Friday, November 04, 2011

Eurozone In One Paragraph and A Bit On Roubini

If it was ever possible to describe the Eurozone debacle in one paragraph, this would be it:
EconoMonitor : Nouriel Roubini's Global EconoMonitor » Full Analysis: Greece Should Default and Abandon the Euro: "Like a broken marriage that requires a break-up, it is better to have rules—divorce laws—that make separation orderly and less costly to both sides. Breaking up and divorcing is painful and costly even when such rules exist. But being stuck in a marriage of convenience that is not working any longer is more costly and painful for the couple and their offspring (children/future generations) than an orderly and civilized break-up. Once the pain and costs of the break-up are managed, both sides can look forward to a more friendly relationship and a brighter future."
I have always been harsh on Roubini, but a good analyst should know when something someone says is right. The reason I am not too fond of Roubini is because he got lucky with the 2008 financial crisis prediction. He is the epitome of the following statement:
If you must forecast, forecast often, and if you’re ever right, never let them forget it.
If you don't believe me, read here:
In 2006, a somewhat obscure economist stood before a room full of peers at the International Monetary Fund and let loose with some good old-fashioned doomsaying. The United States was about to get hit with a ghastly housing bust, he said. The price of oil was about to skyrocket, and a particularly nasty recession was on its way, bringing with it untold ruin and misery for citizens, bankers, and businesspeople all over the world. The prophesy was dismissed initially as the mutterings of a pessimistic crank. A year later, he was proved right beyond all doubt. “He sounded like a madman in 2006,” an economist who had attended the talk later told The New York Times. “He was a prophet when he returned in 2007.” 
That economist was New York University’s Nouriel Roubini. And since he called the Great Recession, he has become about as close to a household name as an economist can be without writing “Freakonomics” or being Paul Krugman.
But here’s another thing about him: For a prophet, he’s wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003. 
How can this be? How can someone with the insight to be so right about a major event be so wrong about so many other ones? According to a recent study, it’s simple: The people who successfully predict extreme events, and are duly garlanded with accolades, big book sales, and lucrative speaking engagements, don’t do so because their judgment is so sharp. They do it because it’s so bad. 
That one big call about the Great Recession gave him an unrivaled platform from which to issue ever more predictions, and a grand job title to match his prominence, but his subsequent predictions suggest that his foresight may be no better than your average man on the street. The curious nature of his fame calls to mind two of economist Edgar Fiedler’s wry rules for economic forecasters: “If you must forecast, forecast often,” he wrote. And: “If you’re ever right, never let ’em forget it.”
Here is more on Alphaville and Real Time Economics:

Roubini has actually talked about this kind of thing before, in his now-famous 2006 speech to the IMF that predicted the crisis. Back then, he was forecasting a 70 per cent chance that there would be a severe recession. 
Where did he get his number? Here’s what he said in the speech:
My analysis has been based on circumstantial kinds of observations. I am not a professional forecaster and I do not use a big global macro model. Even then I said the probability of a recession is “70 percent”. If you ask me where I got that number: just out of my nose, I will be very honest about that. I think if you said “50 percent” you look like a wimp, it means you are not sure. So if you have the guts of believing there is going to be a recession, you should say something higher than that, and that is where the “70 percent” comes from. 
So my model is a ‘smell test’ or a ‘duck test’: if it looks like a recession and walks like a recession and quacks like a recession, it should be a recession. Or we can think of it as being the famous ‘obscenity test’: I’m referring to the Supreme Court Justice who said ‘I cannot define obscenity or pornography, but I know it when I see it’. So I see a recession that is based on this analysis and based on data and historical evidence.
Just out of his nose? Well, there are worse places to pull a forecast out of. Though if 50 per cent makes you “look like a wimp”, what should using the 40% Rule do for your image?
Get what I mean now?