Roubini Clarifies His ‘Optimism’

The man referred to as ‘Dr. Doom’ has been sounding a little more optimistic in the last 6 weeks, but he explains in this piece why mistaken policy responses will drag out the effects of our current economic crisis for at least a decade.

In short, Roubini argues that we should have ‘delevered’ by converting corporate and consumer debt into equity, but instead we just moved this debt to the government’s balance sheet, increasing total Federal obligations from from 40% to 80% of GDP. The increased debt burden will impose a tax of 3% GDP (around $450 billion), reducing productive public spending and crowding out private investment (and that’s before factoring in the unfunded obligations of Social Security, Medicare and a deteriorating national infrastructure).

You don’t have to read all the way to his fears of a W-shaped recession to convince yourself that canned goods, ammunition and field dressings are still your best-performing assets.

You’re The Only Sane Person In the Room

There is no such thing as unconflicted financial advice. Which should come as no surprise. Too many trillions of dollars are out there bidding for attention, and regulators never seem to catch up.

You already know about some of the obvious conflicts – somehow the SEC still lets mutual funds pay your advisor 12b-1 fees to ‘help’ his analysis (“Keep it fair! Keep it fair!”) – but something as unmanageable as career risk can make it hard for your advisor to follow sound independent analysis when that analysis conflicts with the market’s herd mentality.

Think of how difficult it was for investment advisors to raise cash in early 2008. Market PEs were ridiculously high, and the mortgage industry was already admitting that private debt levels were unsustainable – the market was saying “get out!” but most advisors were telling their clients to stay put. They were following a herd of their peers, and with good reason.

Think of who leads your advisor’s herd – thousands of fund managers, analysts and others who earn their livings from keeping investors in the game. No surprise that most were saying through most of 2008, “I don’t think the heavy stuff’s gonna come down for quite a while”. These herd leaders generate the core market information that investment advisors and journalists rely on. These conflicted folks are your advisors’ plausible deniability when the stuff hits the fan.

Your advisor would have risked serious damage to his career by bucking the happy herd in early 2008. Imagine if he had sold half your holdings and then the market had recovered: His clients wouldn’t have cared about the soundness of his analysis; they would have seen a guy who lost their money by ignoring benchmark financial institutions in favor of a hunch. They would have deserted him in droves. He could have lost his job and his home. So he probably raised faint objections to cover himself, and let the money ride. When the market tanked later in the year, at least he was in good company. He probably didn’t lose many clients, even from those who saw investment values drop by 25% or more.

If your advisor had told you to sell everything in early 2008 would look like a hero today, but for how long? People would remember his courage and prescience for maybe 18 months. He would attract more assets, make more money, but then he would be looking at the same risky decision again – follow the herd and be safe, or risk big on another unsupported recommendation. Eventually the odds will catch up to him.

Keep your advisor’s incentives in mind as the herd leaders start broadcasting their forecasts for a rapid market recovery. His difficult position is part of why Don Putnam says that, these days, “Clients are the only sane people in the room.”

A New Computer for 31 Cents

My old ThinkPad X31 became new again last weekend. It took just over an hour, and a 31-cent recordable CD, but the one-step installation created a working computer with a full set of applications for everything from spreadsheets to Skype.

The old laptop had been leaning against a bookshelf for at least two years, useless. I could have rebuilt it one more time with Windows, but just putting Windows on it would have taken an hour. Then I would have had to re-install Office, Firefox, anti-virus software, a bunch of updates for each of them, rebooting maybe 10 times in all. At the end it would have been a painfully slow system soaking up anti-virus protection money. So it just sat there.

On Saturday afternoon I decided to give Ubuntu Linux a try. I had little to lose by then – If all went poorly I could reload Windows XP, or just lean it back against the bookshelf and avert my eyes. Ninety minutes later I was checking email, making Skype calls, rebooting just to see what a 75-second start looked like (if only my Windows systems would do this).

Why would you want to try this?

  • For a new system for kids, houseguests or yourself.
  • For insurance against the Great Windows Plague of 20xx
  • Because it is much easier than you’ve imagined
  • For hundreds of free applications, many of them better than what you are using now
  • For fun, including the ton of games that come with Ubuntu
  • Because it might surprise your friends

After reading Linux
horror stories I was ready for a system designed to embarrass non-technical folk like me, so it was a shock to learn how easy it is to use Ubuntu.

