Think Stocks Correction Is Over? Roubini Sees 20% More Downside

asiablues's picture

By Dian L. Chu, Economic Forecasts & Opinions

Investors are tempted back into the market after a nearly 4% sell-off on Thursday, the biggest one-day drop since April 2009, leaving stocks at more reasonable valuations. Meanwhile, Germany's parliament approved a bailout bill for Greece and other euro zone nations burdened with high debt loads also helped ease worries about sovereign debt.

Europe’s debt crisis has pushed the S&P 500 down 12% during the past month.  So, is the correction over? Nouriel Roubini does not think so. The New York University professor and economist, is predicting markets will sell off another 20% in the next few months, that cash is the safest place for investors right now.

Cash & Futures Options

In a CNBC interview on May 20, Dr. Doom says in addition to the macro problem in the euro zone, Japan, UK and the U.S., China possibly slowing down, there is also "regulatory risk because we don't know how financial reform is going to occur."

"Apart from cash I would invest in short-term government bonds of countries that don't have a serious debt problem, countries like Germany and maybe Canada, and a few other advanced economies that from a fiscal point of view are sounder than the weaker economies."

He noted investors can use options to hedge against future market downside risk that is certain to come.


"There are some parts of the global economy that are now at the risk of a double-dip recession, certainly seeing that risk in the euro zone...From here on I see things getting worse."

Roubini also named Japan with its anemic growth and the U.S. when inventory adjustment goes away and fiscal stimulus becomes a drag in the 2nd half of this year, as possible candidates for a double-dip recession.

A Mission Impossible Train Wreck

Fixing the debt problems in Greece and other troubled nations would be “mission impossible." Governments need to raise taxes and cut spending. "Otherwise we're going to get a fiscal train wreck… and it's going to take years of sacrifices."

My Thoughts

The market hates uncertainty. When investors get scared, they pile into cash equivalents. Spiking treasury demand sent yields on 30-year Treasurys briefly dipped below 4%, the first time since October, while the VIX fear index has almost doubled this month to 40.10.

The market is saying it is unwilling to buy stocks given the uncertainty mainly from the euro zone, financial reform, and signs of economic slowdown in China. Commodities ranging from gold, crude oil, metals to sugar and coffee also fell as investors fled risky assets on fears the euro zone's debt crisis will crimp global growth.

Unlike the US where the Federal Reserve can act alone on behalf of the country, the European Monetary Union is quite different. European Central Bank has limited powers, and the EU cannot act alone on behalf of the euro zone.

This structural weakness could mean

  • Greece and some or all other PIIGS countries must restructure (i.e. bond holders taking a haircut) or possibly default on its sovereign debt due to unsuccessful budget cuts amid continuing protests.


  • A breakup of the monetary union when the North Europe finally gets tired and refuses to finance the Southern Europe's lavish spending habit.

A stampede out of the euro has pushed net short positions to a record high, but the euro rose broadly on Friday partly on speculation of a coordinated central banks currency intervention. This is causing a short squeeze and the unwinding of other assets.

New loans and euro currency interventions, even if confirmed, do not change the debt dynamics and the threat of a global debt contagion (see the scary chart from NYT).  International Monetary Fund's recent forecast that Ireland, the U.K. and U.S. will post the largest budget deficits among advanced economies this year, ranging from 11% to 12.2% of GDP, further point to higher market downside risk.

Meanwhile, the breach of the S&P 500 June futures contract below its 200-day average for the first time since July 2009 coupled with 500+ stocks at their lowest price in a year on Thursday could perpetuate a negative market sentiment and spill into the real economy.

In this environment, I’d recommend stay away from the stocks and bond for now, but instead of sitting on cash, investors should take a look at natural gas, copper and U.S. real estate related investment vehicles as they remain relatively undervalued compared with other sectors.

Economic Forecasts & Opinions

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fl3tch3r's picture

roubini has been saying 15-20% down in every interview for the last 3 years. why cant he be honest and say 50-60%. Is he being nominated to a fed board?

