Nouriel Roubini: Dr. Doom's moment in the spotlight

Call him what you want: Dr. Doom, a permabear, a perpetual naysayer, a peddler of pessimism. It doesn't matter, because economist Nouriel Roubini predicted what is happening now. He is vindicated, and is the subject of this long and generally sympathetic profile in the New York Times Sunday Magazine:

"... Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. ... and is making others see it too: the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things."

Roubini's assessment of what's next, if you haven't read it lately: The crisis in mortgage debt is only the first wave of a rolling financial disaster that will ultimately expose weakness and bad underwriting in almost every kind of debt in America: commercial real estate loans, corporate debt, credit-card debt, student-loan debt, etc.

Like I said, Dr. Doom.

My favorite takeaway from the article: Almost without exception, economists as a group are too optimistic; large groups of economists are almost always unable to see recessions coming:

"A recent study looked at 'consensus forecasts' (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.

-- Peter Viles
Thoughts? Comments? Read Roubini's blog here.

Comments

[original thinker]

Great story on Roubini: The man who knew too much.
Peter, I hope you will keep his comments in the blog
mix here.

Also, I'm beginning to note a marked difference
between your blog entries and those of the "visiting"
editors. What helped make this blog special was
its personal touch. Ultimately, no position or take
on a subject is interesting unless it is personal.
It's is the poster's comments which anchor the
editor's pov. LA LAND has suffered since
this shifted and the number of comments appears to
be down.

[E]

Notice how they give him the name Dr. Doom?

It's really just to discredit him as they have tried to do so many times in the past.

Think about it.

Your average knuckle dragging citizen doesn't read the newspapers. (American Idol anyone?) If they happen to hear something about him they can easily dismiss whatever it is they are told because Roubini is always characterized as a "Chicken Little".

But He's right.

Poverty and hunger will be the new "black" in our country.

[desmo]

"Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later"

Jack Keyser fits in this group.

[OverIt]

Maybe this excerpt from an interview with Robert Shiller can explain this tendency towards over-optimism a bit.

"There's a famous book written by Irving Janis, who's a psychologist, about 30 years ago, called Groupthink. He's a social psychologist, and he points out how even expert groups can make very colossal errors. He did a number of case studies in the book, and what tends to happen—suppose you imagine yourself and a group of experts who seem to have converged on an enlightened opinion which has arguments to support it, and it has prominent influential people saying that. It can be difficult for someone to stand up in that room and air what seem to be half-baked or half-formed doubts about it. It can be kind of damaging to your reputation."

[amir]

Roubini's analysis is correct in many things. However, he is not a prophet. Nobody can predict the future.

There's no doubt that America is a nation addicted to debt in all its forms and the day of comeuppance is coming. However, this economy is still about a third of the world economy and a world financial crisis usually leads to wars, regional or global. How that ends? nobody knows.

[CD]

Patrick.net, Nouriel Roubini and Calculatedrisks are my heroes. Saved me from armageddon. Still, Peter Viles you did a great job informing the people here.You allowed it to happen.Too bad we have to share this blog with Sam Zell 's other journalists. Can you fire them ?

[puckhead]

Really, economists have lousy track records in calling recessions. They also have a lousy track record in calling financial breakdowns and the end of our economic world. Take a look at Amazon and see how many people have written books and called for nuclear economic meltdowns in the last 30 years. I'm still waiting for one of these "experts" to be right. If you believe in Dr Doom, then liquidate all of your stocks, bonds and cash because they'll all be worthless. Short the market and buy gold and other commoditites. Simple play, put your money where your mouth is. It's easy to latch on to a doomsday scenario. It's hard to do something about it.

[TWillie]

Kudlow & Co laughed at him and havent had him on lately. Here is my local flavor in his honor. The people buying houses today at "rock-bottom" prices will be in foreclosure themselves in 2 years.

[anonymous]

Finally, Peter. A link to a real economist. The blog rarely has content that gets the big picture. Instead of the usual, "CNN/Newsweek predicts a recovery Q1 2009. The LA market is just a leaf on this tree of disaster.

