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Roubini: Growth at Stall Speed

Posted by Larry Doyle on August 26, 2010 12:03 PM |

Sense on Cents is serving a full helping of Nouriel Roubini today.

Hopefully, our morning course only served to further whet your appetite for more financial wisdom from this economic giant. Having already dined on market structures, the world of Wall Street, and assorted vices and virtues this morning, this afternoon we are serving a course of Roubini’s outlook on the economy.

Bon appetit as Bloomberg delivers, Roubini Says Third Quarter Growth to Be ‘Well Below’ 1%:

Nouriel Roubini, the New York University economist who predicted the global financial crisis, said U.S. growth will be “well below” 1 percent in the third quarter and put the odds of a renewed recession at 40 percent.

Roubini, chairman of Roubini Global Economics LLC, said his forecast assumes the government will lower its estimate for growth in the second quarter to an annual rate of 1.2 percent “at best.”

“All the growth tailwinds of the first half of the year become headwinds in the second half,” he said in an e-mail message, including the government’s $814-billion stimulus plan, hiring for the census, and incentives such the cash-for-clunkers program and tax credits for first-time home buyers.

In the best scenario, he said he expects an “anemic, sub- par, below-trend U for many years (LD’s emphasis) given the need and process of deleveraging” by households, governments and the financial system.

“With growth at a stall speed of 1 percent or below, the stock markets could sharply correct, and credit spreads and interbank spreads widen while global risk aversion sharply increases,” he said. “Thus a negative feedback loop between the real economy and the risky asset prices can easily then tip the economy into a formal double-dip,” he said, referring to two recessions in a quick succession.

The Commerce Department may report revised figures in two days (LD: that is tomorrow) showing the economy grew at a 1.4 percent pace in the second quarter, according to the median estimate of economists surveyed by Bloomberg News. That’s down from an earlier estimate of 2.4 percent, because of a widening trade deficit, a smaller buildup of inventories and weaker construction.

Ouch, that was a dish served cold.

I do believe Roubini’s call on the economy. However, I expect we will not have a sharp selloff in equities but more of a gradual decline. Why? Volumes indicate less people are involved in the markets. As a result, there is less juice to propel the sharp decline. Not that it can’t happen, but I think the likelihood is lessened.

I still believe our economy is battling a serious bout of ‘walking pneumonia.’ Uncle Sam’s medications have merely masked the symptoms to date, but the structural illness remains and shows no inclination of being alleviated anytime real soon.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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