Roubini Predicts 2007 Recession

[powayseller]

Nouriel Roubini, an economist at New York University and a former U.S. Treasury official, predicts a recession in Q1 2007.

Housing is falling at an annual rate of 6% (10% next quarter), and consumption is falling. Goods inventories are rising, because companies are producing more and demand is reduced. Corporate profits are returned to shareholders, because companies cannot find good investment opportunities for their cash.

Ben cannot come to the rescue, since all measures of inflation are going up. Even if the Fed stops in August or even eases next month – you still have the tightening of the last few months in the pipeline. The fall in housing will kill the economy. We are the point of no return. (In 2000 the Fed paused in June, and we had a recession by year-end.)

Recessions come on rapidly. Before the 2000-01 recession, we grew 5% in Q2 2000, by year-end we were at 0%, and by Q1 2001 we were in a recession. This time it will be the same: Q1 5.6%, Q2 2.5%, Q4 0%, and a recession by the first quarter of next year. “It is very rapid”.

The last recession was shallow. It was a tech recession, but wages were rising and we didn’t have a housing bubble, so consumption remained resilient.

This will be a true consumer recession. With high debt, no savings, higher interest rates, and high oil, there’s no way the consumer can be resilient.

Some say there is enough momentum of growth in Asia and Europe to decouple from the U.S. That is wishful thinking. There was no decoupling in any previous U.S. recession, and Roubini wrote a paper explaining 12 reasons the entire world economy will be affected.

We can’t lower rates to 1% again to save the economy. Last time it could be done because we were in a period of falling inflation. Now we have inflationary pressures in the economy, so we could reduce a little bit, but not much.

The US recession will have a signifcant effect on China. Further problems for China are their fixed exchange rate, because it prevents an independent monetary policy. China is overheating, so they need to tighten monetary policy. But with a fixed exchange rate they cannot control their monetary policy.
They need to let their currency appreciate and raise interest to cool their economy. They can’t just use administrative control – it has not worked, and it will not work.

END of Roubini audio.

I think it will be just as interesting to see what happens to our trading partners, esp. China. Will they finally let the renminbi appreciate, to regain monetary control?

[waiting hawk]

link pretty please?

My website tracking Temecula and South Riverside County

[powayseller]

This link is to the main Bloomberg audio/video site. Today it is the top story, but if it is no longer available when you come here, search for the title “Roubini of New York University Predicts a U.S. Recession “. It’s a 14 minute audio.

[waiting hawk]

thx… I think u know why I want it 🙂

My website tracking Temecula and South Riverside County

[rankandfile]

Waiting Hawk, did you see my post on your blog?

I will be one of the first (and few) to predict that we are actually headed for a depression, rather than a recession. I admit this is mostly based on gut feelings (I think my brain tends to shut down when there are too many variables to calculate). At any rate, there is a little method to my madness.

The science behind my prediction is based primarily on the consumption factor of GDP, which is often broken down between personal and public sector consumption. The US is the largest single consumer in the world. Consumption in the US has been “priming the pump” since the dot com bust. Unfortunately, this consumption has been financed largely by housing speculation and cheap loans. This is somewhat similar to the lead-up of the Great Depression.

From Wikipedia:

“Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect.”

Some predicted that the dot com bubble would lead us to a depression. This was offset by extremely low loan rates and artificially boosted housing prices. In other words, I think we averted an impending depression after the dot com bust and 9/11 by falsely boosting consumption. And now, in the words of Ward Churchill, the chickens have come home to roost. We are no longer able to consume at our previous levels. The worldwide “pump” will no longer be fed by US consumption.

[waiting hawk]

Ya man I saw you’re post. I can see factors for a depression but sure as heck do not hope for one. Would be cool to have an income for next property purchase 🙂

My website tracking Temecula and South Riverside County

[sdduuuude]

“I admit this is mostly based on gut feelings”

🙂

[FormerOwner]

I’ve also had the gut feeling that we were headed for a depression. I started to get that feeling while the dot-com bubble was inflating and I saw firsthand how nonsensical some of the high flying tech companies were and how much money was pouring into them. I read an excellent book a few years ago, “Freedom From Fear: The American People in Depression and War: 1929-1945”. As you said, the conditions that led up to the great depression exist again now. This time, though, the US may not emerge as the world’s dominant economy. We do still have the world’s strongest military, by far – but we just don’t have a way to keep paying for it.

I have a nagging feeling that we are living in the last days of the Roman Empire.

[tucker…]

We need a real leader. Not one that is not like forest gump.We  have a lot of problems that this leader seems to be ignoring,and it looks like all the problems hit about the same time.Nobody really cares until they lose a job and can't find another one. That is when america will wake up.

