Tuesday, 27 November 2007

Why A US Recession is Inevitable

Nouriel Roubini of RGE monitor is the preeminent bear market economist. A lot of his calls of 12 months ago were ignored however the bad news for the goldilocks camp is that he has been right on just about every one one of them.

Roubini has been consistently out in front of the credit crunch and housing debacle and has been predicting a recession for some time. He has recently become even more bearish and has shifted his stance to a hard landing scenario for the US economy.

If you have been asleep for the last 6 months Roubini's latest blog post summarizes all the details of what has led to an impending and unavoidable recession. I have quoted the last two paragraphs however I recommend reading the entire post.

Liquidity and Credit Crunch in Financial Markets is Back to Summer Peaks, Only Much Worse and More Dangerous

And now a perverse cycle of financial conditions and credit crunch worsening leading to a worsening of the real economy and, in turn, a worsening of the real economy increasing the financial losses and worsening the liquidity and credit crunch is creating a vicious circle that has significantly increased the likelihood of a now effectively inevitable US recession and of a global economic slowdown. Bernanke and Mishkin know a lot about the “credit channel” and “financial accelerator” effects as they have extensively written about these in their former academic life. This vicious circle is leading to fall in asset prices, fall in net worth, deleveraging, tightening of the quantity and price of credit and fall in durable and non durable spending by households and financial and corporate firms that, in turn, will worsen the financial conditions.

And indeed a saving-less and debt-burdened consumer is now on the ropes and at a tipping point as it is buffeted by a variety of headwinds: the beginning of the holiday season was weak as U.S. consumers spent on average 3.5 percent less during the post-Thanksgiving Day holiday weekend than a year earlier; add to this the most recent gloom in the auto sales, in consumption of durables and the worst housing recession ever . The combination of a severe and worsening liquidity and credit crunch, oil prices close to $100, a worsening housing recession and its wealth effects on consumption, a weakening labor market and a consumer that is buffeted by severe negative shocks means that a US recession is by now inevitable and that the rest of the world will not decouple from the US hard landing.