Monday, September 15, 2008

Roubini with a Series of Videos on Yahoo Tech Ticker

We've been big fans of Nouriel Roubini [Aug 20: Nouriel Roubini: "Told you So"] and shared most of his thoughts along the way - so we've been in the small crowd that has been proven correct. You can find them here [Jul 14: Reviewing December 2007's Roadmap & Views] Although being correct from an economic standpoint has been a lot easier than a stock picking standpoint, as the market participants ping pong from denial to reality and then back to denial (each denial stage we usually take a big hit). Honestly if we could trade futures on my economic calls we'd be up 30-40% the past few months ;) Unfortunately we have to deal with the actual market. To be blunt, what has me worried are our economic views have been nearly dead on the past year plus as "famous" pundits lived in denial; so if my calls for continued degradation are as accurate as my older calls - I just have a hard time having much faith in this market. Outside of the "hope phases".

Here are a series of videos from Yahoo Tech Ticker shot today. Each clip is of the 3-5 minute variety - it is very important to understand the impliations of all that is changing by the day, hour, or minute.

#1 Top Economist: Americans Should Worry About Bank Deposits if Congress Doesn't Act

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Such concerns are justified, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

In addition, the recent spike in number of banks on the FDIC's "troubled list" is only through June, meaning even that inflated number understates the problem.

The intent here isn't to add to people's anxieties, but Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms

#2 Big Risk: Surging Debt Makes U.S. More Dependent on China, Russia, Gulf States

The demise of Lehman Brothers, Merrill Lynch, and Bear Stearns this year has investors contemplating the long-term outlook for other once-venerable institutions, including Dow members Citigroup, AIG and Bank of America.

But there's an even bigger financial institution with greater debt and an increasing level of bad loans on its books: The U.S. government.

Given the actions already taken, from the Housing Bill to the nationalization of Fannie Mae and Freddie Mac, the U.S. deficit could double to $800 billion in two years, says Nouriel Roubini, of NYU's Stern School and RGE Monitor. (Even worse, the official government deficit figures exclude the costs of the wars in Iraq and Afghanistan, as well as the unfunded liabilities of Social Security and Medicare.)

The big risk is that foreign holders of Treasuries will no longer accept low interest rates to help fund U.S. debt spending, says Roubini, noting countries like China, Russia and oil-producing nations in the Middle East have becoming increasingly important holders of Treasuries. Should they demand higher rates to hold U.S. debt or, worse, dump their holdings, it could have profound ramifications on the U.S. economy and the value of the dollar.

Roubini further notes the Federal Reserve has put its balance sheet -- and independence -- at risk via its intimate involvement in thus-far failed attempts to stem the crisis.

It's tempting to dismiss the notion of a "run" on the U.S. government as unthinkable and some bears have been warning for years, even decades, about such a worst-case scenario. But after the events of this weekend, much less the past six months, it's clear that (almost) anything is possible and no scenario too "outrageous" to seriously contemplate

#3 Feds Right to Let Lehman Fail, But It's a 'Dangerous, Risky' Path, Roubini Says

After the nationalization of Fannie and Freddie last week and the government's role in JPMorgan's purchase of Bear Stearns in March, the notion of America as "bailout nation" has taken hold. This weekend, Treasury Secretary Hank Paulson sought to put an end to that way of thinking by declining to backstop a deal for Lehman Brothers.

The government was right to not intervene and bailout another distressed financial institution, says Nouriel Roubini, of NYU's Stern School and RGE Monitor.

But the government has already started down a "dangerous and risky" policy road, which resumed this weekend as the Federal Reserve announced "enhancements" to existing liquidity facilities that were created in response to the ongoing crisis.

The announced changes include:

  • Broadening of the types of securities Wall Street firms can use as collateral when borrowing from the Fed to include lower-grade debt securities and equities.
  • Stepped up schedule of so-called TSLF auctions to a weekly vs. bi-weekly basis.
  • Removal of restrictions on how much commercial banks can lend to their brokerage units.

This final point means that banks are using Federally insured deposits to support their brokerage units, which puts even greater risk on the Fed and (potentially) the FDIC, Roubini says.

Also joining Henry and me is NY Post Wall Street reporter Mark DeCambre, who notes the Fed and Treasury are faced with a tremendous number of simultaneous crises for which there is no magic bullet.

#4 Crisis on Wall Street: Roubini Predicts Another 20 Percent Stock Drop, Sale of Goldman, Morgan

After failing to find a buyer this weekend, Lehman Brothers filed for the largest bankruptcy in U.S. history while Merrill Lynch agreed to be acquired by Bank of America for $50 billion. Such extraordinary events set the stage for a wild Monday on Wall Street, and most likely beyond.

These incredible, once unthinkable developments have caught a lot of people off guard, but not Nouriel Roubini, of NYU's Stern School and RGE Monitor, whose alarming predictions about the housing market and finanical system have been coming to pass with alarming frequqency.

This morning, Roubini forecast another 20% drop in stock prices, and reiterated a prior view that there will be no major independent broker/dealers standing before this crisis ends. In other words, Goldman Sachs and Morgan Stanley should be seeking suitors today, or face a similar fate as Lehman later.

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