Some recent articles on the economy

Just in case some of you have been suffering from too much cheery news of late I offer the following... (click on the links for the full articles)

The man who predicted the current financial crisis said the US recession could drag on for years without drastic action.

Among his solutions: fix the housing market by breaking "every mortgage contract."

"We are in the 15th month of a recession," said Nouriel Roubini, a professor at New York University's Stern School of Business, told CNBC in a live interview. "Growth is going to be close to zero and unemployment rate well above 10 percent into next year."

Echoing a speech he made earlier in the day, Roubini said he sees "no hope for the recession ending in 2009 and will more than likely last into 2010."

Roubini, who is also known as "Dr. Doom," told CNBC that the risk of a total meltdown has been reversed for now but that the economy is going through "a death by a thousand cuts." He also said that "most of the U.S. financial institutions are entirely insolvent..."

From US Recession Could Last Up to 36 Months: Roubini

March 9 (Bloomberg) -- The Standard & Poor’s 500 Index is likely to drop to 600 or lower this year as the global recession intensifies, said Nouriel Roubini, the New York University professor who predicted the financial crisis.

The benchmark index for U.S. stocks would have to slump 12 percent from last week’s closing level to meet his forecast. Roubini is assuming that companies in the S&P 500 will report profit of $50 a share this year and investors will pay 12 times that for equities.

“My main scenario is that it’s highly likely it goes to 600 or below,” Roubini said today in an interview at the Chicago Board Options Exchange Risk Management Conference in Dana Point, California. A level of “500 is less likely, but there is some possibility you get there.”

The S&P 500 has dropped 25 percent to 676.53 in 2009, its worst start to a year, following a 38 percent decline in 2008 that was the steepest annual retreat since 1937. In response to the U.S. recession that began in December 2007, the Federal Reserve cut its benchmark lending rate to as low as zero and President Barack Obama got congressional approval for a $787 billion economic stimulus plan...

From Roubini Says S&P 500 May Drop to 600 as Profits Fall

The stock market tanked again today, and for 2009 has lost nearly a quarter of its value. And it is only early March.

To put that in perspective, assume that the market ends 2009 at today’s prices. This would be the list of the worst years since 1900 for the Dow industrials:

1. 1931, down 53%
2. 1907, down 38%
3. 2008, down 34%
4. 1930, down 34%
5. 1920, down 33%
6. 1937, down 33%
7. 1974, down 28%
8. 2009, down 25%
9. 1903, down 24%
10. 1932, down 23%

You will note that we have not had consecutive really bad years since 1930, 1931 and 1932.

Here are the rankings for worst two-year periods, again assuming 2009 ends at today’s prices:

1. 1930-31, down 69%
2. 1931-32, down 64%
3. 2008-09, down 50%
4. 1929-30, down 45%
5. 1973-74, down 40%
6. 1906-07, down 39%
7. 2007-08, down 30%
8. 1940-41, down 26%
9. 1916-17, down 22%
10. 1920-21, down 25%

That may mean that the market really is discounting a financial disaster.

Here’s another indication that investors feel more or less the way they did during the last disaster:

It has been 513 calendar days since the stock market peaked on Oct. 9, 2007. Since then, the S.&P. 500 is down 56 percent and the Dow is off 53 percent.

On Jan. 29, 1931 — the identical number of days after the 1929 market peak — the S.&P. 500 was down 49 percent and the Dow was down 56 percent. The 1929 crash got off to a much faster start, but we have now more or less caught up.

You will note, however, that the economic news now is not nearly as bad as it was in 1931. Could there be a tad bit of overreaction this time?

Finally, the good folks at accuweather.com would like to let you know that the weather is also reminiscent of the bad old days:

Dust Bowl II?

The weather pattern has some similarities to that of the 1930s and given the state of the economy these days make it quite sobering. While modern farming practices and technological advances should prevent a 1930s style dust bowl over the southern Plains, indeed some hardship lies ahead unless the current pattern breaks. The spring planting season begins this month in the region and crops need moisture to sprout and grow.

From Plunging Markets, Then and Now

...The question that arises then is whether the new US budget will change things. The boost is huge. The budget deficit is projected to rise to 12.5 per cent of GDP. That is higher than at any time since the Second World War. It is double the size, relative to GDP, of Franklin D Roosevelt's New Deal in the 1930s. It is larger than the fiscal deficits run by Japan during the 1990s, which is not an encouraging precedent since they pretty much failed – though arguably Japan's so-called "lost decade" would have been even more lost without them. Finally, it is even larger than the proposed deficit that our present Government plans to run here.

So what should we make of it? I suppose I fear this administration is making the same mistake with fiscal policy that the previous one made with monetary policy. Remember how the Federal Reserve cut US interest rates way below the rate of inflation to pump up the economy after the collapse of the internet bubble? It succeeded in boosting demand. People borrowed like crazy, savings plunged, the housing boom took off, and the economy recovered. But the growth was artificial and could not be sustained.

The argument at the time was that the impact was not inflationary, and that was right for prices were held down by the imports of cheap goods from East Asia. And the credit boom was not risky as the banks were able to spread their risks by securitising their debts. In any case those debts had AAA ratings. But the lack of inflation (and those AAA ratings) lulled people into a false sense of security and we all know what happened.

The argument now is that the loss of output from recession is so huge that it makes sense for the state to borrow to reverse it. You could say the economy is a bit like an airline or a hotel – the revenue from a seat or a bed not filled is lost forever. So better to borrow now, get demand up, and claw back the borrowing later. To some extent this must be right, provided the fiscal position is indeed brought back into kilter. President Obama's plan holds that the deficit will be back to 3 per cent of GDP by the end of his term. If that were the case, it might be just about acceptable. Trouble is, the assumptions on which this deficit-reduction profile are made look to me to be quite unrealistic. GDP growth next year of more than 3 per cent? Huh?

There is a further concern. This programme assumes the US government can finance it. Now at the moment the dollar is riding high, with government assets seen as a safe haven in the storm. The current account deficit is narrowing and the Chinese are perceived to have no option but to keep investing in the US.

So for the time being the deficit can be financed, or so it would appear. But the mood of financial markets is fickle and at some stage it will turn. There have been runs on the dollar before. You could envisage a nightmare scenario where the flow of funds into the US reverses, long-term interest rates shoot up, the US fiscal position fails to improve and there is a global dollar crisis. Even without that, the debts will be a burden for a generation. The seeds of the next downturn are being sown now...

From Deficit of realism. America assumes a lot in its road map to recovery