Apr 14th 2009

The Dead Cat Bounce

by Nouriel Roubini

 

Nouriel Roubini is CEO of Roubini Macro Associates and Professor of Economics at the Stern School of Business, New York University.

NEW YORK - Mild signs that the rate of economic contraction is slowing in the United States, China, and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5%.

Investors are talking of "green shoots" of recovery and of positive "second derivatives of economic activity" (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near). As a result, stock markets have started to rally in the US and around the world. Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.

This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6% in the last two quarters, US growth will still be negative (around -1.5 to -2%) in the second half of the year (compared to the bullish consensus of +2%). Moreover, growth next year will be so weak (0.5 to 1%, as opposed to the consensus of 2% or more) and unemployment so high (above 10%) that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year. China will have a more rapid recovery later this year, but growth will reach only 5% this year and 7% in 2010, well below the average of 10% over the last decade.

Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world.

It is said that the International Monetary Fund, which earlier this year revised upward its estimate of bank losses, from $1 trillion to $2.2 trillion, will announce a new estimate of $3.1 trillion for US assets and $0.9 trillion for foreign assets, figures very close to my own. By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses.

Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally. Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession. But, in the last two years, the stock market has predicted six out of the last zero economic recoveries - that is, six bear market rallies that eventually fizzled and led to new lows.

The stock market's latest "dead cat bounce" may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast the consensus expects.

Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms' pricing power and keep profit margins low.

Third, financial shocks will be worse than expected. At some point, investors will realize that bank losses are massive, and that some banks are insolvent. Deleveraging by highly leveraged firms - such as hedge funds - will lead them to sell illiquid assets in illiquid markets. And some emerging market economies - despite massive IMF support - will experience a severe financial crisis with contagious effects on other economies.

So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggest. There may be light at the end of the tunnel - no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. The same is true for a sustained recovery of financial markets.


Copyright: Project Syndicate, 2009.

Should you wish to publish your own article on the Facts & Arts website, please contact us at info@factsandarts.com.

Video:

FT.com - Jim O'Neil and Nouriel Roubini discuss the economy, on April 6, 2009:


