There is good reason to believe that we are in the land of make-believe.
http://www.forbes.com/opinions/2008/11/12/recession-global-economy-oped-cx_nr_1113roubini.html
The Worst Is Not Behind Us
Nouriel Roubini, 11.13.08, 12:01 AM EST
Beware of those who say we’ve hit the bottom.
It is useful, at this juncture, to stand back and survey the economic landscape–both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:
–The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.
The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.
–Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.
–The world economy will experience a severe recession: Output will sharply contract in the Eurozone, the U.K. and the rest of Europe, as well as in Canada, Japan and Australia/New Zealand. There is also a risk of a hard landing in emerging market economies. Expect global growth–at market prices–to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus, China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.
The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation, as the slack in goods, labor and commodity markets will lead advanced economies’ inflation rates to become below 1% by 2009.
–Expect a few advanced economies (certainly the U.S. and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon, zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising, thus further pushing down aggregate demand, and where money market fund returns cannot even cover their management costs.
I agree. I feel safe saying this because Ross has me on ignore. I wouldn’t want him to get a swelled head.
Steve
Amazing how much Ross and Nouriel Roubini think alike. Here’s Nouriel Roubini’s November 11, 2008 RGE Blog post titled, “The Dismal Outlook for the US and Global Economy and the Financial Markets”:
Nouriel Roubini November 11, 2008
Here is a below brief summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy and for financial markets:
The U.S. will experience its most severe recession since WWII, much worse and longer and deeper than even the 1974-75 and 1980-82 recessions. The recession will continue until at least the end of 2009 for a cumulative GDP drop of over 4%; the unemployment rate will likely reach 9%. The US consumer is shopped out saving less and debt burdened and now faltering: this will be the worst consumer recession in decades.
The prospect of a short and shallow 6-8 months V-shaped recession is out of the window; a U-shaped 18-24 months recession is now a certainty and the probability of a worse multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009 the recovery could be so weak because of the impairment of the financial system and of the credit mechanism (i.e. a growth rate of 1-1.5% for a while well below the potential of 2.5-2.75%) that it may feel like a recession even if the economy is technically out of the recession.
Obama will inherit and economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollar in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed Funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise given price deflation while the value of financial assets is still plunging.
The world economy will experience a severe recession: output will sharply contract in the Eurozone, UK and the rest of Europe, in Canada, Japan, and Australia/New Zealand; there is also a risk of a hard landing in emerging market economies. Expect global growth at market prices to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.
The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation as slack in goods markets, slack in labor markets and slack in commodity markets will lead advanced economies inflation rates to become below 1% by 2009.
Expect a few advanced economies (certainly US and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon a zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising thus further pushing down aggregate demand, and where money market funds returns cannot even cover their management costs.
???
Of course we think alike, You just did a cut and paste on the same article I posted. Try rereading the intro!
???
Hindsight is always 20/20. Too bad there isn’t a collective2 for political predictions.
true…
Bullshit we’re going to 5000. The analysts are driving the market down by posting unrealistically pessimistic estimates. Average PE next year estimate is at 10.5, when the historical average is 15. By that metric we’re about 50% undervalued here. I’d have to say around 7600 is near the bottom, and I have no doubt about that.
If reports are correct then expect significant downward revisions on earnings thus making today’s P/E projections irrelevant.
I would say that we have no ideas where the market will be in 6 or 12 or 18 months. If we did with any certainty, that is where the market would be. It prices in almost everything knowable.
The market cannot really be predicted with any accuracy beyond several days. Every study on market timers who make such prognostications “good or bad” becomes essentially random. And that is why economists who predict are invariably usually inaccurate when they try to pinpoint it.
The market will be where the market will be. A trader only trades what (s)he sees. Predictions are only for interest, not really for making money.
So although people theorize, it is opinion and not reality. The current market price at any one instant indicates that about 50% of the people think it is headed higher and 50% think it is headed lower.
So even though I posted this person’s opinion, it will only become reality if we dip into near-depression level. The potential of the continuing unwinding of the unbelievable leverage of the world economy (estimated beyond 50 trillion $US) appears to be testing the worldwide govt bailouts and, and may very well overwhelm them all. I saw evidence recently that they feel it may be about 20% “unwound”. If true, the remaining 80% may kill us all.
There is no bottom to a bear market. As there really is no top in a bull market. People discover tops and bottoms in hindsight only.
"the historical average is 15."
