News from Europe

The view from Europe is very different from the view from the US. That is always the case, but I have never felt it as forcefully as now (except right after September 11). The financial/economic crisis is getting worse. France, which was doing better than most until the end of 2008, is now plunging into recession. http://www.ft.com/cms/s/0/ae7c2c3a-0d5e-11de-8914-0000779fd2ac.html.
The figures from other countries are not much better.

Eastern European countries face even worse times, because of their wild ride from a state-managed economy to "Anglo-Saxon" capitalism and their borrowing in foreign currencies (a move that leaves me gasping, I have to say).
http://www.ft.com/cms/s/0/c786ce82-0d4b-11de-8914-0000779fd2ac.htmlB

And yet, perhaps wrongly, the tone of analyses and reportages in the media is much less alarmed and alarmist than in the US. Perhaps the Europeans are in denial. Perhaps the social consequences of the crisis are less dire, at least in the core of euroland: furlough pay keeps you going for up to two years, regions are not dependent on a single industry (as the Midwest is), families may be more able to absorb the economic downturn and help members who have lost their jobs, public health care is a given, universities remain publicly financed and therefore affordable, etc. etc.

Here follows a good piece explaing how the EU works (or doesn't, for those who continue to see only its dark side)
http://www.ft.com/cms/s/0/0b2bd672-0dac-11de-a10d-0000779fd2ac.html

And an explanatioon of why the EU is reluctant to increase public spending as much as the US is.
http://www.ft.com/cms/s/0/70d77274-0db1-11de-8ea3-0000779fd2ac.html

A survival plan for global capitalism

The FT is positioning itself as the repentant capitalist, with an interesting series on the future of capitalism. For social democrats like me, it all looks and reads like deja vu, deja connu, but if it helps persuade hysterical supporters of the unfettered market that such an era is over, I welcome its effort.

http://www.ft.com/cms/s/0/b85b3572-0c0d-11de-b87d-0000779fd2ac,dwp_uuid=ae1104cc-f82e-11dd-aae8-000077b07658.html

And here is an article on Adam Smith by Amartya Sen, Nobel prize in economics and very important political and moral philosopher. There is nothing new in the article (and reading Adam Smith as if he were 100 per cent our contemporary makes no sense), but, as my ancestors used to say, repetita iuvat (repetition helps).

http://www.ft.com/cms/s/0/8f2829fa-0daf-11de-8ea3-0000779fd2ac,dwp_uuid=ae1104cc-f82e-11dd-aae8-000077b07658.html

Greenhouse emissions
There is an interesting project afoot for keeping track of toral greenhouse emissions

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/10/AR2009031001445.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

And a forecast which may help you decide what to do with your money (in case you have money to invest)

Roubini of RGE Monitor: Stock Market to Go Much LowerNouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business – discusses his recent views on the link between the real economy and stock market performance.
Can we rule out another bear market rally some time in 2009?
No, we cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in U.S. and China that the policy stimulus will provide on a temporary basis. Given the severity of macro, household, financial firms and corporate imbalances in the U.S. and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.
What are the downside risks to these bearish predictions for U.S. and global equities?
ROUBINI
On the downside there is at least a third probability of an L-shaped global near depression rather than the mere current severe U-shaped recession. If a near depression were to take hold globally a 40% to 50% further fall in U.S. and global equities from current levels could not be ruled out. But in this L-shaped near depression the last thing one would have to worry about would be stock markets as more severe issues would have to be addressed.
What are the upside risks to these bearish predictions for U.S. and global equities?
On the upside, we have an aggressive policy stimulus in the U.S. and other countries that might lead to a faster sustained economic and financial markets recovery that expected here. The bullish argument for a non-bear market and early persistent recovery of global equities is based on a better than expected recovery of the U.S. and global economy.
Bottom Line: P/E and S&P Index
Earnings per share (EPS) of S&P 500 firms will be in the $ 50 to 60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000.

Nouriel expounded the above topics further at the CBOE 25th Annual Risk Management Conference at Laguna Beach where he was the keynote speaker. Our audience can download the speech here: part 1, part 2 and part 3.