Vendetta's picture

I happen to believe that all paid, mainstream economists are paid shills for the federal reserve and are placed like actors on a stage to cover all the possible 'viewpoints' so that there is plausible deniability that the entire economic profession is a fraud.

anynonmous's picture

Roubini and Rosenberg will be correct eventually, the problem is they have been so very wrong on equities for the past year that they have little credibility.  Are we in for a 20% move down, yes and probably more.  Will Roubini try and claim that he foresaw the coming big decline, yes he will (but he has been seeing it since March 2009).

AccreditedEYE's picture

Asia- Much thanks for your piece on Nat Gas earlier this week, I really appreciated it.

Mark Beck's picture

"Meanwhile, the breach of the S&P 500 June futures contract below its 200-day average for the first time since July 2009 coupled with 500+ stocks at their lowest price in a year on Thursday could perpetuate a negative market sentiment and spill into the real economy."


Massive stimulus driven equity over valuation, manipulated futures contracts, and this will effect the "real economy", which in the historical sense, does not exist.

The acedemic investment playground based in sound markets, with all of its notible complexity in finding price, no longer exists.

We are in a period of debt driven crisis investing.

A challenge to maintain real worth. A mix of hard assets under your direct control. The rate of return rooted in the fundamental needs of daily consumption, raw materials and production.


So we may conclude that fiscal and monetary irresponsibility has put in jepordy the effective use of capital. The real driver of sustainable growth.

We see this in the compression of trust towards shorter maturities. So the effects of debt could perpetuate an unwillingness to invest in the traditional sense. 

The definition of unsustainable. Where the only real money foolish enough to invest, is borrowed through the power to print.

Behold, the loss of trust.

Mark Beck

steve from virginia's picture

RE: Real estate ... fools and their money.

Real estate is a classic currency trap, all the second- tier speculators that paid cash for houses looking for a quick recovery will lose all their money.

It really is different this time.

There is insufficient remunerative commerce to support current real estate prices or even prices that are 20- 40% lower than current. The market is on government life support w/ 90+% of mortgage origination from Fannie, Freddie and FHA. The same agencies that are compelling inmates here to swear off money and buy gold.

Would you trade gold for some papier- mache shit box in some nameless, faceless (doomed) suburbia? Maybe gold for Woolworth building or something like that, but nothing in Fla/Nv/Ca/Az.

Rogerwilco's picture

RE: Real estate ... fools and their money.

Real estate is a classic currency trap, all the second- tier speculators that paid cash for houses looking for a quick recovery will lose all their money.

It really is different this time.

The property next to ours went through two foreclosures in the past year. The second buyer, a flipper, paid $281K for a house that listed at $389K just a year ago. I met him last October when he was doing some work on the roof and he bragged that he got a "helluva deal" by paying cash. The house is now listed at $445K. In that price range we have about 24 months of supply on the market, and the shadow inventory from the big banks hasn't even been added yet. I think Mr. Helluavadeal is going to lose his shirt.

Sqworl's picture

 I just wanted to share this clip of Nouriel on Bill Maher on Friday, May 21.  He will be appearing on Imus on May 24th at 7:30 am.  

His Book tour "Crisis Economics"  ...:-)

lawton's picture

I still think we see Dow 5000 within a year...

DormRoom's picture

The markets are going to melt up.  Hedge funds who have unwound the USD carry trade, will rewind it, pushing up commodity prices, and emerging markets.  The markets corrected because of the USD unwind, forced by a declining Euro. But we all know Central BAnks will push up the Euro, and Geitner will allow the USD to temporary decline so the US economy can gain more steam from it's manufacturing sector.  So party like its 1999.

Ancona's picture

Silver, gold, food, lead and high speed lead delivery devices

onlooker's picture

2 sources in east central Fl, on the coast, say bottom feeding is picking up with improved sales volume. Rentals are cheap and a bad business to be in now. The oil blow out may impact them


Austin is doing well.  Lots 2 to 5 acres east of Dallas are in demand. SoCal is not well, but some Counties like Orange are holding.

Chicago bear's picture

North of the capital in Austin is very hot. Orange Cnty CAis exactly the spot Of high demand and price support for the right housing. A lot of land is available right now. Developers are bankrupt from the hey day and cannot get a loan. However new concepts in land development (and some old concepts renewed for these times) are working to generate excellent risk mitigated returns. Problem is that the octogenarians are the inky ones who can remember how to do these deals. Young mbas are experts at saying no we don't do that, calling it a day and reading the news ( and I have an MBA).