[aj]

Hi Pete,
A hat tip to "original thinker"...
I have followed and truly enjoyed reading the LA Land Blog for what seems a long time (from the East Coast). Although, I do appreciate the new "links", I am getting the sense that there is a possible cutback in personal attention. It could be percieved as easy "offshore outsourcing" to just post links.( I am sure this is not the case :)) It is the personal touch that makes the difference ultimately.
I am still tuning in as they say every day and enjoy the blog immensely. Thanks and keep up the wonderful effort and work!
p.s. I am still convinced that the oil bubble which is now in a possible deflation is the machinations of the powers that be at the major hedge funds to compensate in their portfolios for the massive losses in the subprime/alt-a.
And soon to be other debt losses..INMHO
aj

[mbob]

Amir:

+1

Faber may only be right 50% of the time, almost always in down markets and Richard Russell's Dow Theory is just a bit better. Charlie Minter's "how low can it go" chart is a hair-raiser. The Shiller Case index is hard to refute. The Implode-o-meter has been drum rolling its grim tattoo for years now. Yet all are consistent in saying

A. government economic figures are manipulated for political reasons

B. housing and credit card debt are trailing indicators

A vast, wrenching economic dislocation is already at hand. Debating that smacks of talk radio stuff.

I went by our store front church today with some extra fruit from our trees. Middle of the month, the food pantry is, for the first time, bare. That's my personal tell-tale about how bad things are right now, let alone when the Alt-A's reset and government services (except salaries) really start to get cut back.

[justlooking]

original thinker said:
LA LAND has suffered since
this shifted and the number of comments appears to
be down.

I disagree. I've reduced my viewing and posting in this blog because I read the same old opinions, predictions and pontifications. The opinions of the regular contributors are predictable. It's really become more of a gathering place for like-minded people to support each other.

This was bound to happen because posters who deviated from the majority were chastised, their comments sliced and diced and continually ridiculed.

[Keith]

I love critics like you, Puckhead. You're so mentally simple. People like you listen to talk radio, and spit back the strawman arguments you hear. My favorite arguements take the form of:
1) What are you going to do (fill in absurd action)?; or
2) In x of the last y situations like this, everything was fine.

Tens of millions of people with your Laugh at Chicken Little attitude are riding their homes down as their entire down payment vanishes and they end up owing tens or hundreds of thousands of dollars more than their house is worth. And millions more are now listening, just like you, to the securities industry's statements about markets always going up.

Sit tight Puckhead. Do not sell. You put your money where your mouth is. I have. I made money from the Bear Sterns collapse, and I have a net short position using puts and short ETFs. Make sure sure you have every penny long. That way I can get a good laugh at your expense as the stock market falls another 25% to 50%.

I will be happy to argue points with intelligent people. But people like you who offer mockery with no thought, I like to see suffer.

[tedson]

I was charged $105 for a $12 overdraft at Bank of America and was not able to correct this injustice with them. I am thinking of pulling my money out and wondering is they are in financial trouble particularly after buying Countrywide which is an affiliate of Indymac Bank. Anyone know about the condition of Bank of America?

[puckhead]

Keith,

Well, seeing how my house will be paid off in a few years and other than my mortgage, I don't have any debt, my firm is still hiring like crazy and I just go a nice raise from my last eval, let's just say I'm not exactly sweating it. Bear's also been very good to me. Bought it 5 years ago and sold it last fall as the housing market was imploding. If you've been net short the market since the Bear collapse........................HA HA HA HA HA HA HA HA HA HA!!!!!!!!!!!!!!! Sorry, I've been in this game way long than you and one thing I've learned is that you never take pride in other's loses. It's just bad taste and bad karma. Keith the teeth, I'll make an exception for you. I've been net short plenty of times over the years, but always as a trade or targeting a specific stock. Targeting the market last fall expecting a 20-50% decline was a very smart play. Targeting it now and expecting a further 20-50% is a Keith play, ie someone who's looking at what he believes in rather than what staring him in the face. Unlike you, I wish you don't loose too much of your money.

[LA-renter]

tedson, I feel your pain.

My wife racked up a slew of overdraft fees (from B of A) in a single shopping spree. Like you, our fee total was well in excess of charges.

According to a recent NPR news story, banks are aggressively promoting fees to recover from past losses. For instance, the story pointed out that while B of A could (1) just refuse the card purchase on an overdrawn account or (2) have the cashier inform you that the account is being overdrawn. Instead, B of A would prefer to charge you for each consecutive overdraft.

Nice, huh...

I can't speak for you, but I may lose control of my limbs and inadvertently drop a brick through one of those big panes of glass at the local B of A... That would be a shame because then both B of A and I will be out $105.

[LA-renter]

I'm surprised that Roubini is so beloved by the blog's commenters.

Did anyone notice in the NYT story that

Roubini "applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns... [Roubini] believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments)..."

Hmm... Sounds like Senators Dodd and Frank to me.

