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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (54406)	8/7/2006 8:54:45 PM
From: CalculatedRisk	Read Replies (1) \| Respond to of 116555

Four Investors' Fairy Tales...and Five Ugly Realities About the Coming Severe U.S. Recession. Nouriel Roubini \| Aug 07, 2006 rgemonitor.com Given the recent flow of dismal U.S. economic indicators (Q2 GDP report, July payrolls, service ISM, etc.) I am now taking the view that the odds of a U.S. recession by year end have increased from my previous 50% to 70% now. While I have been arguing for the last few months that the risks of a U.S. recession are growing, most investors and the Fed are still in a delusional mode of denial and believe in four fairy tales that are now, unfortunately, slipping by the moment into the dustbin of wishful dreams: Fairy Tale # 1: The U.S. economy will have a soft landing: according to this tale, U.S. growth will continue at its trend rate of 3.5% (as recently argued by Bernanke) or just below trend, around 3.0% (i.e. the Fed staff and the market consensus view). Fairy Tale # 2: If the U.S. slowdown is excessive, inflation will ease and the Fed will come to the rescue with a sharp cut of the Fed Funds rate in the fall. I.e. a reduction in interest rates will prevent a recession from occurring. Fairy Tale # 3: Even if the U.S. slows down, the world will "decouple" (to use Goldman Sachs' term) from the U.S slowdown and will keep on growing at a perky rate in Asia, Europe, emerging markets and Latin America. In JP Morgan's terminology, this "decoupling" is termed as the "rotation in global growth", from U.S. to Asia and Eurozone. Others refer to it as the "locomotive switch” with a switch in the global growth locomotive from the sputtering U.S. one to the perky ones in EU and Asia. Fairy Tale # 4: The rebalancing of global current account imbalances is underway and will be orderly rather than disorderly: the Bretton Woods 2 regime of vendor financing of the US twin deficits will continue unabated; and any possible fall in the US dollar will be orderly and gradual. <MUCH MORE>