The following are notes taken by a reader of the key points from the keynote address by the famed Professor Nouriel Roubini, who spoke at 'Global Economic Overview for Investors Merrill Lynch Asian Stars conference'. The event was held in Singapore at noon today.
A) Is the worst behind us?
There still is going to be bad news. But no more collapse, due to unlimited liquidity, guarantee of deposits by govt. Authorities also prepared to recapitalise financial institutions. Credit mkt thawing. A total of US$12 trillion provided. Massive amount of backstop. Total expected loss is 3.6 trillion, but expected to spread beyond to subprime to other loans.
IMF figure - US$2.7 trillion losses. Says financial system is technically insolvent. US needs to avoid zombie banks (in Japan), Urges US to take the Swedish approach - nationalise, clean it up and sell back. But USA does not want to nationalise them; but will take creeping nationalisation approach.
Prefers the Swedish aggressive approach so that medium term growth is better. Outlook for US ecoy - U-shaped forecast. By Dec 09, we would be 17 mths into recession. Worst recession in 60 years. But aggressive fiscal policies helping to reduce L shape risk from 30% to15% probability.
B) Comments on greenshots
US positive growth in 3q09? Disagrees although the rate of slowdown is decelerating. Will not be minus six in last two quarters. But minus two in 4q. 11% unemployment in USA. Zero in 2010. Holds similar views as IMF.
Sees hard landing even in emerging ecoys. Four Asian tigers are also in recession. Some Europe in double digit contraction. Expects minus two percent GDP growth in LATAM. His concern is some of them will not just face recession but there is a risk of an outright financial crisis in some weaker countries. Eg Hungary, Russia, Latvia, Pakistan, Argentina.
This is a synchronised downturn. No decoupling, but recoupling due to trade, credit flows. Case in point - Asian countries ecoy collapsed more than USA! Whilst stabilisation occuring, emerging ecoys depend still on G3. Notes that Japan and Eurozone still v weak even though there are green shoots in USA.
C) Issues of concern:
• USA consumer tapped out. Wealth and income contraction. Still some way to go to average levels.
• Shadow financial system (eg 300 mortgage dealers) collapsed. Hedge funds collapsed. The asset writedown will burden this system.
• Absolute amt of debt. Default rates could peak at 20% for junk bonds.
• Too much debt vs equity. So need to convert debt into equity. But its not happening. Instead leverage still exists. Private debt is transferred onto govt balance sheet. Sovereign defaults could occur as a result.
• Debt in USA may go from 40% of GDP to 80% of GDP within six years. So government may choose to monetise, inflate our way out.
D) Not a traditional recession.
This is not a traditional recession due to inventory issue but a liquidity issue. Unfortunately, we do not want to make tough choices like restructuring of debt. So half measures will not lead to sustained econ growth in medium term. For US to go back to potential growth, other components need to grow to replace the reduced domestic consumption. One would be that net exports has to grow. But this US sector depends on other emerging ctys.
Emerging ctys will hv to grow private domestic consumption. China consumption is only 35% of GDP vs 70% of GDP in US. Says that there will be a lack of growth in global level because surplus countries such asGermany, Japan and China are not taking steps to stimulate domestic demand. China, instead, is pump priming by increasing capacity. The result of this may be excess capacity!
China's consumption pattern can't change over night because social safety net does not exist. No credit card culture too. But over time, public net and education over time help. Its current policies are only toward supply side. Japanese are precautionary savers too. These countries policies were weak ccy and export led growth. Strategy used to work cos the American consumer spent. But this will change going forward.
E) Deflation vs Inflation
Deflationary pressures exist due to:- massive supply, demand gap, price pressure downwards. CPI is falling yoy. Slack in labor mkts. OECD expects unemployment in advanced markets to hit 10%.
So wage growth will be limited. In this scenario, commodity prices still have downside risk as the output gap can continue to rise.
Notes that in 2001, it was a mild eight months V-shaped recession. And this subsequently led to low inflation in 2002. Today, with such a longer and deeper recession, deflationary risk are certainly heightened. But there will not be inflation in the short run despite the doubling of the monetary base. Cos velocity of money has collapsed for now. But what about the medium term? What are the government choices then? Raise tax, default or monetise? Easiest political route may be to monetise.
Notes that there are no viable alternative to US treasuries. US long term bond yields may rise slowly over time but will stay low. May rise if we monetise over time. Rest of world is nervous abt US assets. China worried with weakening of USD. But no solution in short term. But over time, countries like China will change its currency basket.
F) Bear market rally.
Shared that the stock market predicted zero of last six recoveries. So onslaught of worst news will bring about another collapse. But does acknowledge that risk taking sentiment is better. And policy actions are very aggressive.
However, remaining risks are:
• Macro news may surprise on downside in second half of 09.
• Corporate earnings will be worst in 2h09. First quarter helped by slashing jobs. Unfortunately, paradox of thrift sets in, crippling the system (editor's note: same view as Paul Krugman).
• Financial shocks could still occur. Some banks and hedge funds, emerging countries will get into trouble. Eg Iceland borrowed 12x of GDP from abroad. A bigger country failing could bring more repurcussions.
So thinks market is overly optimistic over data. Equity markets have got ahead of fundamentals.
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ROUBINI In S'pore: "Is the worst behind us?"
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Professor Roubini has earned a nickname 'Dr Doom'. Image taken off YouTube video of interview with CNBC.