[Marxism] Roubini: the worst is yet to come

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.forbes.com/opinions/2009/01/21/bear-market-rally-oped-cx_nr_0122roubini.html
Doctor Doom
The Worst Is Yet To Come
Nouriel Roubini, 01.22.09, 12:01 AM ET

I have been predicting for a while that the most recent bear market 
sucker's rally would lose its steam and, like the previous bear market 
rallies in the last 18 months, U.S. and global equities prices would 
head again toward new lows. Here's why.

As my work and the work of our research team at RGE Monitor predicts (we 
will publish, later this week, our 2009 Global Economic Outlook, a 
75-page research piece for our clients), this will be the worst U.S. 
recession in the last 50 years--and the worst synchronized global 
recession in decades.

For a few weeks since late November, equity markets ignored the 
onslaught of much-worse-than-expected macro news (and all the news was 
really worse than awful) and had a nice 25% bear market sucker's rally. 
But the drumbeat of worse-than-expected macro new--and earnings news, 
and financial news--has finally taken a toll on the delusional market 
belief that the worst was over for financial markets and for equity 
markets and that the U.S. and global economy would recover in the second 
half of 2009. So equity prices have already reversed more than half of 
their most recent bear market rally as the lousy macro news has finally 
shocked the wishful thinkers.

Indeed, the retail sales figures just published confirmed that a 
shopped-out, savings-less and debt-burdened U.S. consumer is now 
faltering as job losses, income losses, falls in home wealth, falls in 
equity wealth, high and rising debt and debt-servicing ratios and a 
severe credit crunch take a severe toll on the ability of consumers to 
spend. And reduction in spending and deleveraging of the U.S. consumer 
will take years to rebuild the savings rate of a household sector now 
hit by a severe shock to its net worth (as equity and home values fall 
while debts have been rising), and shocked in its inability to generate 
income as job losses mount and the unemployment rate surges.

Our research at RGE Monitor suggests that the U.S. and global recession 
will continue at least until Q4 2009 (a nasty, 24-month, U-shaped 
recession) and that the recovery in 2010-'11 will be very weak, with 
growth around 1%--well below a potential of 2.75%. And we cannot rule 
out that a more severe L-shaped stag-deflation (as in Japan in the 
1990s) will take hold. Indeed, as I have argued, while the odds of a 
systemic financial meltdown have been reduced by the actions of the 
Group of Seven and other economies, severe vulnerabilities remain.

The credit crunch will persist and spread beyond mortgages. Deleveraging 
will continue, as thousands of hedge funds--many of which will go 
bust--and other leveraged players are forced to sell assets into 
illiquid and distressed markets, causing price declines and driving more 
insolvent financial institutions out of business. Credit losses will 
mount as the recession deepens, and a few emerging-market economies will 
certainly experience full-blown financial crisis.

So 2009 will be a painful year of global recession and further financial 
stresses, losses and bankruptcies. Currently, the probability of an 
L-shaped, stag-deflation is now rising to one-third, while the 
probability of a severe U-shaped recession is two-thirds. Only 
aggressive, coordinated and effective policy action by both advanced and 
emerging-market countries can ensure the global economy starts to 
recover, however slowly, in 2010, rather than entering a more protracted 
period of economic stagnation.

So while our benchmark scenarios see a severe U-shaped global recession 
with very weak growth recovery in 2010, we cannot exclude the 
possibility of a worse outcome--i.e. an L-shaped recession that, in our 
view, has at least a one-third probability. So the worst is ahead of us 
rather than behind us, both for the real economy and for financial markets.

With my forecast of 2009 earnings per share for S&P 500 firms being in 
the $50 to $60 range, and with price-earnings ratios likely to be in the 
10 to 12 range, given a severe global recession, the S&P 500 could 
bottom at some point in 2009, at best at a level of 720 and, in a worse 
scenario, as low as 500 or 600.

So, the worst is indeed still ahead of us.

Nouriel Roubini, a professor at the Stern Business School at New York 
University and chairman of Roubini Global Economics, is a weekly 
columnist for Forbes.com. Analysts at Roubini Global Economics assisted 
in research for this week's column.




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