Econ: The Forecast is...?

[Naked Gents Rut]

You think I'm a fool for having gone out of my way to prepare for a longer journey.

No, I think you're a fool because you're being a catastrophist. You're no better than liberals who think the polar ice caps are going to disappear in the next five years.

[notyoueither]

Suit yourself.

I hope you make a nice profit on your Citi shares.

[Naked Gents Rut]

I don't own any stock. I'm a student.

[notyoueither]

We all have a lot to learn.

[Naked Gents Rut]

BTW, the Minneapolis Fed has updated their "The Recession in Perspective" page, much for the better.

http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/index.cfm

As you can see, this is most likely one of the five worst recessions since WWII.

[notyoueither]

I'm not having to look for this stuff. It's popping up all over the place.

Of course, I'm a catastrophist, and students are now the experts.

http://www.dailyfinance.com/2009/02/26/bill-gross-the-747-billion-bond-man-declares-the-death-of-equ/

Bill Gross, the $747 billion bond man, declares the death of equities

Peter Cohan
Feb 26th 2009 at 10:00AM

Filed under: Economy, People, Investing

Stocks are dead for the rest of your life. That's the gist of my exclusive interview with the head of PIMCO Total Return -- the biggest bond fund you've never heard of. But you should know PIMCO because its chief, Bill Gross, is one of the world's most powerful bond investors.

Last September it looked like he was "helping" the U.S. government by advising it to put Fannie Mae and Freddie Mac into conservatorship. While this wiped out stockholders, Gross's Fannie/Freddie bonds were boosted by the U.S.'s decision. In addition to running a $747 billion asset management firm, Gross's PIMCO advises the U.S. on its $251 billion commercial paper program and its $500 billion fund to buy mortgage-backed securities. Gross shared his economic outlook with me yesterday in an exclusive interview -- and he's not optimistic.

I've never met Gross so it came as a complete shock when I received an e-mail from him yesterday morning. I was quoted in the latest issue of Fortune suggesting that he might be too powerful for the U.S.'s good. How so? Because he's such a big buyer of government debt -- which it's selling in huge quantities to finance various bailouts -- that he could use his leverage to threaten to walk away unless the U.S. sells to PIMCO at a favorable price.

On Monday I gave a TV interview in which I suggested that the U.S. might consider avoiding this potential problem by giving PIMCO's advisory contracts to another firm that does not have the potential conflict between buying U.S. debt and advising the government.

Gross saw the interview and e-mailed me. I replied by telling him that I had some questions about PIMCO and his views on economic prospects. I found his answers informative and insightful and he agreed to let me post on his economic outlook which is very grim for those who believe that stocks outperform bonds. In Gross's view, the current economic contraction is killing the animal spirits that drive risk taking and that's contributing to the death of equity capitalism as we've come to know it.

As Gross told me, "things will never be the same. Risk taking has been destroyed and any animal spirits must come from Washington. Global growth rates -- low, low, low -- asset classes will be readjusted for that outlook. That is -- stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle."

This argument is great for bond fund managers such as Gross since it would tend to drive people out of stocks and into bonds. But his point about stocks as a subordinated income vehicle is interesting. If I understand him correctly, he views stocks as the bottom of the liquidation hierarchy -- meaning that if a firm files for bankruptcy, all the other stakeholders -- such as bondholders, lenders, and preferred stock holders -- get their money before the common shareholders see a dime.

This is why so many common shareholders are getting wiped out. And in Gross's view, growth prospects are so dim that there is no point in owning stocks since common stock investors will not benefit when there's no economic growth. Moreover, they'll be last in line for any dividends that might be available.

Meanwhile, Gross has an interesting analysis of how we got into this mess. He attributes it to too much borrowing, weak regulation and greed. He also thinks that the U.S. is going to have to come up with as much as $5 trillion to fill the capital hole in the banking system.

As Gross said, "The cause of the current situation was too much leverage leading to over consumption which was facilitated by lax regulation and good ol' fashioned greed. Human nature will never change but our institutions will. Not sure policymakers understand what needs to be done -- there still is a $4 trillion to $5 trillion capital hole that needs to be filled but politics may inhibit necessary action. Bernanke and Co. get it though and have more freedom and flexibility -- they are independent -- for now."

These are sobering thoughts from one of America's most powerful financial minds. My hunch is that over the medium- to long-run, we'll revive capitalism through venture-backed technology innovation. But I am not sure how soon that will happen. Meanwhile, what do you think of Gross's comments? Do they make you want to sell stocks?

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

[Agathon]

At least this is probably the end of the mathematization of politics. Thank God for that. Perhaps we will have to go back to the old way, where someone lending money uses common sense and judgement of character.

Did you know that the British Labour government had a thing called the "Community Vibrancy Index", which was a mathematical expression that was used to drive government policy? And these people thought Stalinism was crazy...