 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

May 27th 2022
EXTRACTS: "Monetary policymakers are talking tough nowadays about fighting inflation to head off the risk of it spinning out of control. But that doesn’t mean they won’t eventually wimp out and allow the inflation rate to rise above target. Since hitting the target most likely requires a hard landing, they could end up raising rates and then getting cold feet once that scenario becomes more likely. Moreover, because there is so much private and public debt in the system (348% of GDP globally), interest-rate hikes could trigger a further sharp downturn in bond, stock, and credit markets, giving central banks yet another reason to backpedal." ----- "The historical evidence shows that a soft landing is highly improbable. That leaves either a hard landing and a return to lower inflation, or a stagflationary scenario. Either way, a recession in the next two years is likely."
May 26th 2022
EXTRACT: "No, I am not arguing that Powell needs to replicate Volcker’s tightening campaign. But if the Fed wishes to avoid a replay of the stagflation of the late 1970s and early 1980s, it needs to recognize the extraordinary gulf between Volcker’s 4.4% real interest rate and Powell’s -2.25%. It is delusional to believe that such a wildly accommodative policy trajectory can solve America’s worst inflation problem in a generation."
May 26th 2022
EXTRACT: "It will be critical in this context how China will act and whether it will prioritise its economic interests (continuing trade with Europe and the US) or current ideological preferences (an alliance with Russia that makes the world safe for autocracies)."
May 26th 2022
EXTRACT: "The document is full of embarrassing and damming stories of illegal gatherings and bad behaviour. There was “excessive alcohol consumption”, a regular fixture referred to as “wine time Fridays” and altercations between staff. Aides are shown to have left Downing Street after 4am (and not because they had worked into these early hours). Cleaning staff and junior aides were abused, and a Number 10 adviser is on record before the infamous “bring your own booze” party...."
May 17th 2022
EXTRACT: "But even a resounding Russian defeat is an ominous scenario. Yes, under such circumstances – and only such circumstances – Putin might be toppled in some kind of coup led by elements of Russia’s security apparatus. But the chances that this would produce a liberal democratic Russia that abandons Putin’s grand strategic designs are slim. More likely, Russia would be a rogue nuclear superpower ruled by military coup-makers with revanchist impulses. Germany after World War I comes to mind."
May 8th 2022
EXTRACT: "For citizens of states that are members of NATO, taking all possible steps, short of all-out war, to ensure that Russia does not conquer Ukraine is not even an altruistic sacrifice. It is a long-term investment, for themselves and their children, in freedom, democracy, and the international rule of law."
May 4th 2022
EXTRACT: ".....a remarkable transformation is taking place in Ukraine’s army amounting to its de facto military integration into Nato. As western equipment filters through to the frontline, Nato-standard weaponry and ammunition will be brought into Ukrainian service. This is of far higher quality than the mainly former Soviet weapons with which the Ukrainians have fought so capably. The longer this process continues and deepens, the worse the situation will be for the already inefficient Russian army and air force."
May 3rd 2022
EXTRACT: " The conventional wisdom among students of the Russian arts and sciences is that Russian culture is “great.” The problem is that, while there are surely great individuals within Russian culture, the culture as a whole cannot avoid responsibility for Putin and his regime’s crimes." ---- "Russianists will not be able to avoid examining themselves and their Russian cultural icons for harbingers of the present catastrophe. What does it mean that Fyodor Dostoevsky was a Russian chauvinist? That Nikolai Gogol and Anton Chekhov were Ukrainian? That Aleksandr Solzhenitsyn was an unvarnished imperialist? That Aleksandr Pushkin was a troubadour of Russian imperial greatness? May these writers still be read without one eye on the ongoing atrocities in Ukraine?"
Apr 29th 2022
EXTRACT: "The following day Lavrov met his Eritrean counterpart, Osman Saleh, in Moscow. Eritrea was the only African country to vote against the UN resolution condemning the invasion. In this refusal to condemn Russia, Eritrea was joined by only Belarus, North Korea and Syria. Even longstanding allies such as Cuba and China abstained. It’s an indication of Russia’s increasingly limited diplomatic options as this war continues."
Apr 24th 2022
EXTRACT: "Although the milestone lasted only for a brief time, it points to a future in which California runs on 100% wind, solar, hydro and batteries, a future that will certainly arrive even faster than the state plans. As it is, California is ahead of its green energy goals." ...... "A world of 100% green energy and electric cars is not only a healthier and more comfortable world, it is a world where oil and gas dictators like Vladimir Putin are defunded."
Apr 17th 2022
EXTRACT: "Kazakhstan’s authorities have also showed uncharacteristic leniency in allowing public rallies in support of Ukraine. Thousands of protesters holding banners reading “Russians, leave Ukraine”, “Long Live Ukraine” and “Bring Putin to trial” marched across the capital, Almaty, wrapping monuments to Lenin and other Soviet-era figures with yellow and blue balloons symbolising the Ukrainian flag."
Apr 15th 2022
