Flip-Flopping Roubini is Bearish Again

Written By Brian Hicks

Posted August 20, 2009

If Nouriel Roubini’s near-term goal is to discredit himself as a respectable source, he’s doing a good job… flip flopping between bearish and bullish sentiment within weeks.

It was July 2009 when he was bearish on the economy, even pointing to risks of a double dip recession.

Then, just last week, he was slightly bullish, predicting a global recovery by year end. But on Monday, with the market down 180+ points, he returned back to his signature pessimism.

According to Roubini these days:

20 months into the US recession-a recession that became global in the summer of 2008 with a massive recoupling-the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were-as is most likely-to be over at the end of the year, it will have been three times as long and about fives times as deep-in terms of the cumulative decline in output-as the previous two.

Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.

Data from the US-rising unemployment, falling household consumption, still declining industrial production and a weak housing market-suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.

He even went on to reiterate his fears of a double dip recession.

And this time, let’s hope he sticks to his guns and doesn’t flip flop again.

As for myself, I remain short the market, as are a number of other respected sources, including John Hussman who says if you “look carefully at the economic data that shows improvement, and adjust it to reflect the impact of government outlays, it’s hard to see anything other than continued deterioration in private demand and investment.”

“What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7 percent of GDP,” Hussman writes in a note to investors. “That sort of tab will undoubtedly buy some amount of Kool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down.”

What’s to get excited about these days?

First of all, Earnings Aren’t That Great

Take a look at Home Depot (HD), for example.

They reportedly announced “better than expected” earnings of $1.1 billion for the second quarter. Though, it didn’t matter that the number was below last year’s earnings of $1.2 billion… a scary reminder of just how bad most company earnings have been (but not fairly reported).

But if you read the national headlines, all is well. Home Depot 2Q Beats Expectations, they would say. But what the press leaves out is that a big piece of the $1.1 billion earnings came from one-time. For HD, about $410 million came from cutting one-time costs. And this “better than expected” report isn’t repeatable.

On top of that, HD sales actually fell 19% to $19.1 billion. Same-store sales fell 8.5%.

So, if you want to hear about the reality of companies like HD, sales are down a bit, profits are down, and same-store sales are down a lot.

In all honesty, if companies like HD continue turning in these “better than expected” numbers, they’ll be out of business in years.

And this is only one example out of hundreds of similar stories.

Second, Commercial Real Estate is Crumbling

Bernanke. . . even Janet Yellen, president of the San Francisco Fed, are nervous wrecks over it.

That’s because they know that $2.2 trillion of U.S. commercial properties bought or refinanced since 2004 are worth less than original prices. They also know that prices have fallen so much that about $1.3 trillion of properties either lost down payments or are close to losing it.

And that just includes office, industrial, multi-family, and retail properties. Tack on hotels, and you can add billions more to those figures.

Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks).

Says Yellen:

The next area of significant vulnerability for the banking system, particularly for community and regional banks with real estate concentrations, is income-producing office, warehouse and retail commercial property. . . Our biggest concern now is with maturing loans on depreciated commercial properties.

Borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions. In some cases, borrowers won’t have the resources to refinance the loans.

Over the next five months alone, troubled U.S. commercial real estate loans could double to $100 billion, as delinquencies rise and financing remains tough to secure.

Things are so bad that the Fed is extending a program to help investors buy commercial property loans, as $83 billion of office, retail, industrial and apartment properties have fallen into default, foreclosure or bankruptcy this year alone.

Third, Option ARMs are resetting

Already, about 40% on Option ARM mortgages written in 2006 and 2007 are delinquent. And the worry is that when the interest rates and payments recast to higher payments (as loan contracts call for), we’ll see even more delinquencies. Heck, these people could see borrowers are forecast to see payments that are 50% to 80% higher than what they’re struggling with now.

Worse, already a record 13% of U.S. homeowners with a mortgage are either later on their payments or in foreclosure, as the current recession (not over yet) raises the numbers of those unemployed, according to the Mortgage Bankers Association.

But what’s scary about this news is that it’s just not the adjustable rate or subprime mortgages… but prime fixed rate mortgages, too. We’re talking about more than 30%, as compared to last year’s 20%.

The biggest problems are still in the bubble states of Arizona, California, and Nevada (which all account for about 44% of all new U.S. foreclosures). Florida leads the country with 12% foreclosure, which clearly leads many to believe “we have not seen a bottom in Florida.”

Fourth, jobless claims are on the rise

New jobless claims last week soared to 576,000 – a worse than expected number. We need to see fewer than 500,000 new jobless claims per week for a few weeks before an unemployment bottom can be called… and that’s not likely any time soon.

And as we said last week:

Consumers are not spending. No one is lending. Commercial real estate is deteriorating faster. We’re not dealing with the cancerous growth in the banking system. Obama is busy rewarding the fools that got us here. We’re replacing private debt with public debt. Mortgages and credit cards are seeing high default rates. More than 33 million Americans are collecting food stamps, and surprise, surprise, the jobs number was much worse than what was reported.

There are no jobs. Hundreds of thousands of people left off the “real” jobs number frustratingly gave up looking for work. There are no home sales, no mortgages, no expansion, no credit, and a drunken Congress on a spending spree… and you want to tell me this is a recovery?

Foreclosures are still rising… and will continue to rise. Jobless claims “unexpectedly” rose to 558,000, as reported today. Oh, and as for the “real” jobs number, ask the 300,000 people that were left off the count because they gave up looking for work in this environment.

This is the cold hard reality. And investors are buying this market on news of a recovery.

What recovery?

Fortunately, even in the worst of times, there are bull markets to be found… and we believe we’ve found two.  One’s in biotech and the other may soon be in hotels.

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