Sunday, March 15, 2009

Roubini Strikes Again

So much for the positive post I was going to write today!  

Nouriel Roubini "beats expectations" in EBR-land by posting sooner than expected (yesterday) on the latest stock market rally- only one week into the rally- to warn us that it's a fake-out, short-covering rally.  Taking a different tack than EBR did yesterday in its post which argued that buying stocks here was just the opposite of what one would do if the fundamentals and stock chart were reversed, Roubini makes some trenchant observations.  

Dr. Roubini, for those not in the know, was the most prominent academic economist to loudly and repeatedly sound the alarums that A) there was a housing bubble; B) there were other asset  bubbles; C) these bubbles collectively threatened the economy and the financial markets in a major way.  About 14 months ago, he laid out a road map for the financial firms and the economy as a whole that was so accurate as to be eerie.  The only problem is that he was too optimistic.

Since then, he has repeatedly correctly called every hope for economic recovery as false. Several months ago, he predicted correctly that Q1 of this year would show worse economic performance than consensus.  He has also correctly called every stock market rebound as a sucker rally.

He's back with more of the same.  If you can stand it, what follows are a few quotes from his long post (no link as subscription required).  If you simply want his bottom line, scroll to the end of this post.  The italics in the Roubini post are where he is quoting one of his own prior writeups.  From:

Reflections on the latest dead cat bounce or bear market sucker’s rally:

With economic activity contracting in Q1 at the same rate as in Q4 a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation) as I argued for a while (most recently in my Sunday New York Times op-ed). The scale and speed of syncronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capex spending around the world.  And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe”.

the $162 bailout of AIG is a non-transparent, opaque and shady bailout of the AIG counterparties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions. So for Treasury to hide behind the “systemic risk” excuse to fork today another $30 billion to AIG is a polite way to say that without such bailout (and another half a dozen government bailout programs such as the TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker dealers with a full government guarantee) Goldman Sachs and every other broker dealer and major US bank would already be fully insolvent today.

Indeed for a while a spate of relatively good news may push this bear market rally further up: some economic indicators showing a positive second derivative, fiscal stimulus in the US, China and other countries reducing the rate of GDP contraction in Q2 and Q3 before a new slump in Q4, monetary easing helping markets and financial institutions, banks earning nice intermediation margins before further massive writedowns that will be delayed through various forms of regulatory forbearance, Chinese monetary, credit and fiscal pump priming leading a drugged recovery that will increase the productive overcapacity and lead to a temporary recovery of oil and commodity prices.

But the fundamentals of the economy and of financial markets and financial institutions are still bearish for the many reasons discussed above.

And at every step of this cycle – as in the last 18 months – you can expect that worse than expected macro news and financial shocks – that are bearish for markets and that lead to more aggressive shorting of equities and other risky assets – will be followed by more esoteric and unorthodox monetary and fiscal and credit policies that will lead to short-squeezed and renewed bear market rallies.

So, in conclusion and caveat emptor for investors: Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally; most likely most of you will jump the ship as soon as this rally loses its steam; and your attempt to jump ship will make the next round of the bear market bust even faster. Today short-selling covering is leading to a more pronounced bear market rally; at some point in the future the capitulation of investors trying to sell their equities at the peak of the latest bear market rally will make the next round of the bear market bust faster and more pronounced. So, don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.

Copyright (C) Long Lake LLC 2009


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