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Thread: weekend commentary - Professor Roubini's predictions for 2008

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    Default weekend commentary - Professor Roubini's predictions for 2008

    (snip)"Here are in a summary the main questions addressed in my long analysis of the 2008 outlook and a short version of my answers of them:

    Crucial questions about the U.S. and the global economy in 2008

    • Will the U.S. experience a soft landing or a hard landing (recession)?

    • Will the current financial markets crisis (liquidity and credit crunch) get worse or better?

    • Will the US Fed ease, how much and will this easing prevent a recession?

    • Will the rest of the world decouple from the U.S. slowdown/hard landing or recouple?

    • Should we worry about global inflation or deflation?

    • What is the risk of stagflation (negative growth and rising inflation)?

    • What are the implications of the outlook for the various asset markets and asset prices?


    Summary of the answers to these questions:

    • The US will experience a hard landing (recession) that will be severe and protracted rather than mild

    • The liquidity and credit crunch will get worse and the risk of a systemic financial crisis is rising

    • The Fed easing will be “too little too late” and it will not prevent a recession

    • The rest of the world will not decouple; it will rather recouple with the US hard landing leading to a global economic slowdown

    • Existing inflationary pressures (from oil, energy, commodities) will fizzle out once you have a US recession and a global economic slowdown.

    • True stagflation requires an exogenous – politically driven – negative supply side shock to oil prices (such as war with Iran).

    • Risky assets (equities, credit spreads, housing, commodities, emerging market assets, the US dollar) will get hurt. Cash is king in 2008."(snip)

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    Default Re: weekend commentary - Professor Roubini's predictions for 2008

    I don't understand. How can commodities get hurt when the value of the dollar keep falling? He says US dollar is going to get hurt, but then " cash" is king. What is cash then if not the dollar?

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    Default Re: weekend commentary - Professor Roubini's predictions for 2008

    I don't understand. How can commodities get hurt when the value of the dollar keep falling? He says US dollar is going to get hurt, but then " cash" is king. What is cash then if not the dollar?
    I don't pretend to understand everything that Professor Roubini does, but I believe the point he was trying to make about commodities is as follows. In the short term, a minor drop in the US dollar exchange rate does not materially affect levels of global commerce. As a result the production levels of the world's factories aren't materially reduced, their demand for world commodities like steel and copper and even gold/silver doesn't decline much, thus the US dollar denominated price of these commodities goes up (relative to a basket of worldwide currencies ... which is basically all that we have to compare to).

    However, as the US dollar exchange rate continues to fall, the US dollar denominated price of goods produced in countries where employees are paid in say Euros or Yen goes up accordingly. At some point, the US dollar denominated prices of imported goods rises so much that the foreign manufacturer can no longer earn a profit in terms of Euros or Yen at a salable US dollar denominated price, or the foreign manufacturer must raise the US dollar denominated price by such a large degree in order to still earn a profit in terms of Euros or Yen that American consumers can no longer afford to buy those imported products. When either of those things happens, foreign manufacturers no longer have a reason to produce as many manufactured goods for export to the USA. As a result, their demand for steel, copper and to some degree silver/gold drops off, leading to a decline in world commodity prices.

    In terms of 'cash is king', I believe that Prof. Roubini is referring to the concept of 'cash' as short term very liquid interest bearing banking system 'investments' ... which do not involve the downside risks of investing in a business (stocks) or investing in a government (long term bonds). Obviously it is possible to take a 'loss' on 'cash' investments, particularly so if the 'purchasing power' of the currency the investment is denominated in goes down by a wider margin than the interest rate being paid. But Prof. Roubini is arguing that the potential medium term losses from holding US stocks or long maturity US bonds will be higher than any losses in purchasing power that may occur with 'cash' investments ...

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