Roubini - Hard landing in China

NYU economist Roubini is now predicting China could be the backdrop in the next drama of the deteriorating global financial system. Not necessarily a lot of fresh produce connection here, but something to think about it. This link examines what's at stake:

For the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort spending more than its income and running large current account deficits while China (and other emerging market economies) has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.

For the last few months the first engine of global growth has effectively shut down as the latest batch of macro news from the U.S. are worse than awful: collapsing consumption and consumer confidence, plunging housing, collapsing auto sales, plunging durable goods spending (while supply side indicators such as production, ISM and employment are also free falling). The U.S. is entering its worst consumer recession in decades both supply and demand data look worse than in the severe recessions of 1974-75 and 1980-82. And in due time this tsunami of awful macro news, together with ugly downside surprises to earnings will take another toll on equity valuations that are now temporarily lifted by another bear market sucker’s rally.

More worrisome there are now increasing signs that the other main engine of the globaeconomy – China - is also stalling. Let us consider now in detail the evidence that China may be on its way to a hard landing…

Later....

In conclusion the risk of a hard landing in China is sharply rising; a deceleration in the Chinese growth rate to 7% in 2009 - just a notch above a 6% hard landing – is highly likely and an even worse outcome cannot be ruled out at this point. The global economy is already headed towards a global recession as advanced economies are all in a recession and the U.S. contraction is now dramatically accelerating. The first engine of global growth – the U.S. on the consumption side – has now already shut down. The second engine of global growth – China on the production side – is also on its way to stalling. Thus, with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters. The sharp recent fall in commodity prices and the near collapse of the Baltic Freight index are clear signals that Chinese and global demand for commodities and industrial inputs is sharply falling. Thus, global growth – at market prices – will be close to zero in Q3 of 2008, likely negative in Q4 of 2009 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction in 2009.

Roubini on the Hill: the rut of recession

Nouriel Roubini and other economic pundits testified before the Joint Economic Committee on Capitol Hill today. An excerpt from his prepared remarks, where he says the market hasn't responded all that well to the government's moves so far:


The hope that economic contraction in the US and other advanced economies would be short and shallow — a V-shaped six-month recession — has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the US and close to two years in most of the rest of the world. And, given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession — like the one experienced by Japan after the collapse of its real estate and equity bubble — cannot be ruled out.

Indeed, the growing disconnect between increasingly aggressive policy actions and strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of US$30 billion in March, the rally in equity, money and credit markets lasted eight weeks. When the US Treasury announced a bailout of mortgage giants Fannie Mae and Freddie Mac in July, the rally lasted just four weeks. When the US$200 billion rescue of these firms was undertaken and their US$6 trillion in liabilities taken over by the US government, the rally lasted one day.
Until the recent US and European measures were announced, there were no rallies at all. When AIG was bailed out to the tune of US$85 billion, the market fell 5 percent. Then, when the US$700 billion US rescue package was approved, markets fell another 7 percent in two days. As authorities in the US and abroad took ever more radical policy steps in the last few weeks, stock, credit and money markets fell further, day after day for most days. Even the rally following the G7 statement and radical policy actions taken to back stop the financial system lasted only one day and was followed by two weeks of sharply falling equity prices and rising CDS and credit spreads. Policy authorities seem to have lost their credibility in financial markets as - until recently – their actions were step by step, ad hoc and without a comprehensive crisis resolution plan.

TK: Roubini argues for mortgage relief to help households find more disposable income and big injections of federal money in infrastructure projects to soften the "hard landing" the U.S. will feel from the recession. Bottom line, produce marketers and retailers better be prepared to hone their value message in the months ahead.

Economy - where from here?

Just back from the PMA convention, where on exhibitor told me it was a place that was happily insulated from the doom and gloom in recent headlines. Unfortunately, as we return to our offices, the doom and gloom have not departed. Consider this story that quotes the now-familiar economist Roubini:

U.S. house prices will fall by the most since the Great Depression and continue to decline until at least 2010, said Nouriel Roubini, the professor at New York University's Stern School of Business who predicted the current financial crisis in 2006.

''I expect home prices are going to fall at an annualized rate of 16 percent,'' Roubini said Monday in a Bloomberg Radio interview. ``The cumulative fall in home prices is going to 40 percent until 2010. It's the biggest drop in home prices since the Great Depression.''

The latest S&P/Case-Schiller home-price index of 20 U.S. cities dropped a more-than-forecast 16.3 percent in July from a year earlier, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, indicating that the worst housing recession in at least a generation has yet to bottom out even before this month's market turmoil.

As many as ''21 million out of the 50 million homes that have mortgages are going to go into negative equity,'' Roubini said. ``People will have an incentive to walk away from their homes.''

The 50-year-old former senior advisor to the U.S. Treasury Department forecast in February a ''catastrophic'' financial meltdown that central bankers would fail to prevent and that would lead to the bankruptcy of large banks exposed to mortgages. His comments preceded the collapse of Bearn Stearns & Cos. and Lehman Brothers Holdings Inc.

``We're at the beginning of a U.S. and global recession, Roubini said. ``We're going to have a severe and protracted two- year recession.''

It would be no surprise if the U.S. Federal Reserve lowered interest rates by 50 basis points to 1 percent, Roubini said, without being specific on the timing of the cut. Rates will subsequently be reduced to ''nearly zero percent'' as a recession takes hold, he said.


TK: We can hope Roubini is wrong, which has been a rare event. Even if he is right, however, all is not lost. One of the most memorable moments of the convention, for me, was Bruce Taylor's speech to attendees about his experience when things weren't going well. From his speech:


Finally, let me tell you a personal story to provide encouragement for you. I am sure a touch of fear has crossed your mind recently. Fourteen years ago I did not have a job. I had started a new company, but that was only a piece of paper. I had business cards made at Kinko’s. I would spend the day in a small office at our home…and when no one was looking I would lie on the floor and stare at the ceiling… for hours. I was scared… and it felt like I had nothing. But usually about the time I was feeling sorriest for myself, our youngest son would crawl in and lay on top of me… and Linda would come in with a hug and a word of encouragement. In the next twelve months I came to learn that instead of having nothing… I really had everything. I had a loving and supportive family; I had former suppliers and former customers who wanted to support me; I had friends and former associates who wanted to be on the new team; and I had the benefit of thirteen years of PMA-inspired events, education and relationships.

I tell you this because today, each of you has more going for you than you think. You have more strength and support than you know.

Roubini on the State of the Economy - Charlie Rose

We look forward to Bryan Silbermann's "State of the Industry" address on Friday. I'm curious how Silbermann will weave in what has been going on with the broader economy in his address. One of the major themes of this year will surely be the topic of traceability, so I would expect the Produce Traceability Initiative to be a big part of his address. Meanwhile, here is the hyper-bearish Nouriel Roubini talking to Charlie Rose Oct. 14, giving a still gloomy state of the economy.

Roubini: Where do we go from here?

Nouriel Roubini, the New York University professor, was a voice in the wilderness in predicting the financial crisis. Now, his outlook isn't exactly sunny - a 18 to 24 month severe recession - but at least he says we will avoid "systemic collapse." Yee haw! A panel of economists, including Roubini, give their take on the recession and the rescue plan.