Nouriel Roubini says the United States is facing a 12-to 18-month recession that will make a mockery of the recent stock market bounce and the notion of global economic decoupling, cause commodity prices to slide 20% to 30% and hit Canada hard.
"I see the stock market rally as being the last leg of a sucker's rally --essentially people believing the Fed can rescue the economy," Mr. Roubini said in an interview yesterday. "Once the flow of market and financial news gets worse and worse, the expectation of the Fed rescuing the economy is going to be dashed, and the stock market is going to plunge much more."
Mr. Roubini, economics professor at the Stern School of Business, co-founder of economics Web site RGE Monitor and Wall Street bear extraordinaire, may sound alarming, but the rest of the global economics community has spent the better part of the past two years playing catch-up to his increasingly dire prognostications.
Mr. Roubini first forecast a slowdown in the fall of 2005 and said the U.S. housing bubble was heading for a bust in early 2006, just as housing starts peaked. By August, 2006, while many economists were still forecasting a soft landing, he said the recession of 2007 would be nasty, brutish and long.
This February, Mr. Roubini predicted "one or two large and systemically important broker dealers" would "go belly-up," and credit-market losses stemming from the subprime meltdown could top US$1-trillion.
A few weeks later, Bear Stearns Cos. collapsed and the International Monetary Fund came up with a remarkably similar prediction of losses: US$945-billion. It must be pointed out, however, the IMF estimate is only an estimate of losses that might be realized if distressed securities had to be sold or marked to market at current prices. Some of the assets are now attracting buyers.
In that view, then, the estimates are still a worst-case scenario. Mr. Roubini has, in fact, recently raised his credit-loss forecast to US$1.7-trillion as corporate losses pile on.
He says the stock market is following the same pattern it did in the 2001 recession. It started in March and by April the S&P 500 had risen 18% on the view Fed interest-rate cuts would stave off a recession. When it couldn't, the market eventually fell off a cliff, dropping 42%.
The S&P 500 typically drops 28% in a recession, Mr. Roubini says, and having come off only 12% so far, it has a long way to go, he said.
Mr. Roubini is basing his prediction that the United States is facing the worst recession in decades on the view house prices will tumble a total of 30% -- they have dropped 10% so far -- wiping out US$6-trillion in home equity and putting 21 million households, or 40% of all mortgage-holders, in a negative-equity position. Corporate America will be the next to suffer and the credit crisis will continue to spread, Mr. Roubini said.
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