[rankandfile]

It’s funny you mention the Roman Empire FormerOwner, because that’s exactly how I feel. I am of Italian descent and have a fond interest in the times of that great empire. But all great things must come to an end. I think there are many parallels between us and them. To quote Juvenal, “panem et circenses”.

[powayseller]

Well, you may be right, but there is no way of knowing how long the government’s might and our Fed can keep the chararde going. Who would have thought the tech bust would be averted by another liquidity bubble? Who knows how long this bubble will take to pop, and what will be waiting at the other side? Perhaps a depression, perhaps a big recession, maybe we Americans will once again produce more than we consume and turn this country around? Any of these are equally likely to me. I am not prepared for a depression. What do you have to do to get ready for one? Don’t you have to grow your own food? I hate gardening.

[PD]

What are the best recession proof industries? Healthcare? Food production?

[FormerOwner]

rankandfile, I’m 1/2 Italian. I love to listen to my older relatives talk about what it was like during the Great Depression (my grandparents on my mother’s side were Italian immigrants who settled in Boston). Until the last 7-8 years I thought an economic depression like that could never happen again – at least in my lifetime. Anyway, everyone that I’ve talked to that experienced it said that they were poor but they didn’t know they were poor because everyone else was poor. Basically, it doesn’t seem like they were any less happy than people today. It seems like people were a lot more neighborly and down to earth. They would walk everywhere and everyone in the neighborhood knew each other. Crime really didn’t seem to be a major problem either. It wasn’t until the 50’s that the old neighborhood really started to deteriorate and all my relatives moved out to the suburbs. The old neighborhood now is the type of place where you would be afraid of getting shot if you drove through there after dark. So much for progress – it seems like progress has worked in reverse in a lot of our cities.

I think as long as you have the mentality of living within your means and making sound decisions, you’ll survive anything. The thing that does worry me now though is that the social structure of the nation seems a lot weaker. Rather than people helping each other out, I rather think a lot of people would rob and kill each other to try and maintain a faux riche lifestyle. As far as growing your own food, my grandmother did that and it seems like that was very common during the depression. Even city dwellers would grow vegetables on what little land they had. It seems, overall, that city dwellers fared better during the depression than people living in rural areas. Farmers were hit extremely hard.

My grandmother used to talk about a few men that committed suicide. They lost it all when the stock market crashed and were just not psychologically prepared for their illusion of wealth to be taken away. I think the people who fare the best during tough times are the ones who can adapt to change (and are not overly leveraged with debt and high-risk!).

[powayseller]

FormerOwner, very interesting story about your ancestors. So it sounds like we could all manage just fine in a depression. What did your family do for work? This is the area of concern – how will people derive income?

PD – I asked this question many times, and nobody ever answered it. I remember that U-Haul made more money during recessions, so I checked the public owned storage and moving facilites, and they all have PEs of 28-33. Same for PEs of pawn shops. Other ideas: Gillette, Proctor and Gamble, vice (cigarette, alcohol, gambling, sex – magazines, movies).

Looking back at the 2000-2001 recession is not helpful, because consumers were spending heavily. My neighbors at the time owned an RV dealership, and their business skyrocketed after 9/11. People were flush with cash, interest rates were low, and Americans were more interested in travelling the US in an RV, than flying to Europe. This recession will be consumer-led, so there won’t be that surge in RV sales.

I just try to think about my own life. What would I cut back on if my income were cut in half. Think about people with less money, and what they would do – I read switches from Ralph’s to Costco, Nordstrom to Kohll’s, McDonald’s to eating at home. I wonder if *any* business will do better, only some will be hurt less. I checked into some of the companies I consider recession proof, and the PE ratios are too high. Pawn shops will do really well. People will start selling their luxury cars, jewelry, RVs, boats, motorcycles, dirt bikes, and more. But who will buy it from them?

Sometimes the best think you can do with your money is protect your principal. This is such a time. I put a little money into Chevron based on Zeal’s advice, and want to diversify into other currencies, but I am 95% cash. This is my plan in riding out the recession, just to hold on to what I’ve got.

[FormerOwner]

powayseller, my grandfather was a construction worker (specialized in tile floors) and I think his employment situation was pretty up and down. My grandmother worked in a factory making dresses. The older kids provided day care for the younger kids to some extent. When my grandfather died, my grandmother supplemented her income by becoming a bootlegger. She made wine at home (the kids all helped crush grapes in the bathtub) and would host card games at their apartment, selling wine to the patrons. Their pillow cases were old flour sacks. The education level was pretty low and people would do whatever they had to do to put food on the table. A lot of us are much more educated now but I’m not completely sure how that will benefit us other than help us make sound decisions.

One other interesting thing is that people used to put their money in coffee cans and hide or bury them rather then put money in a bank. People did not trust banks. Since deflation was going on, you didn’t need to get any interest on your money! The coffee cans (in that type of deflationary economy) were an effective way to preserve your principal.

[Author]

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