Market bear Roubini sticks to dour forecasts

There's still bad news ahead for the U.S. economy and the bear market for stocks is not over yet, according to a prominent economist who foretold much of the current turmoil.

Nouriel Roubini, a professor at New York University's Stern School of Business and chairman of economic research firm RGE Monitor, said on Tuesday that he expected more dour macroeconomic data and problems in the banking and housing sectors, as well as pressures on consumers.

Big stimulus packages will eventually slow the rate at which economies contract, but that will take time, he added.

"There will be a light at the end of the tunnel somewhere down the line, later rather than sooner," he said at a Toronto news conference, which took place ahead of a Sprott Asset Management event entitled "A Night with the Bears."

Roubini, who made a name for himself by sounding early warning signs about housing bubbles and credit crises, earlier told Canada's BNN television that he still believed the recent market upturn represented a bear market rally, and not a change in sentiment.

"Macro news, earnings news and financial shocks are going to be worse than expected and that's why I believe this is still a bear market rally," he told BNN.

Markets logged four straight weeks of gains until this week on optimism that unprecedented interest rate cuts and billions of dollars of stimulus will eventually fight off the worst global downturn since World War Two, and on upbeat comments from U.S. banks on their performance so far in 2009.

The fact that some indicators did not match pessimistic expectations was also a positive factor, as were last week's pledges by world leaders to do more to fight the crisis.

But Roubini played down the rally.

"I am more a realist than a pessimist. I'll be the first one to call for the bottom of this economic contraction, recovery of the market when I see a sustained economic and therefore financial recovery," he said.

Meredith Whitney, chief executive of Meredith Whitney Advisory Group, said stabilization in the banking sector would hold the key to a turnaround. Whitney, one of Wall Street's most bearish bank analysts, has forecast another rough year for banks as they shed assets to raise capital.

"It's not just the banks that have to stabilize their own lending it's that they have to make up for the void of the shadow banking industry that has been shut down since the summer of 2007. We've got a ways to go," she said.

Canadian banks have largely shrugged off the severe banking troubles south of the border.

But commodity prices have fallen sharply from the peak of last summer and the Canadian auto sector is hurting badly.

"The fundamentals of the (Canadian) economy are robust, but when the U.S. sneezes the rest of the world catches a cold," said Roubini. "This time around the U.S. is not just sneezing, it's a severe case of pneumonia and the biggest trading partner next door is Canada."

Sprott Asset Management's Eric Sprott said his pessimistic view on the economy is based on the "overleveraging of the banking system."

"When we look at the systemic financial system we're in -- and it affects every country in the world including Canada -- I think staying bearish is the route to go," he told BNN.

Source: Reuters

Roubini Says Geithner Plan Won’t Prevent Bank Nationalizations

U.S. Treasury Secretary Timothy Geithner’s new plan to remove toxic assets from the books of the nation’s banks won’t stop some financial companies from having to be nationalized, said Nouriel Roubini, the New York University professor who predicted the financial crisis.

Geithner’s plan, unveiled three days ago, is aimed at financing as much as $1 trillion in purchases of illiquid real- estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds.

Roubini echoed criticism from Nobel laureate Paul Krugman that the proposal will not be enough for those banks that are insolvent and predicted that ultimately the government will have to take over more of them. He didn’t name which companies he thought would need to be rescued.

“Some banks are going to have to be nationalized and for them the plan doesn’t apply,” Roubini said in an interview with Bloomberg Television in London today.

While the Standard & Poor’s 500 Index is recording its best monthly rally in 17 years, Roubini predicted it will not be sustained as the U.S. economy will continue to contract through this year and investors will start “discriminating” between solvent and insolvent financial companies.

“People are going to be surprised to the downside,” Roubini said.

The government is conducting stress tests of banks to determine how much more capital each will need. Roubini said once those were completed it will be evident that some banks will need to be taken over and have their good and bad assets separated before being returned to the private sector.

Geithner’s Plan

Critics of Geithner’s plan including Krugman, a professor at Princeton University, say the government should take over banks loaded with devalued assets, remove their top management, and dispose of the toxic securities. Sweden adopted the temporary nationalization approach in the 1990s.

Roubini, who also runs his own economics consultancy, estimates a total of $3.6 trillion of loan and securities losses in the U.S., including writedowns on $10.84 trillion of securities and losses on a total of $12.37 trillion of unsecuritized loans.

With “deflationary forces” lingering for as long as three years, Roubini said U.S. government bond yields were going to remain relatively low and that American house prices would fall as much as 20 percent more in the next 18 months. While the dollar will benefit as investors seek safe havens, it will ultimately decline as the U.S. trade deficit has to shrink, he said.

The need for governments to issue more public debt to fund stimulus and bank-rescue packages risked more downgrades to sovereign debt and the failure of more government auctions as happened in the U.K. yesterday, Roubini said.

Source: Bloomberg

The Federal Reserve is Bankrupt - And BTW So is the Bank of England

How Did It Happen and What are the Ugly Consequences?

