As much as I respect and am in agreement with Nouriel Roubini’s views, he often, no doubt unintentionally, comes off as unduly enthusiastic about the prospect of carnage.
His last offering goes through the litany of bad news that hit Friday: the rise in unemployment, the rise in oil (stoked in part by fear that Israel might attack Iran) and the precipitous stock market decline.
We’ve mentioned the failed attempts by the US to pass captured weapons in Iraq as Iranian (stunningly, the Iraqi government repudiated the move), that the US is planning air strikes on Iran for August (although Congressional threats to go public may quash that) and the Roubini’s report that Israel plans to attack Iran. The one bit of cheery news on that front is my sources with connections in Israel say that the Iraq war is seen there as a disaster, having destabilzed the region, and taking on Iran would make mattes worse. But the fact that such a move would be deeply unpopular doesn’t insure it won’t happen.
From RGE Monitor:
The US May employment report dashed the delusional hopes that the economic contraction would be mild or avoided altogether: apart from the headline figure – a drop of 49k jobs in May and five consecutive months of falling employment – the details were even uglier: unemployment rate up from 5% to 5.5%; falling employment also based on the household survey; falling temporary employment (a coincident rather lagging indicator of the job market; flat hours worked; falling employment in a broad range of industries; and a birth/death BLS estimate that overstates net job creation by new firms as it is still adding 217k in May alone that are likely to be drastically revised downward once the long delayed benchmark occur. So, an outright ugly job report.
Add to that oil prices going up $10 on Friday alone and $16 dollar in the last two trading days (+13%) and you get a double whammy: contracting economy via jobs and a stagflationary shock via oil prices.
Let us consider the consider the consequences of this double whammy…
First, it is no wonder that the stock market went into free fall….the combination of contracting output/demand and rising inflation is deadly for equity market.
The biggest puzzle is why oil prices keep on going higher and higher while the economy is clearly contracting and US oil demand is starting to fall. One simple explanation is the risk of a stagflationary supply side shock in the event of an Israeli attack on Iran’s nuclear facilities. This forum reported a week ago the views of Joschka Fischer – the former foreign minister of Germany – that such an Israeli strike is highly likely before the end of the Bush administration. Those allegations got reinforced this week by several additional factors: the Israeli deputy prime minister Shaul Mofaz (and likely future PM) stating categorically that “attacking Iran, in order to stop its nuclear plans, will be unavoidable”; the DEBKAfile report of June 3rd stating that “Limited US attack on Iranian Revolutionary Guards bases in sight”’; all these confirming the headline in the May 20th Jerusalem Post that “Bush intends to attack Iran before the end of its term”)….
But of course other forces are pushing oil prices are higher: a weakening dollar,…. speculative/investment demand for oil from new players that have discovered oil/energy and other commodities as a new asset class; the short-covering this week by hedge funds that had bet on a fall in oil prices; the rise in the fundamental demand for oil from Asia; a Morgan Stanley report that oil may soon rise above $150…..a worsening US recession would – in due time – lead to a fall in oil price as the fundamental demand would fall (via the US contraction and the growth recoupling of the rest of the world) thus triggering the unraveling of some of the speculative long position on oil.
But for now contracting employment and contracting aggregate demand (apart from Wal Mart and Costco who are benefitting from desperate US consumers buying the cheapest of all goods most of the other US retailers and chain stores are in deep trouble with contracting sales) together with rising oil and gasoline prices and rising inflation are signaling that the economy contraction will accelerate.
Over 18 ago this forum argued that three ugly bears – the worst housing recession in decades, a severe credit crunch and financial crisis, and sharply rising oil prices – will smash Goldilocks and lead to a severe recession. This economic contraction started on the weight of the first two bearish factors; but now with oil well above $130 the final thick nail on the coffin of the US economic expansion has been hammered. Sharply rising oil prices mostly swamped the effects of the recent tax rebate and while the rebate is temporary the effects of permanently higher oil prices – let alone further rising ones – are severe. So even without an actual military confrontation between the US/Israel and Iran we are headed towards a severe US recession and a significant global economic slowdown. An actual military confrontation would then lead for sure to a painful global recession.