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Stand by for “generalised systemic financial meltdown”

This entry was posted by Helen Thomas on Wednesday, November 21st, 2007 at 9:52 and is filed under Capital markets. Tagged with nouriel roubini. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

1. Nov 29   1:03 Posted by Recoupling rather than Decoupling: the Forthcoming Contagion to China, East Asia and Emerging Markets ! « Crise Systémique Globale — Global Systemic Crisis [report]

   […] - Stock market correlations stand at 30-year highs - Never over last 30 years have market correlations been negative nor been as high as now, between Asia & the USA & Europe. Correlation coeff of 0.6 and above doesn’t make for decoupling.  So much for the idea of Asia decoupling. And, as discussed in my current and previous analyses, the anti-decoupling arguments made by Citigroup for Asia hold even more strongly for Europe, Latin America and other emerging market economies.  Finally, the Financial Times’ Alphaville presented yesterday the following commentary supporting the idea of recoupling, following my Recoupling blog:Don’t count on decoupling to get you out of this onePut down the comfort blanket. Step away from the idea of decoupling. It may not be the thing to save the day after all.As Martin Wolf pointed out this week in the FT, we are in the midst of “the great unwinding” - the re-import by the US of the stimulus it imparted to the rest of the world between 1996 and 2004, when its domestic purchases grew faster than GDP and the current account deficit exploded.The US wants its stimulus back. And with an ever weaker dollar, it’s going to get it, dammit.This unwinding is a turning point, says Wolf. The rest of the world and the emerging markets in particular must now become the demand engines of the world economy. “Will they do so? This is the big macroeconomic question to be answered over the next few years,” he writes.So keep clinging to the decoupling life raft and praying that we all stay afloat, right?Wrong. The backlash has begun.Melvyn Krauss, senior fellow at the Hoover Institution, Stanford University, this week was scathing of the European faith in decoupling to save their economic skins. Writing in the Japan Times he said: “Decoupling is an idea that is based on bad economics — and on some Europeans’ reluctance to accept the fact that Europe’s short but sweet economic expansion is also coming to an end.”So what if the US has become less important for European exports, while Asia’s significance has grown, he asks? “The links between Europe and America are, frankly, much more complex than the advocates of decoupling appreciate.”And the idea that a US recession has no effect on Asia is, says Krauss, nonsense. “So Europeans should not be tempted to think that they are somehow “decoupled” from America’s foibles and woes. Until recently, many Europeans thought they were insulated from the current US housing and mortgage crisis. But in what has been a truly malignant “export” from America to Europe, the US created “garbage debt” in the form of sub-prime mortgages, and Europeans — hungry for extra yield, and as reckless as Americans — bought it. Many European banks’ balance sheets are now as contaminated as those of American banks, and no one is sure who is holding — or hiding — the junk, and how to value it.”The theory of decoupling then is not a panacea - it’s a curse, designed to deny the “very real threats” to the robustness of Europe’s economy. It’s very existence, says Krauss, should be a cause for concern.And if we needed further convincing, FT Alphaville’s favourite bear Nouriel Roubini has also this week torched our decoupling succor.In a sense, the argument is now defunct, says Roubini. Even the most ardent proponents of decoupling would struggle to make the case that in the event of a US hard landing that Europe and the rest of the world could just keep on trucking.But in any case, he adds, what we have is recoupling, not decoupling. In fact, the eurozone has experienced a double whammy - loss of competitiveness relative to the US dollar and other dollar-zone currencies.“Recoupling or contagion is also evident in financial markets. Certainly European financial markets did not decouple from the summer and fall financial turmoil in US financial markets; rather there was massive contagion: the ECB was forced to inject liquidity faster and more than the Fed. And the lingering liquidity and credit crunch has been as severe - if not more severe - in Europe than in the US.”Equity markets have also recoupled with downward pressure in the US rapidly reflected in European equities, argues Roubini. And global shocks - higher risk aversion, the housing cycle, oil and energy prices, other commodity price shocks - will affect Europe as much as the US. Recoupling occurs through confidence channels - as European corporations pull sharply back on capex. A US recession says Roubini will lead to a “serious and significant” slowdown of growth in the rest of the world.In a repeat of 2001 to 2003, the delusion that the Eurozone can decouple from the US will delay the appropriate action, simply ensuring that, again, the slump is deeper and more protracted than the US version, he adds.“For now it is clear that it is still the case that when the US sneezes the rest of the world gets the cold. And since the US will not just sneeze but is risking a serious case of protracted and severe pneumonia the rest of the world should start to worry about a serious viral contagion from this US sickness….There was never real decoupling; the perceived “decoupling” was only a side effect of the modest slowdown of US growth; now that the slowdown is turning into a hard landing contagion and recoupling is reestablishing itself with a vengeance.”Thus, as the FT appears to agree, decoupling is out and recoupling is in. Finally, for more details, links and analyses on this decoupling/recoupling debate see RGE Monitor’s detailed coverage of  Can Asia Decouple from the U.S. Slowdown? […]

2. Nov 27   2:32 Posted by Martin Adamo [report]

   Ben, while I respect your optimism about the declining real estate prices and how that makes things more affordable there is a part of the picture you are missing. Let us stick with your example. Students graduating as engineers might have 120,000 in student loans before they look to buy a house. Those student loans carry rates as high as 12% now and are called parents plus loans. They already have a mortgage before they get a mortage. Now take the cost it takes to heat those homes or cool them , the electricity and taxes. All these numbers are very material and increasing rapidly. The other part of the picture is the ballooning State deficits. Eventually these lead to higher taxes (as in Michigan) or cuts in state spending of some kind.