The Federal Reserve is bankrupt for all intents and purposes. The same goes for the Bank of England! This article will focus largely on the Fed, because the Fed is the "financial land-mine".

How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!

The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine!

In a recent article, I referred to the remarks of British Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed.

Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances.

The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is "Mary Poppins" in comparison!

The idea of a central bank going bankrupt is not that outlandish. I am by no means the first author who has given this stark warning. What underlies this crisis (which I initially examined in an article in December 2006) is the potential collapse of the global banking system, specifically the Shadow Money-Lenders.

Nouriel Roubini, the New York University professor said:

"The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."

Please read the underlined words again. "Sovereign bank" means central bank. When a central bank "cracks" i.e. becomes insolvent, "all hell breaks lose", because as the professor correctly pointed out, "any government guarantees will ring hollow and will be useless".

If a central bank goes belly up, it is as good as the government going bankrupt. Period!

Read Entire Article Here

Source: Matthias Chang - Market Oracle

New Roubini Interview

New Nouriel Roubini interview on the state of the economy in Time Magazine.

TIME: Where is the global economy heading from here?

Roubini: My concern right now is that this U-shaped recession we are in could turn into something much uglier, meaning a Japanese-style L-shaped recession: near stagnation or stag-deflation. We're in the worst global synchronized recession in the last 60 years. Unless we take the right policy actions, we'll end up in a near depression. I did not want to use that term six months ago. At that time, I said the chances of a near depression were only 10%. But today those chances are 33% or so.

How can this be avoided?

You have to have a set of concerted, coherent policies done not just by the U.S. but by Europe, Japan, China and everyone else. The credit crunch is just massive. One thing that's needed is much more aggressive monetary easing. The second dimension is that you need much more fiscal stimulus — in the countries that can afford it — that is front-loaded. The U.S. [stimulus package] is $800 billion, but only $200 billion is front-loaded. Of that $200 billion [in stimulus] this year, half of it is tax cuts. That's going to be a waste of money, because people are not going to spend it.

Why hasn't the banking mess been cleaned up?

You have to do triage between banks that are illiquid and undercapitalized but solvent and those that are insolvent. The insolvent ones you have to shut down. You need more aggressive credit creation by the government, or you have to force the banks to lend. We're in a war economy. You need command-economy allocation of credit to the real economy. Otherwise, the incentive individually for every institution is to pull out, not extend credit. Not enough is being done. (See which businesses are bucking the recession.)

What do you think of President Barack Obama's progress so far?

I have to give [the members of Obama Administration] credit. In about six weeks, they have done three major things: the $800 billion stimulus package, a mortgage program that is much more than the previous Administration did and a bank plan that, however flawed, at least has the benefit of not having another bailout of the banks. The glass is half full. But for each one, there are some flaws ... the bank plan wants to pretend that the government is half pregnant with the banks. The debate is between partial and full nationalization, not between nationalization or no nationalization. Go and do the job and do it right by taking over the banks and restructuring them and selling them back to the private sector.

What's the best-case scenario?

If you do everything right, you avoid an L, and that's really good news. But you still have a situation in which global growth this year is negative. GDP growth in advanced economies is going to be negative through the fourth quarter of this year, and next year, growth will be anemic — probably 1% or lower. Job creation is going to be negative. Even in the best scenario, there will be job losses through the end of next year. In the best of circumstances, we have a two- to three-year recession in advanced economies.

Is there a part of the world you are especially worried about right now?

I'm worried about every part of the world. People thought the rest of the world would decouple from the U.S. That was nonsense. Emerging Europe is on the verge of a fully fledged sovereign-debt, banking and currency crisis. I think China is in a near recession right now. Many emerging markets, even those that are in better shape, are in severe trouble. I don't think there is any economy in the world right now that is safe.

Is a breakup of the European monetary union possible?

I don't see that as being likely, but the probability of that eventually happening is rising. Right now, we are facing a situation in which many countries now have banking systems that are too big to fail and also too big to be saved. If Ireland or Greece go bust, then there is already a commitment from the Germans and French to, one way or another, bail them out — because they know that otherwise the monetary union is going to collapse. But if you have to rescue on top of them Austria and Italy, Portugal and Spain, and Belgium and the Netherlands, then that is not going to be possible. I am still of the view that we can avoid a collapse of the monetary union, but this is really the very first true test of its stability.

Many people are pinning their hopes on the Chinese government to stimulate demand. Is that justified?

I have to give credit to the Chinese. Their fiscal stimulus will contain the degree of economic contraction. But China is radically dependent on U.S. growth. Forcing state-owned enterprises and banks to spend more when you have overcapacity, or to lend more when there are already large [amounts of bad debt], is going to postpone a problem, maybe by a few months. But it will lead to a harder fall down the line. A hard landing is unavoidable, given what has happened to the rest of the world.

Any good news out there?

Honestly, as of now, I don't see any. Policy is moving in the right direction. My concern is this is too little, too late.