EXTRACT: "People’s identification with the Soviet Union appears to have a clear and growing basis in Russian public opinion. Surveys we have conducted throughout the Putin period show that Soviet identification among the general population – something that had been steadily declining after the collapse of the Soviet Union in 1991 – began to increase in 2014, when the Russian government annexed Crimea and supported rebellions in the Ukrainian regions of Luhansk and Donetsk. By 2021, almost 50% of those surveyed identified with the Soviet Union rather than the Russian Federation."
Apr 13th 2022
EXTRACT: "Worse yet, the Hungarian government has effectively been helping Putin by prohibiting the shipment of weapons to Ukraine across its borders. Hungarian public TV spreads Russian disinformation day and night. The day before the election, an assembly of ordinary people expressing solidarity with Ukraine was framed on state television as a “pro-war rally.” "
Apr 13th 2022
EXTRACT: "It may well be that the Russian army’s fate has already been sealed in what is likely to be a long war. The single qualification to this may be that Russia could default to escalation using “weapons of mass destruction” of one form or another – whether tactical nuclear warheads or chemical weapons."
Apr 13th 2022
EXTRACTS" "Ukraine and Russia produce a substantial amount of grain and other food for export. Ukraine alone produces a whopping 6% of all food calories traded in the international market. At least it used to, before it was invaded by the world’s largest nuclear power." ...... "When it comes to cereals like wheat, corn, rice and barley, the big players talk about millions of metric tonnes, or MMTs. A single MMT of wheat contains about 3.4 trillion food calories,." ....."Ukraine produced about 80 MMT of grain (a category that includes wheat, corn and barley) in 2021, and is expected to harvest less than half of that this year. A shortfall of 40 MMT is enough missing calories that a country like the UK could only make it up by having everyone stop eating for three years. That’s the thing about tonnes of grain: a million here and a million there and pretty soon you’ve got a real issue on your plate."
Apr 11th 2022
EXTRACT: "I don’t even know the little girl’s name. All I do know is what a friend of a friend wrote on Viber: that her relative, a senior nurse in one of Kyiv’s hospitals, “saw in the morgue a child with 20 varieties of sperm on her small body.” Since this information was conveyed in a private conversation, there is no reason to doubt its veracity."
Apr 8th 2022
EXTRACT: "Russian society has so far failed to stop Putin, just as German society failed to stop Hitler. And so, like a poisoned chalice, that task has fallen to the West, as it did in 1939. The West must now treat Putin and his regime the same way that Winston Churchill treated Hitler: Don’t talk to him, just defeat him. Dead-enders such as Putin are too fanatical and desperate to be reliable negotiating partners."
Apr 3rd 2022
EXTRACT: "From 1807 to 1814 on the Iberian peninsula, Napoleon had to fight Spanish, Portuguese and British armies while beset by ubiquitous, ferocious insurgents. He described this war as his “bleeding ulcer”, draining him of men and equipment. It is the west’s aim to make Ukraine for Putin what Spain was for Napoleon. In the absence of a negotiated settlement, Ukraine and Nato will continue to grind away at Russia’s army, digging away at that bleeding ulcer and prolonging Russia’s agony on the military front, as the west continues its parallel assault on its economy. If Putin’s plan is to proceed with the Korea model, he will fail. There is a strong possibility that Putin has only a limited idea of how badly his army is faring. So be it – he’ll find out soon enough that there is now no path for him to military victory."
Apr 1st 2022
EXTRACTS: "Policymakers expected that the country would be able to secure its energy supply entirely from renewable sources, so they resolved to phase out coal and nuclear energy simultaneously. The last three of Germany’s 17 nuclear power plants are set to be shut down this year." ---- ".... the share of wind and solar power in Germany’s total final energy consumption, which includes heating, industrial processing, and traffic, was a meager 6.7%. And while wind and solar generated 29% of the country’s electricity output, electricity itself accounted for only about a fifth of its final energy consumption." ----- "If Germany suddenly halted Russian gas imports, gas-based residential heating systems – on which half the German population, approximately 40 million people, rely – and industrial processes that rely heavily on gas imports would break down....."
Apr 1st 2022
EXTRACT: "For Putin, the past that matters most is the one the dissident author and Nobel laureate Aleksandr Solzhenitsyn exalted: the time when the Slavic peoples were united within the Orthodox Christian kingdom of Kievan Rus’. Kyiv formed its heart, making Ukraine central to Putin’s pan-Slavic vision. ---- But, for Putin, the Ukraine war is about preserving Russia, not just expanding it. As Russian Foreign Minister Sergei Lavrov recently made clear, Russia’s leaders believe that their country is locked in a “life-and-death battle to exist on the world’s geopolitical map.” That worldview reflects Putin’s longstanding obsession with works of other Russian emigrant philosophers, such as Ivan Ilyin and Nikolai Berdyaev, who described a struggle for the Eurasian (Russian) soul against the Atlanticists (the West) who would destroy it. ---- Yet Putin and his neo-Eurasianists seem to believe that the key to victory is to create the kind of regime those anti-Bolshevik philosophers most detested: one run by the security forces. A police state would fulfill the vision of another of Putin’s heroes: the KGB chief turned Soviet General Secretary Yuri Andropov."