The Roubini Ratio
I've just come up with another unscientific but nonetheless revealing indicator of economic health — the Roubini Ratio.
Constant readers will recall some of my other attempts in this regard — the Stress Index and especially the iPhone Index. None of them have caught on, but it won't stop me from trying.
The Roubini Ratio is the difference between NYU professor Nouriel Roubini's forecast of $1 trillion in losses from the credit debacle and the forecasts of more mainstream economic analysts.
The gap is wide, but it's been steadily narrowing, and this week it approached the vital .5 threshold.
Wall Street banks, brokerages and
hedge funds may report $460 billion in credit losses from the
collapse of the subprime mortgage market, or almost four times
the amount already disclosed, according to Goldman Sachs Group
Inc. Profits will continue to wane, other analysts said.“There is light at the end of the tunnel, but it is still
rather dim,'' Goldman analysts including New York-based Andrew
Tilton said in a note to investors today. They estimated that
residential mortgage losses will account for half the total, and
commercial mortgages as much as 20 percent.
Oops, hold on, the gap might be widening. A quick Google News search reveals that Roubini is thinking about upping his $1 trillion forecast.
The losses that we're facing at this point — $1 trillion — is the
floor, not the ceiling. Losses might be much bigger than that. Even if
you believe subprime losses might be in the order of $300 billion to
$400 billion, more losses are going to be derived from commercial real
estate, credit cards, auto loans, student loans and leverage loans, as
well as from corporate defaults and losses from city assets.Eventually
the monolines will be downgraded, which means we'll see another round
of write-downs on the things that they insured…I would argue this is the worst financial crisis the U.S. has had since
the Great Depression. We haven't seen this type of real financial
turmoil for the last 70 years. Of course, it's not going to be as bad
as the Great Depression. But this isn't your typical run-of-the-mill
recession that in the last two episodes lasted only eight months with a
minor contraction in output. This is going to last at least 12 months
and more likely 18 months, which is something we haven't seen in
decades.
That last remark that brings me back around to generational thinking. No one in the current Millennial generation has any memory of a significant prolonged economic downturn. The oldest of them were born during the second dip of the vicious double-dip recession of 1981-82. How might this most protected and coddled of generations react to this cold, cruel reality?
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