Tag Archives: Recession shapes

Roubini: Federal Reserve Out of Ammo

“The US remains on course either for a double dip recession or growth that is so sluggish that it has a recessionary feel,” says Professor Nouriel Roubini of the Stern School at New York University.

Talkking with James Blitz at this year’s Ambrosetti Forum in Italy, Roubini says there are few if any options for policy-makers to stimulate the economy – and that a new round of quantitative easing by the Federal Reserve will be ineffective.

Here’s the interview from Financial Times:

(Click to play)

Robert Shiller Says Double Dip Imminent

Albert Edwards Sees S&P500 Returning To 1982-Level at 450 Points

El-Erian: Economy Losing Momentum For Recovery

Rosenberg Says US Virtually Certain To Fall Back Into Recession

Welcome To The Double-Dip!

China To Invest In Nassim Taleb’s Bear Fund

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Rosenberg Says US Virtually Certain To Fall Back Into Recession

The US economy is almost certainly headed back into a double dip recession, and economists aren’t seeing it because they’re using “the old rules of thumb” that don’t apply this time, well-known economist David Rosenberg tells CNBC.

“The risks of a double-dip recession—if we ever got out of the first one—are actually a lot higher than people are talking about right now,” he says.

“I think that it’s almost a foregone conclusion, a virtual certainty.”

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Another Day Older And Deeper In Debt

We continue to receive Wall Street research telling us to overweight stocks and underweight bonds. This does not happen at true fundamental bottoms in equity prices and Treasury yields.

I continue to get asked what will turn me more bullish. This doesn’t happen at lows, either. At the true lows, the bears get asked why they’re not even more bearish. At the lows, people threaten to call the police when equity brokers go cold-calling.

What the bulls still refuse to see is that we are in an entirely new paradigm and that the old rules of thumb are rarely, or are ever going to be able to be relied upon, as was the case in the familiar credit-expansion days of yore.

There is simply too much debt overhanging the U.S. household balance sheet — the largest balance sheet on the planet. And, despite the deleveraging efforts to date, the process of balance sheet repair is still in its infancy.

Consider the facts — these are not opinions:

The aggregated household debt-income ratio peaked in Q1 2008 at 136%. Currently, this ratio is at 126%. But the pre-bubble norm was 70% (no wonder 25% of Americans have a sub-600 FICO score). To get down to this normalized ratio again, debt would have to be reduced by around $6 trillion. So far, nearly $600 billion of bad household debt has been destroyed. In other words, we have much further to go in this deleveraging phase. Maybe this is why the McKinsey report concluded that this process can and often takes up to seven years to complete.

Folks, we are in this for the long haul. It’s not too late to enter the acceptance stage.

What about debt in relation to household assets? That debt-to-asset ratio is currently at 20% (the peak was 22.7% set back in Q1 2009) but again, the pre-bubble norm was 12.5%. The implications: classic Bob Farrell mean-reversion would mean a further $7 trillion of debt extinguishment.

We are a long way off this deleveraging phase from running its course. The government, along with the Federal Reserve, have expended tremendous resources to cushion the blow. But now we see first-hand what happens when policy stimulus fades and a mini-inventory cycle peaks out in a credit contraction: stagnation in Q3 followed by renewed economic contraction in Q4.

Play it safe. As in … safe yield.

Here’s a copy of the latest market commentary/analysis from chief economist David Rosenberg at Gluskin Sheff.

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Fitch: Global Economy At Critical Juncture

The outlook for the global economy and sovereign credit is at a critical and uncertain juncture, Fitch Ratings writes in a new special report. According to Fitch, the economic data is still pointing towards a recovery, but the uncertainty and risk of a double-dip recession is rising. The agency also reports a sharp increase in consumer savings.

“The degree of macroeconomic uncertainty is highlighted by the presence of both inflation and deflation risks, and the scope for policy mistakes is high.”

Fitch Ratings

“The outlook for the global economy and sovereign credit is at a critical and uncertain juncture. Economic data show a strengthening in the global recovery, which would support a gradual exit from unsustainably loose fiscal and monetary policy settings. However, concerns over sovereign debt sustainability in some euro area countries and renewed market volatility raise the risk of a double‐dip recession,” Fitch writes in a new special report.

