Nouriel Roubini Break Up

Nouriel Roubini Professor of Economics at New York University’s Stern School of Business, breaks it up for us as to how ugly it is out there.

  1. Initial claims for unemployment benefits now at their recession level signaling the beginning of a serious slack in the labor market.
  2. Durable goods order falling – excluding transportation – for 4 months in a row; and non-defense capital goods orders and shipment falling, signaling that non-residential spending will show negative growth in Q4.
  3. Consumer confidence still plunging close to recession levels. Polls showing that a majority of Americans expect a recession in the next 12 months.
  4. Oil prices in the $90 to 100 range putting a dent to consumer pockets.
  5. Retail sales falling in real terms during the holiday seasons. With consumption spending being over 70% of GDP a saving-less and debt burdened consumer that is buffeted by several shocks – falling home values, falling home equity withdrawal, rising debt servicing ratios with ARM resets, rising debt ratios, high oil prices, plunging consumer confidence, slack in the labor market – decided to throw in the towel in December and cut spending in real terms, for the first time since 2002.
  6. The worst housing recession since the Great Depression getting worse and uglier with starts, permits, sales, prices, mortgage applications all sharply down and falling more; the only thing going up in housing is defaults, foreclosures and delinquencies.
  7. Non-residential commercial real estate in serious trouble as a series of press reports and data suggest.
  8. Forward looking indicators of economic activity signaling weakness ahead and manufacturing ISM likely to fall below 50.
  9. Corporate earnings falling 8.5% (y-o-y) in Q3 and expected to fall more in Q4 and ahead.
  10. Interbank spreads (Libor vs. policy rates, TED spreads, BOR/OIS spreads, etc.) still at very elevated levels in spite of massive central bank injections and policy rate easing by Fed, BoE and BoC.
  11. Bond yields curve and credit spreads pricing recession ahead.
  12. Credit markets are in turmoil.
    1. Unraveling of the $350 billion SIVs and collapse of the Super-Siv scheme forcing banks to bring back on balance sheet SIVs assets, thus absorbing significant capital and liquidity and thus exacerbating the liquidity and credit crunch.
    2. Signs of sharply increasing default rates on credit cards, auto loans and student loans leading the spreading of the credit crunch from mortgages to overall consumer credit. Banks and financial institutions have only recognized a small fraction of the total losses.
    3. Monoliner bond insurance firms all under review for downgrade and one already downgraded to C and on the verge of bankruptcy. Risk of hundreds of billions of losses for the underlying securities and issuers of insured bonds.
    4. Losses and writedowns by financial institutions that will increase as the crisis moves from subprime to near prime, prime, credit cards, auto loans, student loans, commercial real estate loans, leveraged loans, losses on ABS instruments, corporate loans.
    5. Pressures, losses and runs on non-bank financial institutions, (hedge funds, money market funds, state funds, investment banks, SIVs and conduits) that borrowed short and illiquid and lent long and illiquid that do not have direct or indirect access to the central banks’ lender of last resort support.
  13. US dollar falling and most of the financing of the still massive US current account deficit coming from central banks and SWFs, not private sector investors.
  14. Geostrategic risks rising (being the assassination of Bhutto; unstable petro-states; high energy insecurity; political and policy uncertainty in the US as 2008 will be an election year).

All the above points make the possibility of recession much more likely.

  • I like the format you’ve been using with green and red for easy scanning of “good” and “bad” news.

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