I spoke with the bearish—but prescient—economist Nouriel Roubini on Wednesday about what's in store for the economy, housing, and stock markets in 2009. Here's what he had to say:
What is your outlook for the length and depth of the recession?
My view is that that recession is going to continue at least through the end of 2009. It started in December 2007, so it's going to be 24 months long. It's going to be the longest we've had in the last 60 years. I expect a cumulative fall in output from the peak of 4 to 5 percent. Just to give you a sense, in the last recession, the cumulative fall in output was only 0.4 percent—this one is 10 times deeper. The unemployment rate will peak at above 9 percent sometime in 2010. And we're facing not just a U.S. recession but a global recession. There is a recession in all of the advanced economies, and now there is the beginning of a hard landing also in the emerging markets.
What are the main factors behind the recession?
Initially, it was the excesses in the U.S. housing market, but we have discovered that those excesses were not limited only to housing. The household sector was highly leveraged—subprime, prime, credit cards, auto loans, student loans. There was a releveraging of the financial system, with massive amounts of excessive leverage and risk taking. That led to the worst financial crisis since the Great Depression and, because of securitization, we spread it to the rest of the world. Also easy money from the Fed—they pushed down the federal funds rate and kept it too low for too long—and lax supervision of financial institutions played a role. So a number of different factors .
What's your outlook for housing?
Well, between 1996 and 2006, real home prices doubled. So just to go back to the previous level—without undershooting—you need a fall in real terms of 50 percent in home prices. You can achieve 40 percent of that through nominal falling home prices and 10 percent of it through inflation. That means that home prices have to fall at least 40 percent
. And they have fallen, as of today, from their peak of 2006 by 25 percent. I expect them to fall at least another 15 percent or maybe even 20—so a cumulative fall in home prices in nominal terms of at least 40 percent, possibly 45. And the housing recession has not bottomed out. The data yesterday about housing starts and building permits suggested that it's a total disaster in housing, and there is no bottom to it. This is the worst housing recession since the Great Depression.
Do you think stocks have bottomed?
No, I don't think so. Of course, in the last few weeks we have been in another bear market rally, but bear market rallies have occurred for the last 12 months. Markets rally after shocks, and then shocks come and they fall further. But I see another downside to U.S. and global equities of at least 15 to 20 percent from current levels for three reasons. One is that the news about the economy—both in the U.S. and abroad—is going to be much worse then expected. The numbers have been just awful, and they are going to get worse. Two, there is still a lot of delusion about what earnings are going to be in 2009. And three, I think that there are going to be many more financial shocks, other large institutions going bust—highly leveraged institutions like hedge funds.
The financial shocks are not over, and the credit losses are going to mount because they are spreading from subprime to prime to credit cards to auto loans to student loans to leveraged loans to municipal bonds to industrial and commercial loans to corporate bonds. We have to take about $2 trillion of credit losses and so far nearly half of it has been recognized. So I see another wave of massive credit losses that is going to worsen the credit crunch.
http://www.usnews.com/blogs/the-home-front/2008/12/18/nouriel-roubini-the-700-billion-bailout-isnt-enough.html
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