Roubini, HSBC issue financial crash warnings
Posted on 05 October 2009 with no comments from readersAfter US unemployment data last week that confirmed the economic slump is ongoing and that talk of a recovery is premature, two global icons have issued their own warnings on the present overvaluation of financial markets.
‘Markets have gone up too much, too soon, too fast,’ said Professor Nouriel Roubini who first spotted the US sub-prime crisis more than three years ago. ‘I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That (correction) might be in the fourth quarter or the first quarter of next year.’
HSBC warning
Meanwhile, the Financial Times features an interview with Michael Geoghegan, the chief executive officer of HSBC who is convinced that there will be ‘a second global economic slump’ and as a result ‘doesn’t want the bank to grow too fast’.
Roubini’s warning is well timed as financial markets have been uneasy for almost a week and with the S&P up more than 50 per cent from its March bottom of 666 there is a general view that a correction is overdue.
It is also something of a mystery where the buyers have come from in this rally. Small investors have largely missed it and parked 13 times more money in bond funds. Recently share price rises have been concentrated into a few large stocks suggesting bigger players have been driving the market up.
Goldman Sachs wildly inaccurate unemployment number forecast last week, which was altered at the last minute, it considered by some insiders to have been an attempt to break the market rally by making Friday’s jobs data appear much worse than expected.
However, the big debate is now moving on to whether we will experience a correction that will quickly reverse back and then continue the rally, or whether a downward plunge will follow like in the 1930s (see chart comparison below). The bullish rally camp is looking emptier by the day but optimists will not give up that easily.
Liquidity trap
It is hard to see why a rally would resume apart from excess liquidity in the system. But that assumes liquidity is going to get into the economy and not sit on bank balance sheets, ironically waiting for the recovery that only it could produce.
In the meantime, a global economy still starved of credit for private consumption and investment combined with a collapse in global trade not seen since the 1930s points to a continued recession and much lower stock prices. And if the plunge is deep enough then leveraged investors will be extinguished and small investors frightened off stocks for life.
Is history repeating the 1930s or will it be more like the wild gyrations of the 70s? Only time will tell, and it seems The Day of Reckoning is in town.
no Comments posted by readers:
I definitely agree with their assessment. The country is in horrible shape. Deficits are exploding=at least 25 trillion within 5-10 years.
Housing is a nightmare. Alternative documentation loans will be 5-10 times worse then sub-prime. Commercial real estate is the biggest fear with trillions in losses coming as we speak.
Wall street is playing their typical games, saying a recovery is happening and is going up and up and up. Don’t believe it, you will get crushed. Earnings are horrible, we are going much lower. 600-700 is realistic on the S&P 500.
Good luck to everyone,
J
Oct. 6 (Bloomberg) — Nobel Prize-winning economist Joseph Stiglitz said U.S. unemployment will keep rising and should be the focus for policy makers, and gains in the stock market show investors have been “irrationally exuberant” about a recovery.
“There’s a lot of risk going ahead of some big bumps,” he said yesterday in a Bloomberg Television interview from Istanbul, citing housing, commercial real estate and consumers’ inability to pay off credit cards because of job losses. “There’s a very big risk that markets have been irrationally exuberant.”
His comments echo New York University Professor Nouriel Roubini’s view that “markets have gone up too much, too soon, too fast,” and billionaire George Soros, who warned yesterday that America’s economic recovery will be “very slow.”
A rally too far, says The Economist:
Given this outlook, the bears believe stockmarkets have got far ahead of themselves: the S&P 500, having sunk below 680 in early March, stood at 1,057 at the end of September. “If the S&P 500 was at 840-860, I would say this is a natural market reaction to the end of a recession, but let’s get a grip,” says Mr Rosenberg. “The market is up 60% from the lows, not 20%. Normally, it takes three years of recovery before the market is up 60%. The rally has occurred while the American economy has shed 2.5m jobs. This market is pricing in 4% economic growth, but what if there’s only 1-2% growth next year?” he asks.
In addition, Mr Rosenberg says investors should be suspicious that the recovery is so dependent on low interest rates and government action. “What is the appropriate multiple that investors should place on earnings that are being propped up by the government? All asset prices are going up together, from gold to Treasury bonds. People say the rally is driven by liquidity. But when every analyst is talking about liquidity you know the top is near,” he argues.
Conventional analysts tend to argue that on the basis of profit forecasts for 2010, stockmarkets are reasonably valued. But bears doubt that profits will rebound so dramatically. They tend to prefer longer-term measures. Andrew Smithers of Smithers & Co, a consultancy, produced a timely book in 2000 arguing that Wall Street was in bubble territory. On his two favourite measures, the q ratio (which compares share prices with the replacement cost of net assets) and the cyclically adjusted price/earnings ratio (which averages profits over ten years), the American market is still overvalued, by 41% and 37% respectively. As chart 3 shows, Wall Street got back to an average valuation by the March lows, but never looked particularly cheap by historical standards.