Roubini Missed the Stock Rally?
By Staff News & Analysis - August 27, 2009

While perennial pessimist Nouriel Roubini (pictured left) has been prescient in predicting recent economic woes, investors sticking to his forecasts have suffered dearly since March. That's because he's been warning about continued problems in the economy while stock prices have soared. The New York University professor has been arguing for weeks that the economy is in danger of suffering a double-dip recession. And he hasn't yet recommended that investors plunge into stocks, Bloomberg notes. Yet the Standard & Poor's 500 Index has soared 53 percent from its March low. When the rally began, Roubini called it a "dead-cat bounce," and in May he said the ascent may "fizzle," Bloomberg reports. On March 9, Roubini said the S&P 500 was headed down to 600. Instead it has jumped 71 percent to 1,027 as of Wednesday morning. –

Dominant Social Theme: Roubini strikes out?

Free-Market Analysis: Not really. The problem with stock market investing in general is that the timing is difficult. If you are reaching the age of retirement especially in America and most of your income is in equity, you have probably felt sick-to-your-stomach for several years now. You may have sold your stocks right in the middle of the downturn on the theory that you simply could not afford to lose more.

Perhaps you had a financial planner who told you to hold on. You told the financial planner that when the great stock crash of 1920 hit, it took something like 20-years-plus for stocks to gain parity from an index standpoint. You told the financial planner you didn't have 20 years to wait. You were about to retire, and the 20 years WAS your retirement. So you sold. And now the financial planner is on the phone with a reproving tone. "Stocks have rebounded some 50 percent," she says. "You should have held on. But I have some other opportunities for you."

So now your head is exploding. You should have "held on" – but what if the stock market hadn't come back? It was never supposed to fall so far and so fast in the first place. Only a year ago, the whole system was about to fall apart, according to the US Treasury Secretary. And didn't the Federal Reserve itself lend something like US$9 trillion at home and abroad? You were supposed to hold on through all that? And now you're supposed to put more cash back into the market?

What the hell do you know? You're a plumber, or a carpenter or a real estate salesman. You're nobody's fool, but this stock market stuff is hard to handle. Not only that, this is the rest of your life that you are trying to figure out. If you make a mistake, you and your family surely will pay. So what do you do? Play it safe? …

See, Roubini may have missed the rally – but is that so horrible of him? We question those who held on during the greatest meltdown since the varied stock market crashes, worldwide, at the beginning of the great depression. The American stock market in particular was said to be finished. It needed an emergency injection of nearly US$1 trillion in TARP and related funds. And the Fed was busy shoveling trillions into the larger marketplace. Nobody was really talking about holding on during that hysterical period. But now, a year later, equity investing is apparently back in fashion, even for retirees. At least it is rhetorically.

In fact, the stock market is subject to a larger business cycle. Everyone on Wall Street knows it, but financial planners aren't supposed to admit it. They're supposed to chant "buy and hold" even when the evidence is overwhelmingly on the side of free-market analysis – that the stock market's ups and down are entirely predictable (though not the timing). See, Keynesian/socialist analysis CANNOT explain the larger markets' booms and busts. It is supposed to be entirely irrational – leading us to books by such professional obfuscators as John Kenneth Galbraith whose oeuvre was mostly concentrated on variants of the "madness of crowds."

No, in a central banking environment, money is overprinted leading to a boom and then a bust. Keynesian theory has no such explanation. Recessions are simply caused by a "lack of demand" – and the solution is to print more money and spend more money. This is in fact what Ben Bernanke and other central bankers have done – which will lead to other problems.

In the short term, so much money-printing, an inconceivable amount, has managed to re-inflate markets in America and abroad. But now another problem will kick in as central bankers struggle to remove money before price inflation sets in. If they remove the money too soon, the re-inflated bubble economy will begin to collapse again and any real progress will be lost. If they remove the money too late, it will already have been disgorged from the money center banks into the real economy which will then inflate or hyper-inflate.

The latest mantra is that the Japanese managed to remove money as necessary during that country's recent struggles with recession, depression etc. But in fact all the Japanese central banks managed to do by tightening too soon was to turn a bad recession into one that lasted a decade. The Western central bankers probably don't have that luxury. If they move too soon and cause a double-dip recession, all hell will break loose. Likewise, if price inflation heats up, it will be taken as proof positive of the incompetence of central bankers. Bernanke and others reside at the eye of the storm. The rest awaits.

Roubini should be given credit for applying proper free-market analysis to the larger economy. He probably won't admit he's an Austrian at heart (has he?), but he is. And knowing what he knows, he's probably very reluctant to jump back into the market. He's waiting for the storm to return. The money is out there now, sitting in commercial bank vaults in virtual (electronic) piles. It will have to be dealt with.

But try telling this to the plumber or the carpenter, or the housewife, or the widow. Poor people. Retirees. Even with the Internet, the chances are they will not figure out what's going on. Their world almost fell apart a year ago. And now they see central-bank-manipulated markets zooming skyward. They will resist as long as they can. But sooner or later someone will tell them that Roubini missed the rally, that he didn't know what he was talking about. So maybe, then, they will get back in, with at least some of the assets of their already gravely reduced estate. They will make their bets right before the second phase of this double dip financial crisis. Down the markets will go, taking even more of a lifetime of savings.

After Thoughts

This is no way to run a retirement, dear reader, don't you agree? Of course, if there were a private gold and silver standard, or even a gold standard, money would gently appreciate over time. You could save a little every month and watch your horde grow – without the depredations of inflation. That's how it used to be, when technology made everything cheaper but honest money. These days, everyone piles in at the top, gets out at the bottom and then the process is repeated. Roubini may have missed this rally, but maybe that's because he understands what's really going on and cannot afford to be caught in a major downdraft.

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