Analysis tends to personalize our debt, mortgage and bubble problems. We blame it on extravagance or immorality, or amorality. Or it's a sign of American degeneration.

But this cannot be the case. The housing bubble is global. Bubbles in commodities are global.

I fear that world is saturated with investment money. Insufficient outlets for investment with a real return has created the need for fictional investments, like bubbles and debt... in which case, we're in for more trouble ahead.

[CathyG]

Friendly piece of advice, Puck. Don't commit CUI - commenting under the influence.

[Steve]

RE is local, where I live home prices are firm and rents are up 20% from demand. Tedson I would not put a dime in in a national bank, especially B of A. Take a look at Midwest regional banks with no exposure to CA. A great bank I use is 1st Bank based in CO, one of the strongest and most secure. With online banking it is relatively simple or better yet, just get out of the hell hole as soon as possible.

[puckhead]

Yes CathyG, I was also drunk 3 months ago when the majority on this board had their collective panties in a bunch and was predicting $200 oil, $10 gas, the Fed jacking up interest rates to 7%, the dollar becoming worthless and the economy on the brink of biggest meltdown since 1929. It was drunk me who said 3 months ago that;
a) we might see $150 oil but we're close to the top of oil in the near tem and that fundamentals do not support these levels
b) oil and other commodities were bubbles and would see significant declines
c) the US dollar would strengthen over the Euro and other currencies towards the end of the year
d) the drop in oil and other commodities and the slowing economy would moderate inflation the 2nd half of year
e) because of d), the FED would hold rates steady until we see some growth in the economy
f) the markets would finish the year well off of the lows of the year

Not bad for a drunk. BTW, doing the above has been a big part of my job for the last 20 years and I get paid pretty well doing it. Ya bunch of f'ing amateurs.

[Keith]

OK Puckhead,

There's no fool like an old fool. It's August 18, 2008. I'm short. You're long. I'm currently even for the last 6 months on my positions. Is the S&P 500 a good proxy for the market? I made money betting a hedge fund manager that the S&P would drop in 2001. He was a perma-bull cheerleader like you.

I had hundreds of conversations with people like you about housing starting in early 2004 when I decided that the bubble was out of control. Prices are back to that level, still falling, and every person I know who bought since then is upside down.

Have a good ride.

[The original RZ]

I often question economists' political motives when they make predictions. I remember Alan Greenspan backtracking a few times on things he said after the Bush administration came out with a contrary opinion.

I don't have an economics degree, and only took a couple of econ classes in college, but I made similar predictions to "Dr. Doom" just based on common sense. All I did was look at how quickly housing prices went up and how many high priced homes were selling, and at how the median household income didn't rise to match home prices.

[The original RZ]

"The people buying houses today at "rock-bottom" prices will be in foreclosure themselves in 2 years."

TWillie, can you tell us why you think this will be the case? Thanks.

[puckhead]

Keith,

Me a permabul??????!!!!!!!!! Oh man, my bosses would have a good laugh over that one. Basically I could not give a rats ass which way the market goes as long as it goes in a direction. I just let the market tell me which way it wants to go instead of me telling the market where I think it should go. Based on the direction of the dollar, oil, other commoditites, weakness abroad and significant events that have already happend (Bear, Fannie, Freddie, Indymac), and the FED doing everything it can to keep the economy going, it's telling me it wants to go up. You tell me, what events are out there that take the market down another 50%?

[Keith]

Puckhead,

I would be happy to go into it, but I'm not sure how quickly we'll wear out our welcome on this real estate board. (as an aside, I am not always bearish on stocks, but I have been for almost a year, and went net short about 6 months ago) In a nutshell, I don't care what has happened so far. In my view, every indicator points south. Without exaggeration, I do not see anything as oversold. A simple indicator, which I know is easy to criticise for a hundred reasons but which still has value, is the P/E ratio. The P/E ratio is a measure of confidence as related to earnings. It is over 15 right now for the S&P500. If profits fall, prices have to fall to maintain that 15. But in past recessions, the P/E has fallen as low as single digits. If the P/E falls to 10, prices have to fall by 1/3, and that is if profits fall no further than they have. But financing across the board from credit cards to mortgages to SBA loans to LBOs has dried up. So economic activity will be drying up. Which means profits will fall more. Which means that we could see the S&P 500 fall by 50% from here. If it takes a couple years, and inflation is high, then a 50% real drop will be a 30% or 40% drop in nominal terms. But it's not rosy either way. And maybe we'll get lucky and it will only fall 25%. But it's going to fall.