Stocks not yet pricing in economic reality says Roubini
Posted on 20 September 2010 with 2 comments from readers
The man who first predicted the US housing crisis still thinks the stock market has not correctly priced in the outlook for the US economy.
He gives a 40 per cent chance of a double dip recession. But he says one per cent growth in the second half of 2010 is more likely, still well below the market expectation of 2.5 per cent.
Nouriel Roubini has been forecasting a correction for stock markets for almost a year and will probably be right in the end. Some analysts now reckon quantitative easing policies may have created so much money in the global economy that this will drive stocks back up. But that would mean inflation risk, something that is again not yet priced into stocks at present levels.
Roubini has a point: stocks look fully priced for a very weak US economic outlook, and vulnerable to a correction. The ECRI Leading Index Growth Rate has never failed to correctly forecast a recession if negative.
It is presently -9.9. This is an independent, non-government institute based in Washington and very reliable. The index is comprised of forward data like shipping, trade, housing, etc.
Also big buyers do not seem very interested in taking a risk on stocks right now. They are waiting for a crash. Gold and silver seem the only winners but would also likely correct in a major market downturn.
2 Comments posted by readers:
Roubini missed the flight..
Ed Note: Who wants to be on board the next Challenger?
I think the learned professor, who is one of the few people that seems to know the appropriate response to a ‘thank you’, underestimates the importance of emotion, and herd instinct, in setting stock prices. Just look at what happens when some obscure merger is announced. The market goes way up. So what if IBM buys XYZ Company. It changes nothing, yet stocks zoom up by over 1.4%. And even I knew the recession was over. It is the rise of the machines.
The emotional factor of the Republicans gaining control of the US House in November, is why I’m sticking with my 11,800 prediction for the DOW on Dec. 31, 2010. (That probably means get ready for a major crash.)
“They (Wall Street) don’t mind (government) intervening when it helps THEM.” President Barack Obama, 20 Sept. 2010.
The head of housing company Toll Brothers, Bob Toll, is saying on CNBC TV that another stimulus is needed, and that those making over $250k or $300k, can pay more taxes, without hurting the economy.
Here is an interesting fact. It took nearly 100 years to finish construction the US Capitol Building. During the American Civil War (600,000 killed) , President Lincoln had to keep an army of 10,000 troops around it to keep the Confederate army from grabbing it. And we think Obama has problems.
Mort Zuckerman, after discussing the US housing market mess, just said that if housing continues to fall, “We will be lucky if we can avoid another serious downturn in the economy.” Next year might be rough. Watch David Faber’s ‘House of Cards’ on CNBC, if you haven’t seen it. It won awards for a reason.
There are two things that are absolutely guaranteed to go up in value in the future, crude oil and high quality farm land. The farm land will take longer to go up than the oil.
Ed Note: Yes but if the US economy tanks so will oil… and farms sold for peanuts in the Great Depression…