[notyoueither]

The CRTC requires me to give equal time to opposing points of view. I'll bet Drake complained.

http://business.theglobeandmail.com/servlet/story/RTGAM.20090227.wbloodpointerhome/BNStory/crashandrecovery/home?cid=al_gam_mostview

Divas of doom find their fame in peddling the direst of fortunes to pessimistic masses

Bleak is chic as demand grows for dark oracles of blood-filled streets and 'zombie banks'

IAN BROWN
From Saturday's Globe and Mail
February 27, 2009 at 11:50 PM EST

The financial headlines can make your eyeballs bleed. William Burroughs, the great Beat writer, could have fashioned one of his cut-up poems out of a single day's fare:

Markets tumble as bank fears linger
Will invoking the Great Depression bring it on?
Manulife needs to confront its reality
There will be blood ...

The boom in doom reached a new peak Tuesday. That was the day Harvard financial historian Niall Ferguson declared, in this newspaper, that the global recession is about to produce blood in the streets, "civil wars" and toppled governments. By Friday it was the No. 1 all-time best-read story on globeandmail.com, and a global Internet tizzy as well.

Bad, bad news has been avalanching ever since. Nouriel Roubini, New York University's famous Dr. Doom, is predicting the collapse of Eastern Europe. "The financial system is actually imploding right now," the professor implacably informed his TV audience this week.

Meanwhile, Standard and Poor's has downgraded Ukraine's foreign currency rating to CCC-minus — that's seven levels below investment grade, ladies and gentlemen, the equivalent of your dope-smoking teenage son getting a mark of 13 in physics. The prospect of a default has European bankers sprinting for the Valium.

In Toronto, Paul Volcker, a former chairman of the U.S. Federal Reserve Bank, has admitted he has no idea how to fix the mess.

In New York, Nobel-Prize-winning economist Paul Krugman is calling for the nationalization of banks. In England, storekeepers are posting a sign in their windows; Keep Calm and Carry On, it reads, a slogan revived from the Blitz. The new bad news is so bad, even Bernie Madoff has been knocked out of the spotlight. By now he barely qualifies as a shoplifter.

This is the way we live these days, hiding under the blankets. But as frightening as the future looks, we seem to enjoy being told how much it's going to hurt. Dire news makes us feel like grown-ups, serious once more. We might consider seeing a collective psychiatrist. At the very least, we should take a close look at what we're afraid of.

Niall Ferguson wields the whip of shame the way we like it. "Niall is a self-publicist and a controversialist," one of his fellow Cassandras on the global lecture circuit says. "That's his stock in trade."

The Scottish-born, Oxford-trained, Harvard-seated professor's fourth book, The Ascent of Money, is currently No. 4 on the New York Times's business bestseller list. His website is stacked with his latest pronouncements. They range from a discussion of pre-First World War central bank incompetence, which led to the rise of fascism and Hitler (his ever-ready theme), to an imaginary economic retrospective of 2009 (predictions include an assassination attempt on Barack Obama by al-Qaeda next Thanksgiving).

He works the rhetoric of doom like a master. Is violence inevitable because of this crisis? "There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]"— but we already knew that, where's the evidence? "It will cause civil wars to break out that were dormant" — again, where, and were they about to break out anyway?

Prof. Ferguson's best stroke is to nuzzle up to the Direst Prediction of All, without touching it. "I don't see it producing anything comparable with 1914 or 1939." By then, of course, the war horse is out of the barn.

Most of all, he's a good storyteller. His prose style is as brisk as his speeches are lucrative, at $50,000 per. Don't complain: You deserve it.

Nouriel Roubini, the other dark oracle of the Collapse of '08, is known to fans as "The Professor," which is what he is at the aptly named Stern School of Business at New York University. He's also the chairman of RGE Monitor, which provides a relentless barrage of online bleakness about the global economy, assembled by teams of economists and analysts. The reports sell "to an average retired person," the RGE receptionist explained recently, "for about $5,000."

The professor in New York isn't as flashy as the historian in Boston, but he is easily as respected. It was Prof. Roubini who first predicted, back in the day (2006) that the housing collapse would produce the credit squeeze. (He underestimated the losses, though, at $1-trillion, versus a reality of as much as four times that number.) "People called us lunatics," Christian Menegatti, the managing editor and chief economist of RGE Monitor, recalls.

Lately, Prof. Roubini has been ratcheting up the fear factor with talk of "zombie banks" — liabilities greater than assets, hence worth "less than zero." His expressionless delivery —the man rarely blinks — has the same staggering effect that kryptonite had on Superman. His mantra is "the worst is yet to come." When the recovery does arrive — growth of 1 per cent or less, at the very end of 2010 — it will be so feeble "that it will feel terrible even if the recession is technically over."

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Excuse me while I lie down in front of that truck.

Compared with Profs. Ferguson and Roubini, other economic alarmists are practically upbeat. At 86, Paul Volcker is the Eeyore of the woe-wringers: He doesn't threaten dire decline so much as he renders you catatonic with the incessant unfathomability of it all.

"I have never, in my lifetime, seen a financial problem of this sort," he recently told an audience in Toronto. "I'm not saying it's going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either." Aiiiieeeeee!

