Glass Half Full, Half Empty
Research for Online Investors

by John Dalt

6/13/11

Nouriel Roubini is an Economics professor at New York University’s Stern School of Business.  He famously predicted the housing credit crisis in 2005.  He warned the IMF in September 2006 that “the U.S. was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence, and, ultimately, a deep recession.”

He was right on all accounts, except the oil shock disappeared quickly as the credit crisis developed in 2008.  Today, Roubini wrote in the Financial Times of a “perfect storm” of economic disasters that may smash the global economy in 2013.

His concerns are; the European debt crisis, Japanese stagflation, a slow U.S. economic recovery/budget deficit and the possibility of a slowdown in China.  We have covered all of these concerns except the possibility of a Chinese slowdown, but try to be cautious of predicting dire events.

We have reported and marveled at some of the infrastructure improvements in China, like the South China Shopping mall with seven million square feet and designed for up to 2350 stores. We wrote about it in March 2010 when the mall had less than a dozen tenants.

Today, the parking garage has been turned into a go kart racing track, the mall has been renamed the “New South China Mall” and has 47 retail shops. They are mostly fast food restaurants that are near the entrance.

Roubini writes there is a one-in-three chance the problems he sees will converge and plunge the global economy into a major recession.  He said, “There are already elements of fragility. Everybody’s kicking the can down the road of too much public and private debt.  The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Roubini is at an investment conference in Singapore this morning.  Reuters reports, he told the attendees that China will have a difficult time avoiding a “hard landing” before 2014.  His reasoning is that China avoided a downturn during the credit crisis of 2009 by increasing fixed investments (like the South China Mall).

Roubini says that China’s fixed investments already make up 50% of GDP. He says that this sort of over investment in fixed asset improvements leads to hard landings. His reasoning for this are his observations of the Soviet Union in the 1960’s and 1970’s and East Asia just before the 1997 financial crisis.

Roubini cites a new high speed train, the Maglev line that runs from Shanghai to Hangzhou. The train runs half empty, and the station has even lower utilization. Next to the trail station is a new airport, and running parallel to the train route is a new highway. Roubini observes the highway carries little traffic, estimated at three-fourths empty.

Roubini says, “There is no rational for a country at that level of economic development to have not just duplication but triplication of those infrastructure projects.”  Roubini observes that U.S. corporations have strong balance sheets, but believes it is best to stay defensive.  He says, “The glass is half full and half empty.”

The Europeans do not want to restructure Greece’s debt. His observes they are “Kicking the can down the road, muddling through, extending and pretending that Greece will be better and you buy time…may make the collapse more disorderly over time.”  We couldn't agree more.  I have compared the Greek credit crisis to a pilot flying into a "box canyon."  There is no way out without a crash!

Business Insider reports that Roubini believes that The Split up of the Eurozone Seems Inevitable.  He observes that successful monetary unions have been driven by political and fiscal union.  The Eurozone was successful because low interest rates drove growth.  Without growth the weaker countries (PIIGS) may have to re-adapt national currencies to depreciate their debt.  This will create huge losses for debt holders, but Roubini believes it is inevitable.  The benefits of leaving the monetary union for the PIIGS will outweigh the benefits of staying in.  The original PIIGS countries are; Portugal, Italy, Ireland, Greece and Spain.

The market opened higher this morning, but as we go to press the NASDAQ and S&P have fallen into negative territory.  We should test support on the S&P 500 this week at 1250 to 1255.  Fear seems to be creeping into the market.  This is good.  We want people to be scared, the more the better.  We want to hear the talking heads on TV tell us the world is ending, that the DJI is headed to 5,000!  That is the best indication we could ask for that the market is ready to move higher.

The Mailbag:
I enjoyed your excellent Q & A article on covered calls Sunday.---subscriber L.H.

John’s reply:  Many investors claim to be “long-term” oriented until there is a 7 or 8% correction.  We must resist this tendency to avoid buying high and selling low.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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