Fitch Ratings still believe the global economy is on track to recovery, but the agency is clearly getting worried.

In a new special report; “Sovereign Review And Outlook”, Fitch examines the risk of another downturn in the global economy more closely.

The conclusions are not too reassuring:

“As governments eventually rein back fiscal stimulus measures, the burden of countering the risk of a double‐dip recession and deflation in MAEs and soothing market concerns will fall even more squarely on central banks. Against this backdrop, Fitch expects monetary policy in the MAEs to remain looser for longer, and be a vital support for the global economy and financial system. It has adjusted downward its forecast for ECB refinancing rate to 1.25% for 2011 (annual average), from 1.5% (in the March 2010 “Global Economic Outlook”), while forecasts for US and UK policy interest rates are unchanged at 1% and 1.5% respectively.”

“However, at this juncture, there are even greater than usual uncertainties around this essentially benign global base case forecast, highlighted by the presence of risks of both inflation and deflation. First and foremost is how fears about the sustainability of some European countries’ sovereign debt will play out, including whether the market will impose a more abrupt fiscal retrenchment than governments are currently planning, and what impact it will have on EU and global activity. It is also uncertain how heavily household deleveraging will weigh on growth in MAEs and whether the private sector can take up the baton of growth as governments eventually have to tighten fiscal policy to protect their credit profiles. In addition, risk of a sharper than anticipated policy tightening and financial risk in China and other EMs cannot be discounted. Finally, all these uncertainties mean the scope for policy mistakes is high.”

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Those Damn Consumers!

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In spite of the indisputable Keynesian theory, and the immovable beliefs of our governments, the average Joe’s and Jane’s all over the world seem to be perfectly capable of making sound and rational financial decisions on their own.

In fact, the figures in the Fitch report show that private households are the only sector in the overall economy that made significant progress in reducing its debt level (deleverage).

Households in the UK, for example, have increased their savings rate from 0,8% in second half of 2008 to 7,7% in the first six months of 2010.

In the US, the households have increased their savings rate from 1,7% in 2007, to 4,7% in 2009, and will reach 6% this year, according to Fitch Ratings.

“The deleveraging process underway in the US household sector is a key influence on the global economic outlook. Encouragingly, US households have already made significant inroads into debt reduction with the ratio of gross and net debt to income down by about 10% from its peak. This has been achieved by a large swing into financial surplus as savings have risen and residential investment rates fallen since 2007. The position is similar in the UK, where the household savings rate increased to 7.7% of disposable income in H209 from 0.8% in H108.”

“A number of factors suggest that the full peak to trough decline in the US gross debt‐to‐income ratio could be as much as 30% — ie, fully reversing the run‐up in the ratio seen over 2002 to 2007 1 . A further 20% fall in the debt ratio could be achieved by 2015 if the household sector sustains a net saving ratio of 6% over the next five years on plausible growth and other assumptions (see the Outlook for US Household Finances table). This saving ratio would be higher than the rate of 4.3% in 2009, but lower than the rates seen before the 1990s and below the long‐run average.”


This trend is seen all over – and will probably continue for several years to come:

“Overall, this suggests that the household deleveraging process is probably less than half complete, and this will continue to prevent above trend growth over the  medium term. Nevertheless, once the household savings ratio reaches 6% ‐ which could happen this year as consumption is expected to grow less rapidly than GDP ‐ it will not need to increase further to secure a typical pattern of balance sheet improvement by 2015. Consumer spending can then grow in line with GDP from 2011 (provided the labor share and household tax rates are broadly constant) while still allowing balance sheets to improve. Hence household deleveraging should not preclude a return to trend growth from 2011.”

Here’s a copy of the full Fitch Special Report; “Sovereign Review And Outlook.”

Related by the Econotwist:

Internal Wrangles Could Leave EU Without 2011 Budget

German Banks With More Than 200 Billion Euro In Faul Credits

El-Erian On G20: A Non-Cooperative Game

G20: Another Meaningless Summit

Webster Tarpley: The Financial Reform Is A Failure

Welcome To The Euro, Estonia! Here’s Your 4,5% Extra Risk Premium

Citigroup: Euro Zone No Longer A Single Economy

Goodbye Keynes – Hello Ricardo!

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