Kina's picture

As discussed earlierl.

University of NSW Professor of Business Law Michael Peters said rising lending rates between British banks were a sign the fallout from the European debt crisis has already spread to England.


The London Interbank Offered Rate (LIBOR), a barometer of risk sentiment towards English banks, is at 0.48 per cent, its highest since August 2009 and more than double what it was in March this year.


"The UK is the basket case no one wants to talk about," Prof Peters said.

"The problem is Britain is worse than Greece.

Kina's picture

Roubini's english is much easier to understand than many native speakers I know.

goldfreak's picture

the shoeshine boy told me to sell all my gold because he read Nadler saying it was going down.

Quinvarius's picture

Gold bears have been spouting invented contrarian indicators for the last 5 years.  Their vain searches are the contrarian indicators gold bugs use to keep buying.

anarkst's picture

Roubini is about Roubini, arrogant and self-serving.  His English sucks too.  And this so-called "Dr. Doom" has profited every step of the way.  Is there anybody in this country in any position of power or influence who has not sold out (besides Ron Paul)?

Pamela Anderson's picture

It's not about the accent... it's about the message just look at Sarah Palin...perfect English...dumbest retard in the world.

Trust me, I am a blond, blue eyes, big boobs.

RockyRacoon's picture

Good sentiment, but Dr. Paul does not have power nor influence -- unfortunately.

Roubini's English may be a bit faulty, but so is my Turkish.  Don't throw out his intellect because of his speech, get past that. 

Treeplanter's picture

On Fri. the PM miners mostly tracked the New York markets.  Sure looked like computer trading.  Then there were a few like Seabridge that rose higher and dipped less, closing well.  So some real investors or gold bugs are betting long on miners they really like.  Meanwhile my gut says Dr. Doom has a good record of forecasting.  Maybe it's time to throw the I Ching.  

LeBalance's picture

Life and growing are about finding new experiences and things you haven't done before.  As a result you are the "newbie" and experience many "interesting" things.  aka "no pain, no gain."

-- Markets hate uncertainty --

means to me that this is not a true market, because to find new experiences and ways to live is THE greatest thing to find in a market.  Therefore a true market of GROWTH is one in which chaos is rampant and "go back to sleep, eat some more sugar" is anathema.

Needless to say the author's concept of markets do not have anything to do with this GROWTH market.  And I am only writing this as a "hmmmm" thought.

Play fair? No way.

Teach you? Okay!

So maybe the markets of NOW are this "rip your face off, teaching environment?"

Well only for the segment that was sort of asleep and not the long term Mises,Hayek crowd.

So turning full circle on the thesis at the start of this comment: Is this not the teaching market? Was it ever about raising capital for business investment?  Was its goal to be the market in which the lesson is "To win the game is not to play.  Or to win the game is to have a bigger stick than the present rulemakers."



Chicago bear's picture

New housing priced $400k or less in nice neighborhoods in relatively urban areas will get lines out the door of buyers. Builders are buying lots to serves these buyers. Homes under 2,000 sf and more than 1,000 sf that are new are in demand. People with jobs and kids who know they are in for a slog through the coming years want to get out of the big house and debt to size down. Private investments in these markets yield 20% irrs which compared to the uncertainty os stocks is now getting a lot of interest. Institutional equity is clamoring to participate. Construction debt is stupid and their regulators are slowing the proces by making it scary to fatbankers to do their job and make a loan. This is direct experience.

DosZap's picture

I am sure you read/heard about the NEW bill just passed.

Now, to buy a home, you must show PROOF of financial vilability, and produce W-2's, Year end stubs,proving employment,and FICO scores high enough to qualify.(Hello?).

Excuse me, but until Clinton did his "Welfare: thing, and Bawney Fwank, got involved.......if memory serves me, I had to do this every time I bought a home.

Noah Vail's picture

Yo, bro, just in time for the next leg down. Don't worry, be happy, 0% down, 0% per month, for 0 years on superfine uncle freddy loan. Yeah, that'll work.