   I can mention many statistics but the one that noone can argue is that the savings rate has only gone negative one other time and that was before the Depression. Liquidity is drying up, this isnt a normal recession but rather the collapse of a debt bubble that was seen as growth in the US economy but was nothing more than expansion of personal and Govt debt.

   As for skills, there are tons of qualified people everywhere. The problem is they keep getting their jobs outsourced as their pay gets up to reasonable levels. In our area Radiology jobs were outsourced. In one odd case in MOntana a drive through restaurant didnt want to pay up in a tough market so he outsourced the drive up order taker!!! People are losing jobs making 60-90k or more and lucky to find jobs for half that.

   Speaking of engineers I know one. He was making 95k a year with a family of 5 people. His company left for overseas . Gave him a month notice of their closing. He lined up another job but the pay was 55k and a wait on the 401k plan.

   People are clueless as to what is going on out there. I work with 400 taxpayers. Some have their own businesses, others work for all kinds of companies. I cant think of more than 10% that are even holding their own.

   Citigroup just announced a “massive layoff” , some analysts are saying 45,000 people will be laid off. While the CEO walks off with millions for losing billions 45k people are losing their jobs (after 17k just did recently there).

   This is not some prices go down everyone is fine thing. This is as basic as does it make sense to send your kids to college for 30k a year? (or more). Does buying a house make sense? Homeownership .. was it really? or did it only increase because of teaser rates no money down that made it more like renting?

   Things are really out of whack, and the cycle has just begun. The stock market tanked again today, there is a lot of stuff going on behind the scenese noone even wants to talk about. All this subprime stuff is off the books like Enrons woes were and that game hasnt even started yet.

   As for the engineer jobs at 50-60k, I graduated in 1986 with a degree from Holy Cross College. My jobs was at 25k a year and I had only 13k in student loans . That school now costs 45k a year, if I was an engineer I couldnt even take that job., unless of course I had rich parent that paid for my whole education.

   BusinessWeek once ran an article about a guy that had worked in the Steel industry making great money with excellent benefits. His job was outsourced when Japan won the steel contracts. He retrained as an information technology specialist. That job got outsourced to India.

   I truly believe noone gets it out there. At least noone writing articles or in the media.

   Martin

   www.onceuponabid.com
   www.worldofebay.blogspot.com

3. Nov 24   17:38 Posted by RevolutionRadio.org » Blog Archive » Stand By For "Generalised Systemic Financial Meltdown" [report]

   […] FTAlphaVille.com […]

4. Nov 24   15:26 Posted by Ben in Sacramento CA [report]

   Before we sink into despair, and abandon all hope, we should remember that it’s normal for the older generation to think that the younger people have no hope, no morals, have no ambition, and don’t know how to work or save. And the future is nothing but higher taxes, diminished expectations, bankruptcies, and never ending declines in values.

   Yesterday I talked with a couple of senior managers at a large local utility. They told me how much trouble they have finding qualified people in information technology and in engineering. They were fully aware that there are still thousands of engineering and technology jobs (more than 7000 listed on hotjobs.com in Northern California alone) available and unfilled.

   This morning’s Sacramento Newspaper mentioned that the median price of a home had fallen below $300K and “as of Oct. 31, there were nearly 5,000 homes for sale below $295,000 in the county”..

   3,726 were priced between $200,000 and $299,000. That was about one-third of all the homes for sale in Sacramento County. The number of homes priced now between $100,000 and $199,000 was 1,161 at the end of October. Three years ago, you couldn’t find anything fit to live in below $200K.

   With a 7% 30 year fixed mortgage and 10% down on a $250K home you are talking a payment of $1497. Most of these young engineers can make at least $50K - $60K ($4k - 5K per month) so with only one income a young person with one of these technology jobs can afford a house. With two incomes in this range a young family can afford a really nice house.

   The real key is education — having the skills the current job market needs.

   So don’t worry so much about us Californians. We will do just fine — we always have.

   And don’t worry so much about the real estate market never recovering.

   It’s already well on it’s way to becoming affordable and reasonable again.

   So all you pessimists can grow long beards and sit in your dark houses counting your piles of gold coins by candle light, but I plan to stay optimistic and involved, confident that whatever happens short term, the future is bright.

5. Nov 23   14:23 Posted by Martin Adamo [report]

   Just wanted to add to my prior comment - I did not make one point as strongly as I wished.

   Regarding my discussion of the late 70s-mid 80s inflation and the 75% increase in cost of living adjustments to Social security , wages, pensions, Govt jobs etc.

