As last week ended and stocks rallied, we reported that Nouriel Roubini surprised some investors with his call (apparently) that the worst was behind us. But by the end of Friday’s U.S. trading, Roubini sent out a clarification of his comments. As a result, Friday’s U.S. action was fairly muted.
For the record, Roubini said, “”It has been widely reported today that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook. Despite those reports – however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”
“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.”
“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anaemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.”
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.”
“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.’
While Roubini is talking about exiting the strategy of easing fiscal policy, officials in China are warning that said policies may already have caused some danger in the form of risky lending in the real estate market. Hmm. That sounds familiar.
“Liu Mingkang, chairman of the China Banking Regulatory Commission, urged banks to guard against projects that have falsified or inadequate capital and risks in the real-estate market, according to a statement on the commission’s website,” reports today’s Australian.
“Mr. Liu said banks should strictly follow criteria for granting loans on second mortgages.
Banks should also closely observe capital adequacy ratio standards and ensure the quality of loans, Mr. Liu said. The foundation for a sustained economic recovery was still not stable, Mr. Liu said, adding that the global financial situation was still fluctuating.”
China’s lending boom was instigated by its official monetary and fiscal policies and will end up causing a bubble in household debt, along with inflated real estate prices. But in the Western world-as Roubini pointed out-the household debt bubble is gradually migrating to the public sector, where deficits and debt are rising.
Australia’s government debt and deficit levels as a percentage of GDP are still small compared to Japan, the U.S. and the U.K. But in a world with a capital crisis, even smaller deficits may be hard to fund. And maybe that’s why the Australian Office of Financial Management is looking for back-door ways to tap your super.
The AOFM is working with the ASX to list government debt offerings so that you, the individual investor, can buy them as easily as you buy stocks. The AOFM reckons there’s $30-$40 billon to be had in that market. And when you’re selling around $700 million in debt once a week and $300 billion over the next three years, every little bit helps.
The AOFM’s Chief Executive Neil Hyden told the Age, “We want to see whether we can expand the market for our bonds.” That’s probably a good idea, tapping domestic super annuation funds. Why?
Well, as we pointed out last week, the Aussie banks seem to have lost at least some of their appetite for snapping up government bond offerings. It’s time for the government to find another creditor. This is the trouble when you become an endemic borrower. You always need a new fix, a new supplier.
“Ken Chapman, the ASX’s general manager for new markets, said he would expect retail transactions would average $50,000 if government bonds were traded on the ASX. Mr. Chapman said government bonds would probably be attractive to investors nearing retirement age or already in retirement due to the security of the asset class. He said it would not be unreasonable to expect that 10 per cent of self-managed superannuation holdings – worth between $30 billion and $40 billion – would eventually buy government bonds through this system.”
At least those who do have a self-managed super would be able to make the choice about how to allocate their assets. With nearly $400 billion in self managed super assets, it’s not a small amount. But the bigger prize is setting up a retail government bond offering that super funds themselves can access, and invest in without their clients being any the wiser. More on super tomorrow.
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