Why do we hunger for their dark predictions? It's an interesting question. Maybe Tolstoy was right: Unhappiness tells us more about ourselves than optimism. Maybe the prospect of a sharp cleansing purge makes us feel better about our languid lust for pleasure: ow trumps oooh. Maybe, as Martin Wolf, the renowned chief economic pundit for the Financial Times (and no stranger to the international doom circuit) says, "This is a shock. And in periods of shock, people get real. They ask big questions about their lives."

"There is a peculiar human need to contemplate disaster," Vivian Rakoff, professor emeritus in the department of psychiatry at the University of Toronto, says. "Because there is the sense that if it gets bad enough, we can start over again."

Things are different here in Canada. When I telephoned Wendy Dobson, a former director of the C. D. Howe Institute who now teaches at the University of Toronto, she said "Calm down!" before I even said hello. Dr. Dobson takes Niall Ferguson's alarms with a grain of the old salt: "Predictions of civil war and depression?" she says. "He's right — in some small, badly governed country." And while she admires Prof. Roubini's foresight, she claims he occupies "the bleeding edge of prognostication," so far out in the future that's it's hard to be anything but cautious and non-committal about his views.

Optimism isn't common here, but it isn't unheard of. "We continue to maintain the view that a recovery will take hold by the end of the year," Douglas Porter, the chief economist at the Bank of Montreal, said yesterday, "despite the recent wave of downbeat economic releases."

Mr. Porter and Dr. Dobson are rarities: Most economists have an ingrained terror of being caught out as the Dolt of the Century — like, say, James Glassman, who published the ultimate text of optimism, Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market, in 1999, when the Dow Jones industrial average was exuberantly cresting 11,700. Today, the Dow sucks air just over 7,000.

Even worse to be Irving Fisher, the eminent Yale economist who promised Americans the stock market had reached a "permanently high plateau" in 1929, a week before its pants fell off, and 24 years before it pulled them back up to where they'd been. Promise up or down, but down is safer. "What doesn't sell," Mr. Wolf says, "is being in the reasonable middle. If you're going to hear a speaker, you either want a new point of view or a list of calamities."

Today's extreme pessimism is a lesson even the doomsayers learned the hard way. Mr. Wolf has taken of late to talking to his wife about his past economic predictions. "I find all the embarrassment today, looking back three or four years ago, is that I was clearly too optimistic." He wasn't alone. "Nobody came close to being pessimistic enough. That is the most significant feature in the past 12 months. Essentially, what has happened is way more pessimistic than anyone predicted."

Which, oddly enough, is predictable. Even Niall Ferguson and Nouriel Roubini, the most daring doom divas, hesitate to raise the spectre of the Great Depression. "I'm not making the comparison to this crisis," Mr. Wolf says. "I'm not. But without the Great Depression, Hitler would never have come to power." Europeans are especially sensitive to the destabilizing power of severe recessions, to the fact that the Depression in the United States led to fascism in Europe. Drs. Ferguson, Roubini and Wolf all are Europeans.

"The countries with pretty strong democracies withstood it," Mr. Wolf says. "Those without did not. I don't find that so implausible. Really frightened people do really frightening things."

The trick, then, is not to be frightened — to resist not just the urge to panic, but also "the puritanical dislike of the world human beings have made," as Dr. Rakoff puts it, that makes us welcome doom and bust. "This crisis does seem more serious, and I don't want to be an idiot. But I do think that for one of the first times in history, everybody is in it. No one is chortling. It's a single raft of the economy, afloat in the stormy sea."

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[Naked Gents Rut]

You still haven't read about the head of the IMF saying we're in a depression? I've been waiting weeks for you to add that to your fear-mongering repertoire...

[Kidlicious]

"In Toronto, Paul Volcker, a former chairman of the U.S. Federal Reserve Bank, has admitted he has no idea how to fix the mess."

How the hell is Obama so optimistic then? That's his guy. Personally I don't have much faith in him.

[Dinner]

"Meanwhile, Gross has an interesting analysis of how we got into this mess. He attributes it to too much borrowing, weak regulation and greed. He also thinks that the U.S. is going to have to come up with as much as $5 trillion to fill the capital hole in the banking system."

Gee, which posters here have been saying that?

[Barnabas]

I just hope that a lot of third world countries default and stop paying their debt.

[Naked Gents Rut]

Gee, which posters here have been saying that?

Not you. You've been blaming it on Republican deregulation that never existed rather than the bipartisan resistance to increased regulation that did.

[notyoueither]

You still haven't read about the head of the IMF saying we're in a depression? I've been waiting weeks for you to add that to your fear-mongering repertoire...

Why do you seem so emotional about all this?

[notyoueither]

"In Toronto, Paul Volcker, a former chairman of the U.S. Federal Reserve Bank, has admitted he has no idea how to fix the mess."

How the hell is Obama so optimistic then? That's his guy. Personally I don't have much faith in him.

It's his job to offer hope, and to act as he sees best to mitigate the damage and get things back on track again at a short date.