   At the end of that cycle of inflation, peoples incomes were now up substantially and able to pay down fixed debts quite easily. Incomes tracked inflation, once inflation slowed , incomes at high levels is how the debts were paid down.

   Now at 25% COLA in the last 8 years everyone is falling behind as their incomes have been sliding backwards. Benefits as well. You cannot take a job that pays 40k a year with benefits and say that a job that pays 42 without benefits (that you now pay 800-1100 a month for is the same job.

   After my initial post the tracking group showed a 7.9% increase in the cost of a turkey dinner this year. That is 3.5 times the inflation rate. And stores usually keep turkey prices down.

   Thanks for the nice emails people sent me!

   Just seeing that people are not all blind helps lessen the stress some.

   Just today I was watching FOX NEWS (definately not liberal media by any means) and the reporter was in Best Buy in Dallas , Texas, there was NOONE IN LINE!!!! The story was about how busy Black Friday was. Another friend works in a Macys in Providence , Rhode Island, sales have been terrible, but no report from today yet.

   I think this is the time when things come home to roost. I hope good leadership rises up and takes control of this mess.

   Marty
   clhct1@aol.com

6. Nov 22   13:32 Posted by Ippoippo » Stupid bloody f**kwits!! [report]

   […] Stand by for “generalised systemic financial meltdown” Europe Suspends Mortgage Bond Trading Between Banks … Everything is fine… yeah right! Meanwhile, in France… the latest in transport technology […]

7. Nov 22   1:06 Posted by World Crisis scenarios for the 21st century - Worldwide economic depression.(update 8) « morbius glass [report]

   […] But this will not just be a contained single country financial problem, with global and interconnected money markets, this is gong to be a ““generalized systemic financial meltdown.” as Professor Nourial Roubini has indicated. […]

8. Nov 21   13:58 Posted by Martin CPA In Ct, USA [report]

   I am a CPA (accountant) in the Northeast part of the United States. All the “experts” have been the biggest idiots in the world , I agree that the scenario above is possible from what I can see. We have a near meltdown now in our area. Small businesses have no cash flow. Almost all the “consumer spending” in recent years had been on credit and flow from equity loans. This country has systematically outsourced good jobs in multiple industries and created Walmart jobs and underreported inflation, makes up stupid meaningless unemployment statistics (all kind of manipulation) and has the nerve to give social security receipients 2.6% increases while raising their medicare premiums 5%. HERE IS WHAT I SEE AS THE PROBLEM…
   In the last 70s to mid 80s over an 8 year period we had high inflation. During that time cost of living increases reflected in Social security, Govt jobs and even private employment and pension calculations. By the end of the inflationary period people were making 75% more (you can look at a historical COLA chart for CPI increases to see this). Now in the last few years, health care costs, energy costs, education costs , grocery costs , pretty much everything you can think of has soared in cost for the consumer but there has been no wage inflation or COLA adjustments to keep pace. The COLA increase for the last 8 years has been 25%.

   Here are some increases as I see them compared to those COLA increases.
   Health care coverage at my office - up 200% in that time
   Energy prices (gas) Up 100% or more
   Heating oil up 250%
   Groceries hard to tell based on varied purchases but Beef is up like 60% and other grocies are at least up 30-40% in that time
   Housing rose 150%-200 percent in my area in that time , though it has recently fallen 40% in one year.

   The bottom line? The unnannounced inflation has made people not able to pay their bills to live. The first to topple might be subprime mortgage borrowers in over their head but that is not the problem. FNMA and FREDDIE MAC do a lot of conforming loans not Subprime. In addition due to the war spending (whether you agree with the war or not) US infrastructure and technology development expenses are lagging. Roads are falling apart, bridges etc. We have not invested in the new technologies that would replace jobs lost to outsourcing.

   What I see is bad, very bad.. I do not wish for bad things I hope to be WRONG!
   I am thinking maybe the FED might realize the importance of this retail season that starts this weekend and do a surprise rate cut , as at this point I think the inflation is here but the Depression risk is greater. I am open to anyone wishing to discuss this I have been writing CNBC and everyone possible to give them the scoop from the bottom of the pile here but noone cares..

   Marty CPA In CT - clhct1@aol.com

   Support our part time EBay store at http://Onceuponabid.com
   (my wife and I work like 3 jobs to keep even) LOL

9. Nov 21   12:09 Posted by GSM [report]

   Well Helen, I suppose that your in the camp that thinks we will all”muddle through”? (somehow). I guess if the past couple of months is any pointer to the credibility, honesty and accurate foresight of the “wise men” in charge(Darling, Paulsen, Bernanke, Prince, O’Niell, Applegarth et al) then we should all breathe a collective sigh of relief. We are after all in safe hands, no? I mean, why should we NOT believe these people? The Subprime contagion is contained, right?

10. Nov 21   12:02 Posted by John Barry [report]

    While the economist leader isn’t as bleak as Roubini, I think we’re well into what the EIU report called the “main risk scenario” I may just have to reread that, and ponder the apocalypse