Not long ago, Professor Nouriel Roubini was a respected “but obscure” academic, says Stephen Mihm in the International Herald Tribune. Now ‘Dr Doom’ is a household name. Having studied a series of emerging-market blow-ups, he became familiar with “massive credit bubbles” and saw that the US was a case in point. In 2006, he said America was set for a massive housing bust, while mortgage-backed securities would bring the global financial system to a halt.
So what next? “It’s getting uglier.” This will be a year of “severe and protracted global recession” as the record global credit bubble continues to unwind. Worldwide credit losses are set to reach $3.6trn, of which $1.1trn has hitherto been disclosed. The European and US banking systems are bankrupt, and unless governments quickly recapitalise them the credit crunch will become even more severe: the risk of a “near-Depression shouldn’t be underestimated”.
As far as asset markets are concerned, there is still a 20% downside for global stocks as earnings and macroeconomic data are set to keep disappointing, while a recession in erstwhile powerhouse China also bodes ill for global equities, he reckons. The severe recession could also wipe another 15% off commodities.
Another analyst often referred to as “Dr Doom”, Marc Faber of the Gloom, Boom and Doom Report, isn’t particularly cheerful either. Faber foresaw the Asian crisis and warned before the latest slump that the world was in an unbalanced boom driven by credit creation in the US. He says 2009 will be a “write-off” economically; US equities aren’t as historically cheap as they were at the market lows of 1982 or 1974. There is better value in Asia.
“Everyone thinks fiscal and monetary measures will work to fix the financial system,” says Faber. “I don’t. They will be disastrous and fuel inflation.” So he’s not keen on the medium-term outlook for government debt, especially the US’s. The Fed’s money-printing looks set to bolster the appeal of hard assets, whose supply can’t be boosted quickly: “the supply of oil, gas and copper is relatively limited compared to paper money you can print”. And with many governments wanting to lower the value of their currencies, the stage is set for all currencies to lose value against precious metals.