Nouriel Roubini Three Years Ago

One of the common complaints of the financial media is that perma-bears are rarely held to account. Various gloom-and-doomers go on TV and make vague predictions of disaster, and whatever bad news comes to pass, they claim credit for predicting.

As someone who has his Buy List up for all the world to see all the time, I find it infuriating that these folks can get away with it. Just to be clear, I don’t think being wrong with a prediction is that bad. What I hate is that well-known people can so easily walk away from what they said and no one seems to care.

Let’s jump in the Wayback Machine and see what Nouriel Roubini was saying three years ago at the beginning of one of the greatest bull markets in history.

How Low Can The Stock Markets Go?
Nouriel Roubini, 03.12.09, 12:00 AM EST
The answer: Lower … much lower.

For the last six months, I have been arguing that, in spite of the sharp fall in U.S. and global equities, there were significant downside risks to stock markets. Thus, repeated bear market rallies would fizzle out under the onslaught of worse than expected macro news, earnings news and financial markets/firms shocks.

Put simply: If you take a macro approach, earnings per share of S&P 500 firms will be–quite realistically in 2009–in the $50 to $60 range. (Some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e., the price-to-earnings ratio, will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession.

For the record, the S&P 500 earned $56.86 in 2009 but the P/E Ratio soared because the market correctly saw that earnings would come roaring back. The S&P 500 ended 2009 at 1,115 which was nearly 20 times earnings.

Then, even in the best scenario (earnings at $60 and P/E at 12), the S&P index would be at 720. If either earnings are closer to $50 or the P/E ratio is lower, at 10, then the S&P could fall to 600 (12 times 50 or 10 times 60) or even to 500 (10 times 50). Equivalently, the Dow Jones industrial average (DJIA) would be at least as low as 7,000 and possibly as low as 6,000 or 5,000. And using a similar logic, I have argued that global equities–following the U.S.– had another 20%-plus downside risk.

It didn’t turn out to be. Going by the intra-day low, the S&P 500 doubled in less than two years. This was one of the greatest buying opportunities in history.

I expect to soon see Professor Roubini groveling before Jon Stewart and promising that he’ll try to do better.

Posted by on March 12th, 2012 at 11:04 am


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