The Man Who Predicted This Crash

Published in Investing on 9 August 2011

Nouriel Roubini has been proven right once again.

At this most difficult of times it is not surprising that we are getting deluged with opinions. Some people are telling us to buy, some are telling us to sell, and some are telling us to sit tight -- they can't all be right.

In the search for the best answer, wouldn't it make sense to listen to someone who has a track record of getting these calls right? But what if this person's views are negative, so negative in fact that he is typically derided as a 'doom-monger'? Should you reject his views as too extreme, or should you take a deep breath, suspend your disbelief, and listen?

Dr Doom

Well, the person I am talking about is Nouriel Roubini. Of Turkish origin, he is not short of intellect, being a professor of economics at New York Stern with a doctorate from Harvard. His bearish tendencies have gained him the nickname 'Dr Doom'.

During his long academic career, Roubini spent a considerable amount of time studying the emerging market crises in Asia and Latin America. In particular, he worked at the IMF in 2001 as it battled the financial meltdown in Argentina.

These experiences were crucial in his calling the credit crunch. "I've been studying emerging markets for 20 years, and saw the same signs in the US that I saw then, which was that we were in a massive credit bubble," he said.

Calling the crunch

On 7 September 2006 Roubini stood before an audience of economists at the IMF and announced that a crisis was brewing. He warned that, in the coming months and years, the United States would suffer a massive housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.

He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of pounds worth of mortgage-backed securities unravelling worldwide and the global financial system shuddering to a halt. These developments would cripple or destroy hedge funds, investment banks and other major financial institutions.

After his presentation people were dismissive -- the moderator of the event even joked, "I think perhaps we will need a stiff drink after that." Two years later, I don't think anyone was laughing. You don't need me to tell you Roubini was shown to be on the money in spectacular fashion.

Roubini's success in predicting the credit crunch turned him from an obscure academic to a major figure in the debate about the world economy. He had become a prophet: a prophet of doom.

Predicting the crisis of 2011

So fast forward to 2010. Despite recovering economies and stock markets, Roubini said that the crisis was not over: "We are just at the next stage. This is where we move from a private to a public debt problem... We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it."

Then, in May 2010, the first Greek debt crisis hit. Here was Roubini's take on the situation: "We have to start to worry about the solvency of governments. What is happening today in Greece is the tip of the iceberg of rising sovereign debt problems in the eurozone, in the UK, in Japan and in the US. This... is going to be the next issue in the global financial crisis."

Roubini had called the financial crisis, the second leg of the Credit Crunch, that is just emerging at the moment.

So, what next?

So, you may be interested in hearing what Nouriel Roubini is predicting right now.

Firstly, is the US and Europe's economic slowdown just a 'soft patch', or is it something worse?

Roubini is clear -- we are likely to enter a second recession. "The first half of 2011 showed a slowdown of growth -- if not outright contraction -- in most advanced economies. Optimists said this was a temporary soft patch. This delusion has been dashed. Even before last week's panic, the US and other advanced economies were odds-on for a second severe recession."

What about the European debt crisis? "...the eurozone periphery is now contracting, or barely growing at best. The risk that Italy or Spain -- and perhaps both -- will lose access to debt markets is now very high. Unlike Greece, Portugal and Ireland these two countries are too big to be bailed out."

So what can we do? Well Roubini recommends short-term fiscal stimulus, rather than the fiscal tightening that is occurring in most countries, followed by medium-term fiscal austerity. He also recommends further quantitative easing and the European Central Bank cutting interest rates to zero.

Perhaps most revealingly, he says: "Another recession may not be preventable. But policy can stop a second depression. That is reason enough for swift and targeted action."

Now, everyone is fallible, and Roubini has got some of his calls wrong in the past, but I am minded to agree with his view that things are going to get worse before they get better. I don't know about you, but I am battening down the hatches.

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Comments

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UncleEbenezer 09 Aug 2011 , 10:03am

Hmmm. Not really so hard to predict, was it? The only harder bit was the timing.

Turning to my own blog for August 2009, I see I called this crisis in an entry titled Prisoners Dilemma and Boom&Bust. But my dates were, as usual, a little premature.
http://bahumbug.wordpress.com/2009/08/29/prisoners-dilemma-and-boombust/

JimDiGritz 09 Aug 2011 , 11:56am

Roubini has called the markets right, but his proposed solutions will just lead to an inflationary money collapse.

diddyda 09 Aug 2011 , 1:12pm

Good call. I have been predicting a UK housing crash for years now. Only a modest correction to date. The worst is yet to come.

Solutions are a much more difficult area. Ideally, spending should be cut to balance the countries books. The amount of waste on politically correct quango's and the like is astonishing. It would take a very brave government to introduce such measures. Although the current administration is a million times better that the last lot, I'm not sure they have the stomach for the tough medicine needed.

Avalaugh 09 Aug 2011 , 1:52pm

doesn't he predicts it every few months, at last he was right but for how long!

jaizan 09 Aug 2011 , 7:32pm

This isn't much of a crash, yet.

k8r4u 10 Aug 2011 , 10:53am

I have been predicting a UK housing crash for years now.

Bound to be right some day, eh ? :-)

Dozey1 10 Aug 2011 , 4:34pm

Like the clever guys who forecast a hot summer (cold winter) every year, and then shout round the houses when they are right; don't hear so much as a whisper when they are wrong.

snoekie 10 Aug 2011 , 6:53pm

I agree with Roubini's analysis, but then in his discipline I am the smallest of pygmies, a virtual ignoramus.

I disagree the QE remedy, it will, merely exacerbate/prolong the problems.

Better the nasty medicine be applied/taken for a quicker resolution.

Isn't his solution merely lumping all the debt onto one card and then applying a deficit repayment plan, a plan that makes repayments, but insufficient to reduce the debt, but adding to it? QE=higher inflation, relief for a month or two and then the higher costs of imports (because of QE) kicking in. Not the answer. In the cuts, export the permitted 'imports' of benefit claimants, cut deeply the foreign aid, 99% wasted and mostly going to govts and corrupt politicians/functionaries of govt.

chrispmorris 11 Aug 2011 , 10:48am

Hello everyone. Just to remind all those out there of a very wise comment that I once heard: "if you keep saying its going to rain long enough, sure enough, you will eventually be right". Remember the story of the boy who cried wolf? All those who are crying out that prices are going to fall in a bull market are treated like (due respect to the website) fools, and then suddenly the big fall comes and they are clairvoyants. Why don't people remember all the times these guys and girls have got it wrong?
Truthfully, there is no forecasting the markets, except maybe to say that if you keep forecasting that prices will rise or prices will fall, you will eventually be proven right. Hey, I know, I predict that sometime in the next century we will enter a bull market. Now, anybody willing to pay me big money to hear me say why?

Thangbrand 11 Aug 2011 , 6:28pm

Robert Beckman, in his book "The Downwave", forecast an 80% fall in housing prices (in the UK).

That book was published in 1983.

JGH03 14 Aug 2011 , 9:42pm

... wouldn't it make sense to listen to someone who has a track record of getting these calls right?

It would indeed. Unfortunately the man who in January 2009 predicted that oil would remain below $40 a barrel for the rest of the year doesn't quite fit the bill.

For a look at how some of hjis other predictions turned out, visit http://www.nicholasvardy.com/global-guru/articles/predictions-of-the-great-roubini/ .

tophernator 18 Aug 2011 , 11:32am

Anyone who could really consistently predict the markets wouldn't be shouting from the rooftops, they'd be sitting at home making millions.

This is the same problem I have with books on investment. Surely any money made from book sales is offset by the potential profits lost by giving away your ingenious secrets?

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