Ned Zeppelin's picture

Agreed, also from first hand observation.  Residential real estate "close in" to those pockets of economic activity that are at least treading water if not growing ever so slightly, like in the Northeast near the cities, will see significant demand for realistically priced housing.   Land prices have adjsuted, but the land developers all went out of business, plus banks are recoiling at investments in real estate development. Private and institutional equity will have to fill the gap. I'm not sure I would agree with the 20%+ return scenario. I think returns would line up in the 14%+ range as realistic. Plus as I like to say when you buy well-located properly priced dirt, at least you bought a tangible asset that is in short supply, long term. May not be glamorous, but housing is a basic need.

Blindweb's picture

I agree that areas outside the major cities in the Northeast are good locations, although I would continue to wait.  At some point many of the paper shufflers and their servicers will start piling out of the cities looking for jobs in the brick and mortar world.

Pimp Juice's picture

If you bought gold in 1980 @ $800 per ounce you also had a tangible asset in short supply, long term, but got hosed. Location, location, location, does not trump price, price, price. Better to wait a few years on RE.

been there done that's picture

re"but instead of sitting on cash, investors should take a look at natural gas, copper and U.S. real estate related investment vehicles instead as they remain relatively undervalued compared with other sectors"

How can he think housing is undervalued???

Quantum Nucleonics's picture

The key word is "relative".  If stocks are overvalued by 50% and real estate is "only" overvalued by 25%, then real estate is undervalued on a relative basis.

There is an argument to be made for real estate as an inflation hedge.  Prior to the craziness of the past few years, residential real estate was tightly correlated to inflation.  Most commercial real estate have mechanisms for adjusting to inflation.

Dirtt's picture

Asiablues just said go long oil last weekend.  Are his (her?) posts becoming the contrarian indicator?

Moneygrove's picture

the bush tax cuts should be kicking in and day now !!!!!!!!!!!!!!!!!  lol !!!!!!!!!!!! gdp to the moon !!!!!!!!!!!!!!!!!!!!!!lol !!!!!!!!!!!!!!!!!!!!!!!

mikla's picture

You're right, housing is still massively over-valued, and will continue to correct down.

My guess is he's trying to hedge against currency collapse.  In that case, real property is better than nothing.

Vendetta's picture

real estate is a good tulip to buy.

wafflehead's picture

you guys should go check real estate prices before you talk! I bought a house last year in south florida for 100k which in 2006 sold for 295k. The prices have overshot to the downside and will go up when and if the economy recovers! Just to build a pool like the one at my house will cost about 20k. The building cost have not gone down that much not to mention materials. It cost 25 dollars for a box of screws at Home Depot.

Windemup's picture

Isn't Florida one of the Gulf States that is subject to wafting on-shore winds from the Gulf of Mexico. I don't think land values there will hold up well months from now.



Dirtt's picture

Those screws are worth every penny.  Huge labor saver.  Exterior grade should be used in a climate like Florida and Hawaii etc.

I know $25 seems expensive but so is time. FWIW

DosZap's picture


Yeah, IF you get to keep it.............

Read a stroy yesterday, lady and son, living in a paid off home,left to them by a deceased husband.

She had financial difficulties(like most of America),she had an issue with Utilities pmts..............and was backlogged to the tune of around $3k.

County turned the tax bill over to collections(outside the city's purview), and she lost it all...............guess who foreclosed on her......the Bank that bought the delinquent debt/paper.

She & son, now homeless.Property unless you are VERY well heeled, with the new taxes upcoming, I would run away from like scalded dog.

SamThomas's picture

How is that possible?  Wouldn't the creditor be required to pay the difference between the debt owed and the value of the home to the homeowner?  How could they claim the $3,000 AND the remaining equity?

Can't be....

silvertrain's picture

 Make it a hatrick for massively overpriced housing..Its no where near a bottom, commercial is going to showem how its done..

mikla's picture

commercial is going to showem how its done..

+1, nice quote.

Crab Cake's picture

I will take the Devil's Advocate position, and say that Real Estate is not necessarily developed property; residential or commercial.

In my estimation there are solid investments out there in undeveloped acreage.  I compare this type of purchase with the investment in a quality gun.  The gun might go up and down in value, like gold, but it will always be valuable.  Things like acreage, guns, and gold are not even investments per se, they are stores of wealth. 

QQQBall's picture

That will be similarly true next year when dirt values are lower.