  • The desktop (see screenshot) looks roughly like a Windows desktop, only it’s much easier to find all your applications, files and system tools. No strangeness at all there.
  • Adding a network printer took about a minute, requiring no wizards or CD. Ubuntu found the available printer (a 5-year-old Brother) and the next thing I knew I was printing.
  • Adding applications is a matter of a couple of clicks to find a menu of around 100 free apps, then a couple more clicks to decide what you want and install them. Wow.
  • All the cool ThinkPad features still worked. (probably because they are controlled by the BIOS, not by the operating system)

There were a couple of hiccups. Burning the Ubuntu installation CD required adjusting the burner software’s write speed (not hard, see this article). The system boots quickly, but applications do run a bit slowly. And I had to consult Ubuntu’s confusing Help menus to make the speakers work for Skype (took 5 minutes to set speaker output to ‘Pulse’). But ease of use in other areas has generally more than compensated for any effort required to learn the new system.

You probably don’t want to try this for a business system. Eventually, you’ll figure out that the documents you write on an open-source word processor won’t work perfectly in the Microsoft world.

But it’s great for web browsing, email, working with Skype and playing lots of included games. Some of Ubuntu’s bundled applications (Gimp photo editing, for example) are more powerful than most of what is available in Windows, so you might find yourself firing up your new Ubuntu system yourself to get certain things done.


  1. Make sure your old PC has at least a 1 GHZ processor and 512 MB of RAM. Here’s how.
  2. Transfer all your important information (files, contact lists, email, etc.) from your old computer to a CD, another system or an external drive. Check to make sure your data survived the trip intact.
  3. Download the Ubuntu package from here. (note: you can also buy the CD from the publisher if you’d rather – in that case, bypass steps – )
  4. Download and install Infrarecorder on a system with a working CD burner.
  5. Burn the Ubuntu installation disk. Here’s how. Remember to set the recorder to burn at 4x or 8x speed.
  6. Confirm that the CD is correctly burned – put it into an optical (CD or DVD) drive, open up Windows Explorer and look for the Ubuntu logo on your optical drive.
  7. Set up the PC you want to install Ubuntu on so that it boots from its optical drive. Here’s how.
  8. Reboot the PC to be reconfigured, with the Ubuntu disk in the optical drive.
  9. Follow installation instructions. For help with this, go here.
  10. After you’re all done, re-set your computer to boot from its hard drive again.
  11. Have fun!

Brown Shoots

  • WSJ on 5/11 – The S&P 500 is priced at 14.7 times trailing 12-month earnings.
  • WSJ today – US consumers spent 0.4% (MTM) less in April.

With all due respect to David Swensen, nobody should be buying S&P index funds these days.

First, a 14.7 PE is over historical average. Second, trailing 12-month earnings should be stronger than forward 12-month earnings. Official unemployment numbers started with 5’s from April through June of 2008. When wallets snapped shut in October the official number was still only 6.5%. We’re over 8.5% now and still climbing. Credit is tighter. Europe and Asia are significantly weaker than they were last year.

And yet we have been reading for the past few weeks that the recession has hit bottom, or that we’ll see recovery by the end of 2009. Don’t believe it.

Every one of the experts quoted in major papers knows more than I do about markets and our economy. Unfortunately, they all really need markets to recover, a conflict which makes their advice nearly useless. They want you to put your money back into the market. They need the layoffs to stop and bonuses to resume. When they tell you they see good news, forget that they’re Phi Beta Kappa folks steeped in market history – see them instead as Dorothy, clicking her heels together and repeating, “There’s no place like home.” Only without the magic slippers.

US consumers were spending somewhere around 103% of their income when the credit markets fell apart. Worse than saving nothing for retirement or a rainy day, they were pulling cash out of their homes for jet-skis, iPods, vacations and boob jobs.

Compare this to 1970, when Americans saved over 8% of their income, before we had massive consumer debt (under water mortgages, credit cards maxed out to keep homes and cars, etc.) to work off. And then imagine that American consumers save not 8%, but 7% for the next few years. Their spending would go from 103% to 93% of income, a 10% swing.

This reasonable (even likely) scenario would knock 7% off the top of US GDP (since consumer spending has been around 70% of US GDP lately). It wouldn’t be just a temporary dip, something we could recover from in a year – it would be the new starting point for the US economy, over $1 trillion lower than 2007’s GDP.

Unemployment, debt and other write-offs only compound the problem. Maybe GDP drops by 10% temporarily, before resuming growth at 91-93% of its 2007 level.

In the Monty Python version a prone S&P 500 would say, “Not live yet!” There may be great deals in the rubble, but don’t buy the market right now.