Friday, October 2, 2009

Where are we in the crisis?

Dr. Doom, aka Nouriel Roubini, is giving a speech in his beautiful city of birth. Here is me live blogging from the beautiful "river" of Bosphorus, to quote Axl Rose:

I'll give my current outlook. 6 questions:

1. Current Outlook: shape of the recovery: V, U (like me), W.
2. ROW. Bottoming out- light at the end of the tunnel in Asia? Can china and EM be new locomotive.
3. Financial institutions in the US.
4. Whether inflation or deflation?
5. Exit strategies from monetary and fiscal stimulus. If too soon, back to recession, if too long and monetize deficits, uppppps....
6. What's been happening in mkts since March? How much of recovery by fundamentals? How much too quick, too fast?

1st observation: first we had freefall. Fall last year PM that had been in denial looked at freefall and decided to act with full force. Different degrees but most did. That stopped free fall, in Q2 rate of decrease. Close to bottom now. What is shape of recovery:
US: anemic, well before potential. Why? Job condition awful. Compared to january better, but still high compared to previous recession. Firms cuts hours, reduction wages etc, so impact on con. Bad
2nd obs: this was a credit of excessive debt, leverage. Develeraging is not occurring right now- massive releveraging of public sector.
5 reasons why recovery weak:
1. Consumer in trouble- it makes much of gdp.
2. Financial system still in trouble. Also destruction of shadow banking- SIVs, securitization, delevearing by priv. Eq, hedge funds.
3. Corporate sector: we have with so much debt they are lucky the don't shut down. Even others will not do much cap reasons because there is glut of capacity and because there won't be rapid growth in profitability.
4. We need fiscals stimulis. But large deficits crowd out private sector.
5. In last decade, we had imbalances.

Other advanced:
I am more worried because:
1. Potential growth lower
2. Productivity will not improve by much.
More bullish because;
1. Did not have as much leverage
2. Good financial systems.
3. Potential growth rate higher. Already
Recovery in some.
4. Have room for countercyclical policy.
But could they be locomotive of growth? No. China not big enough!
Could they fully de couple? No. There is already some decoupling, but if growth weak in main, they won't go to rates before.
Was a sound econ. at eve of crisis. Corporate sector stopped capex. Reversal of capital flows. But since banking sector robust, no baling crises like other EM.
Prospects for TR: 1.since open econ. If eurozone robust, good for TR
2. Fiscal consolidation very important. Is the mt fiscal sustainability OK? IMF will be + for investors-confidence. Does not need IMF money, but signalling effects will be important.
TR will also do reforms, taxation reforms, flexibility in labor markets, liabilities in social security and healthcare. You need to diversify exports.

INFLATiOn DEFLATION: in short ruin deflation because 1.firms do nor have much pricing power. 2. Slack in labor markets. Slack in good and labor markets imply deflation. We have deflation today in many countries. In world more def than inf pressure. Wall of liq: not inflationary because lack of velocity. This liq go to assets, but not to goods. But next year inf risk because 1. If mon deficits, expected inflation could get out of control 2. Wall of money chasing commodities. 3. Usd main currency of carry trade, could lead to inf because of FX, through inverse relationship with comm. prices

V. EXIT STRATEGY; 2 edged shitty stick:)!!! If you don't if difficult to inc taxes, the bond mkt vigilantes will be worried- 8:52:18 PM bond yields inc- stagflation! Very narrow and razor-edged. Double dip risk is here.

VI. ASSET MKTS: Rally since march. Some warranted by fundamentals. Because L was being priced; that tail risk has been reduced by mon fis easing and backstopping of fin. Sector. There is now light at end of tunnel. 3. Risk aversion lower, so moving to more risky assets. Why do I worry about relapse? If recovery weak, 3 reasons for mkt correction in risky assets.
1. If U rather V, will be worse than expected.
2. Surprise on downside on earnings and profits. If rec anemic, quantity not growing, curring prices, so revenue anemic. Better results because slashing costs, but can't go on forever.
3. If high U, weakness of fin system bigger. Real estate prices lower, credit card losses.

CONCLUSION: either V shaped recovery or markets adjust (something's gotta give).If I am right, after new year, weaker than expected, than commodity prices, stocks, credit will correct. EM risky because money rushing to EM- they increased more than developed. But will not be as in March.

ED: so the light at the end of the tunnel is the train!

Q: where will liq. Go to?
A: still very easy, O rate, sharp increase in money. Chinese bank credit one third went to real estate, commodity. IN my view, USD70 too high for oil. USD 100 next year will have same impact next year as USD 145 last year.

Q: what would happen to USD?
A: this is long-run; will be gradual process if us does not fix econ and fiscal, if uses inflation tax to fix debt problem. But a gradual fall of dollar is necessary. Most of usd adjustment can not be EUR YEN. Others, and this is necessary and beneficial.

Taylan: Q: are you concerned it will be business as usual now assets have rallied?
A: definitely. Agency problems, etc. G20 list has to be immediate sooner than later. More liq, more cap, less lev, imposing higher cap charger in sys important fin inst, broader cooperation in regulation. If you are too large and interconnected you have to be supervised. G20 agreed we'll see if implemented. Definitely risk of complacency.
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