Economist Nouriel Roubini, a professor of economics at New York University, who is also known widely as “Dr. Doom,” has always leaned towards the bearish side. He has forecasted a U.S. recession for 2012 due to the building gridlock in the government. In the modern world of social networking, Dr. Doom tweeted, “Super-Committee: Super-Failure, Super-Pathetic, Super-Gridlock, Super-GOP-Lunacy on Taxes, Super-Fiscal Drag in 2012 that ensures double dip.” Based on the tweet, I clearly see a confident prediction for a recession.
While the probability of a U.S. recession is likely at less than 50%, there are increasing signals that a recession could emerge not only in the U.S. but in Europe as well. If this were to happen, it would be devastating for stocks and the jobless, and could sink America deeper into an economic cesspool characterized by further joblessness, declining home ownership, and turmoil.
The Federal Reserve just ordered additional stress tests for the largest U.S. banks to measure the impact if a recession were to surface. Last Tuesday, we saw soft third-quarter GDP of 2.0% versus the estimate of 2.5%. The positive is that the estimate for the Q4 GDP is around 3.0%, albeit there are many who believe the number is way too optimistic. I for one feel that three percent can only be achievable if consumers spend to drive up the critical post-Black Friday holiday spending season followed by a strong cyber Monday.
The reality is that the global economies are in trouble and the debt contagion could spread to non-PIGS countries, such as Italy, the Netherlands, England, and Austria. The eurozone grew a miniscule 0.2% in the third quarter, threatening to contract and drive another recession at a time when there is financial Armageddon in Europe.
The next big financial collapse could be in Italy where the 10-year Italian bond is yielding around seven percent. In addition, the Spanish 10-year bond yields are hovering around 6.5%. The fear is that the critical seven percent levels were the breaking point that triggered the move by Greece and Portugal to ask for emergency funding.
Portugal is in trouble. The country’s 10-year bond yields exploded upwards to 13.85% last Thursday. Fitch just downgraded the country’s credit rating to junk status, blaming the negative tone and move on large fiscal imbalances, high debts, and austerity risks. The problem is that the junk rating means it will be very expensive for Portugal to raise debt and the high carrying costs will be difficult to maintain on the books. Economists polled by Reuters predict that Portugal’s GDP will shrink by 2.9 % in 2012.
The key Markit monthly composite purchasing managers’ index came in at 47.2 in November and continues to signal a contraction in the eurozone. But should Germany and France fail to find any growth, the impact could be devastating for the eurozone and cause another recession. Of course, Greece is still entrenched in its initial recession.
Read what I have to say about the situation in the U.S. in Retail Sector—It’s Make or Break Time.
And you can read about the worsening situation in Greece in European Union, Global Investors…We’re All Fed up with Greece!