from Follow the Money

Can David Rosenberg out-Roubini Roubini?

October 30, 2006

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Nouriel “If you are going to be a bear, might as well be a grizzy” Roubini has a bit of competition.  Merrill’s David Rosenberg now puts the odds of a recession at up to 80%

“HSBC, US Bank ... now pegs the odds of a recession at 75 percent, and Merrill Lynch ... says that recession odds could be as high as 80 percent.” 

(hat tips: Andrew Samwick for the grizzly quip – I love it; and  the Mess than Greenspan Made for Merrill's current US call, which presumably is confirmed behind the Barron’s firewall).

Roubini is still (officially) at 70% and (unofficially) at 100%.  Any doubts -- check out the titles of his last ten blogs.   Merrill hedges a bit with “could be” as high as 80%.  But Merrill is still taking a rather bearish view for a company with a bull in its logo that has long branded itself as “bullish on America.”   

I always thought of the Merrill bull as an equity bull.   But maybe the Merrill bull is a bond bull?

Rosenberg – and the rest of the interest rate team at Merrill – aren’t shy about the market implication of their call on the US economy.   Buy Treasuries.   Merrill – via Bill Cara -- thinks the 5 year bond will fall to 4% in the fourth quarter of 2007.

I would put Merrill (and apparently) HSBC as the most bearish of all the big economic research shops.   UPDATE: BNP Paribas belongs here too ...

Goldman has some bearish tendencies, but right now is a bit less bearish on the US than Merrill and bullish on the BRICs (and on the possibility of global decoupling).

Morgan Stanley is schizophrenic.  Roach is finding it hard to sustain his unnatural bullishness of this spring.  Berner is still optimistic.  Jen too.  

Citi is pretty bullish, last I checked.

"In our judgment," writes DiClemente [Citi’s chief US economist], "growth pessimists have oversold the potential for declines in housing wealth but also have underestimated the broader health and sustainability of the current upturn." He notes that consumer spending is showing "continued resilience." 

And Bank of America is also fairly bullish ….

"The Fed described the scenario in which they're very comfortably on hold," said Mickey Levy, the chief economist at Bank of America. "Moderate pace" represents a drop to "below-trend-like growth, but not any kind of hard landing; not a sharp slump" (more from BofA here)

Incidentally, the q3 BEA data suggests that a slowdown in the US was combined with a quite large current account deficit.   Stephen “the current account deficit has peaked” Jen might want to take note.    

A $805b (annualized) trade deficit plus a $80b (annualized) transfers deficit and a $20-40b (annualized) income deficit works out to a current account deficit in the $905-925b range, or around 7% of US GDP.    That is back at the q4 2006 level.    The transfers deficit is pretty much a straight line forecast, the income deficit is my estimate … but it is an informed estimate.

What happened?  Shouldn't a US slump help reduce the US deficit?  

A few things are worth highlighting …

  • The US is flying into a real headwind – a rising income deficit requires a falling trade deficit to keep the current account deficit constant …. In q3, the trade deficit increased, and I suspect the income deficit will rise as well. 
  • A fall in investment (as in q3) only helps bring investment in line with savings if savings stays constant.  Judging from the natoinal accounts, national savings rather clearly fell in q3 … that is how consumption growth was able to exceed income growth.
  • So long as the investment slump – in this case one centered around residential investment – doesn’t spill over into consumption, there isn’t good reason to think the trade deficit will fall.  The bullish case for 2007 in effect rests on strong consumption growth, falling US savings and a rising trade deficit.   The bearish case expects the housing slump will morph into a consumption slump, which should lower the trade deficit -- and help to keep the current account deficit constant in the face of the income balance headwind.
  • If you prefer to look at things from a more micro point of view rather than a savings and investment point of view, I suspect homes have a lot more US (and Canadian) content that most goods Americans purchase these days.   Especially computers and, increasingly, cars.
  • The US will get a bit of help from lower oil prices in q4, but it the q3 uptick in non-oil imports continues in q4, it won't be much help.   And to continue to get help in 07, oil needs to fall further.

Judging from q3, sustained consumption growth and a “sudden stop” in residential investment isn’t a recipe for a fall in the US current account deficit so much as a recipe for further falls in the US savings rate  …

UPDATE:  I left one of the most bearish shops of them all ... BNP Paribas.   Richard Iley from the comments section:

 "At BNP Paribas, we have been calling for a 'hard landing' in the US economy since mid-summer and were warning that the housing boom was likely to begin to unravel via the biggest residential construction bust for fifty years at least since the end of 2005. As of July this year, we had the lowest end-2007 Q1 Fed Funds forecast on the 'street' of 4.5%. And we expect a 'hard landing' - which we define as five quarers of below 2% annualised GDP growth - rather than full-bloodied recession only because we expect such a nimble response from the Bernanke Fed to the mounting evidence of the corrosive deflation now emerging in the housing market. And our end-2007 Fed Funds forecast of 3% is comfortably the lowest of the 22 primary dealers."

BNP Paribas may out-Rosenberg Rosenberg! 

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