Nouriel Roubini: Has Pessimism Worn Out Its Welcome?

Nouriel Roubini, whose pessimistic notes to investors have become redundant, has passed along his latest predictions of the economy and, to hear him tell it, we are all going to hell.

At his website, he makes three observations, which sound a good deal like those that he makes at public appearances all over the world.

The first is that “I expect that while the rate of US contraction will slow from -6 per cent in the last two quarters, US growth will still be negative (around -1.5 to -2 per cent) in the second half of the year.” In that prediction, he is out of step with what is probably a majority of economists who look for a turnaround before the end of the year. Roubini has on his side the fact that he has been mostly right in his forecasts, at least during the last two years.

He also sees not end to the catastrophe in the banking sector. “Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. ” Since these numbers are similar to IMF calculations, they are not novel, but they imply strongly that American banks will have to raise tens of billions of dollars in new capital. Since private and sovereign investors are unlikely to provide the funds, Secretary Geithner will have to return to Congress, hat in hand.

Finally, the stock market is in for a beating which will at least match the one it took earlier this year. “While this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.” Sell stocks now, or suffer holders’ remorse.

The only silver lining in the report is that Roubini believes that the global economy has dodged a depression. Cold comfort.

Douglas A. McIntyre