Thursday, July 23, 2009

Roubini: Risk of "Double-Dip" Recession

I don't want to rain on the parade here, but I think its important to look beyond earnings and realize the effect of cutting this many jobs, and what it will mean going forward. I found it amusing that last week CNBC took Nouriel Roubini's comments about the recession ending this year out of context and made it breaking news. Here's some commentary out today' about Roubini (via Bloomberg):

The global economy may fall back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth, said Nouriel Roubini, the New York University economist who predicted the credit crisis.

A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote in a research note today. “It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented.”

Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, predicted that the global economy will begin recovering near the end of 2009. The U.S. economy is likely to grow about 1 percent in the next two years, less than the 3 percent “trend,” he said.

Roubini based his short-term outlook on the worsening condition of the U.S. housing and labor markets, which he called “inextricably linked.” He said a “weak” job market will contribute to another 13 percent to 18 percent drop in house prices, bringing total declines nationally to as much as 45 percent from their peak.

“The worst-case assumption in U.S. stress tests were that unemployment could average 10.3 percent next year,” Roubini wrote. “The reality is clearly going to be worse as the unemployment rate is likely to peak around 11 percent.”

Emerging markets may fare better than the industrial world because, “paradoxically,” many have better sounder economic foundations than more advanced nations.

“We are now closer than we were six months ago to the end of the worst financial crisis since the Great Depression and the worst global recession in decades,” Roubini wrote. “But the road ahead will be very rough and bumpy.”

I tend to agree with this viewpoint, although probably not quite as bearish. It will be very tough for a recovery of any size without better employment numbers. Anything else will just be artificially inflated due to Fed policy and Washington policy. We know that that has happened before, and that is what they're trying to do again. At some point, somebody needs to figure out that you need to let the economy cycle out so when can come back stronger. Otherwise the bubbles will only increase in size and frequency and we'll need more and more bailouts. The problem with that is no politician wants to take the heat for short-term pain. The stimulus is a prime example. It was pushed through in attempts to re-inflate the economy. If it doesn't have the desired effect, which is likely, they will pass another one. Its just bad policy. Both parties are to blame, as is the whole system in Washington. Until the system is changed, the results won't; the politicians are just actors.

Sorry if that got to be a little bit of a rant, but what the heck, its my blog.

Now off to try and digest the massive amount of earnings results.

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