Bloomberg (October 23, 2008): Roubini Says `Panic' May Force Market Shutdown. Friday Morning Update: Markets are becoming dysfunctional and S&P and DJIA futures trading already suspended today
Nouriel Roubini | Oct 23, 2008
Early Friday Morning Update: Yesterday Thursday I gave a speech in London (see video below) arguing that markets were in sheer panic and becoming literally dysfunctional and unhinged. I also made the point that policy makers may soon be forced to close financial markets as the panic selling accelerates.

Indeed, we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. There is a free fall as most investors are rapidly deleveraging and we are on the verge of a a capitulation collapse. What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.

And while panic and destabilizing market dynamics is the driver of financial markets even economic fundamentals are awful as investors are finally realizing that a severe US and Eurozone and G7 and emerging markets and global recession is coming and will be deep and protracted. As I have argued for a while equity prices may have to fall another 30% based on fundamentals alone before they bottom out. Why so? In a severe two year US and global recession S&P 500 firms earnings per share (EPS) could realistically fall to $50 or $60. If P/E ratios fall to 12 this implies the S&P 500 index falling to a 600 to 720 range. If P/E ratios fall - as likely in a recession - to 10 then the S&P 500 index could fall as low as 500 to 600. So even based on fundamental factors alone there is another 30% or more downside risk to US equities; and now, on top of such fundamentals, thee is also an ugly and nasty panic-driven market dynamics at work.

I was accused yesterday of being alarmist arguing that policy makers may have to shut down financial markets. But today Friday Asian markets and in free fall and European markets are also in free fall. And US equties futures have fallen so much today before the US markets have opened that trading in the S&P futures index and the DJIA futures index has already been suspended in Europe as these indices reached their daily limits of a 5% drop. So it has taken only one day for my prediction that markets will be shut down to start to be realized. If - as possible -the free fall will continue today once US markets open then automatic circuit breakers on the S&P 500 may be triggered and trading may be stopped; and if - as likely - the capitulation panic continues today and in the next few days authorities may be forced - as I argued yesterday - to close down financial markets for a week or more in the next few days. We have reached the scary point where the dysfunctional behavior of financial markets has destructive effects on the financial system and - much worse - on the real economies. So it is time to think about more radical policy actions and government interventions of the type I discussed in my London talk yesterday (see the video below that may be worth to watch in its entirety of 48 minutes).

Bloomberg October 23, 2008: Roubini Sees Crisis Worsening, Hurting Emerging Markets (click for video)




From Bloomberg:

Oct. 23 (Bloomberg) — Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.

``We've reached a situation of sheer panic, Roubini, who predicted the financial crisis in 2006, said at a conference in London today. ``There will be massive dumping of assets, and ``hundreds of hedge funds are going to go bust,'' he said.

Group of Seven policy makers have stopped short of market suspensions to stem the crisis after the U.S. pledged on Oct. 14 to invest about $125 billion in nine banks and the Federal Reserve led a global coordinated move to cut interest rates on Oct. 8. Emmanuel Roman, co-chief executive officer at GLG Partners Inc., said today that as many as 30 percent of hedge funds will close.

``Systemic risk has become bigger and bigger, Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds, and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.

Roubini predicted in July 2006 that the U.S. would enter an economic recession. In February this year, he forecast a ``catastrophic financial meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ``sharp drop in equities.

Bear, Lehman

The comments preceded the collapse of Bear Stearns & Cos. and Lehman Brothers Holdings Inc. as well as the government seizure of Freddie Mac and Fannie Mae. The Dow Jones Industrial Average, a benchmark for American equities, has lost 37 percent this year, including its biggest daily drop in more than twenty years on Oct. 15.

The Dow average rose 0.5 percent to 8563.42 as of 10:09 a.m. today in New York.

Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn't mean it.

``In a fairly Darwinian manner, many hedge funds will simply disappear,'' Roman said, speaking at the same event as Roubini.

The hedge fund industry is stumbling through its worst year in two decades and posted its biggest monthly drop for a decade in September. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

`Very Ugly'

``Things are getting very ugly also in the emerging markets, Roubini said. ``We used to say when the U.S. catches a cold, the rest of the world sneezes. Well, the U.S. now has chronic and persistent pneumonia. It's becoming a mess in emerging markets.

Developing nations' borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.

``There are about a dozen emerging markets that are now in severe financial trouble, Roubini said. ``Even a small country can have a systemic effect on the global economy, he added. ``There is not going to be enough IMF money to support them.''

Roubini, a former senior adviser to the U.S. Treasury Department, earlier this month said that the world's biggest economy will suffer its worst recession in 40 years.

``This is the worst financial crisis in the U.S., Europe and now emerging markets that we've seen in a long time, Roubini said. ``Things will get much worse before they get better. I fear the worst is ahead of us.


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