What relevance is that? If you were moving to another country and wanted to decide what clothes to pack would you base your decision on the average temperature for the whole year or for the relative extremes? I can see you now sitting there in your shorts and t-shirt complaining that they told you the average temperature was 64 so there’s no way it should be 32 degrees today.
You should be looking at the average PE that bear markets bottom. Even then that’s still only an average. Do you know what it is? You might be surprised. Give you a clue, it’s lower than where we are now.
It’s not that much lower, Jon. 15 is where it should be a reasonable growth rate. 5000 is way off the mark.
They’ve already revised all their earnings 30-50% lower, which is mostly why the market is down here. They’ve overshot on the low end.
Don’t forget your coat.
You shorting here, Jon? Take the big dow $25/point, and about 3000 points to go. How can you lose?
If I got a signal to sell it here would I take it? Yes, absolutely.
You’re missing the point though. There is no such thing as too low to sell or too high to buy (read Jesse Livermore, “Reminiscences of a Stock Operator”, or Charles Mackay’s “Extraordinary popular delusions and the madness of crowds”). As Ross said earlier you will only know what the bottom or top was with hindsight not when you’re in it.
When you’ve been trading long enough you will discover that oversold can get more oversold and remain oversold for a long long long time, and it can hurt. The market doesn’t care what the average is, where your stop is, or how low anyone thinks it can go. If this year has taught any market player anything it should be that the market never loses it’s capacity to surprise and just when you think you’ve seen everything it will surprise you again.
I’ve seen multiple bull and bear markets and through them all read some outlandish forecasts, when the dow went thru 10,000 there was a report that said it was going to 100,000 and another that said it was going back down to 1,000. My answer to both, ‘that would be incredible and I hope I get a chance to benefit’. Why? Because if you are a good trader or have a good system you should be able to make money in any environment. As a trend follower I couldn’t care less whether the market goes up or down just as long as it trends so I can trade it. I would welcome either forecast. What does it benefit me to say ‘that’s bullshit’ or ‘that will never happen’ etc… it just shows you to be narrow-minded and having a lack of respect for the market. If this market has taught us anything this year it should be that anything and everything can happen. As soon as you lose respect for the market you are just lining up to be taught a harsh lesson.
Great Crash of 1929:
After a six-year run when the world saw the Dow Jones increase in value fivefold, prices peaked at 381.17 on September 3, 1929. The market then fell sharply for a month, losing 17% of its value on the initial leg down
Shortly before the crash, Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau."
On Monday, October 28, 1929 the first "Black Monday", more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 13%.
The next day, "Black Tuesday", October 29, 1929, the volume on stocks traded on October 29, 1929 was "…a record that was not broken for nearly 40 years, in 1968." Amid rumors that Herbert Hoover would not veto the pending Hawley-Smoot Tariff billstock prices crashed even further."
The Economist cautioned: "Some bank failures, no doubt, are also to be expected. In the circumstances will the banks have any margin left for financing commercial and industrial enterprises or will they not? The position of the banks is without doubt the key to the situation, and what this is going to be cannot be properly assessed until the dust has cleared away."
William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12% that day. The ticker did not stop running until about 7:45 that evening. The market loss for the week was ten times more than the annual budget of the federal government.
An interim bottom occurred on November 13, with the Dow closing at 198.6 that day. The market recovered for several months from that point, with the Dow reaching a secondary peak (ie, dead cat bounce) at 294.0 in April 1930.
The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak.
The stock market will do whatever it has to do to fleece the most amount of money from the most people.
Rick Haines
Either they have overshot or underestimated the impact of the "wealth effect" or lack thereof.
I’m knee deep in the CFA curriculum now. They’ve decided to “go with the flow” and post predictions in line with the sentiment felt today. The problem is, they’re too late to the party, and that’s why 5000 won’t happen, and I don’t think 7000 will either, but if we do, it won’t take a long to be above 7000 the next day or so.
I hope you are right. But with all the layoffs, sinking house prices,… people tend to clam up and remove their money from the markets. Particularly with so many baby boomers near retirement not wanting the recent market risk.
Credit card companies are becoming a lot more aggressive with interest rates. Apparently they are raising rates to 25+% for those late for two payments. Companies are not able to get short term loans from the banks.
And don’t forget that Wall Street has to be optimistic (the ones that still have jobs that is.) If they aren’t optimistic then no one will buy stocks and they will be out of work.
My belief is that the analysts don’t have a clue where earnings will be next year.
