust of the latest bear market sucker’s rally and consider the future outlook for risky assets…
Bloomberg (Nov. 19, 2008): Roubini Says U.S. Recession to Be Worst in 50 Years (click for video)
Transcript of Talk at AEI seminar on the “The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?”
Here is below the annotated transcript of my talk at the American Enterprise Institute’s September 30, 2008 seminar “The Deflating Mortgage and Housing Bubble, Part IV: Where Is the Bottom?” The transcript is courtesy of The Housing Doom. For those who are interested there is also a video version of my talk.
20 Reasons Why the U.S. Consumer is Capitulating, thus Triggering the Worst U.S. Recession in Decades
Today’s news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm what this forum has been arguing for a while, i.e. that the U.S. has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption real GDP growth could be a whopping 5% negative or even worse in Q4 of 2008. And this is not a temporary phenomenon as almost all of the fundamentals driving consumption are heading south on a persistent and structural basis. Consider the many severe negative factors affecting consumption. One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years: