Brad Setser

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JP Morgan is now forecasting a global recession

by Brad Setser
October 28, 2008

Via Martin Wolf and Nouriel Roubini comes the latest global forecast from JP Morgan:

“Once again, we have taken an axe to near-term growth forecasts for the developed world and will likely follow up with additional downward revisions for emerging economies in the coming weeks. Already, our forecasts suggest that global gross domestic product will contract at a near 1 per cent annual rate” in the fourth quarter of 2008 and the first quarter of 2009.

JPMorgan expects shrinkage this quarter at an annualised rate of 4 per cent in the US, 3 per cent in the UK and 2 per cent in the eurozone. It is forecasting 0.4 per cent global growth in 2009, with advanced countries shrinking 0.5 per cent and emerging ones growing 4.2 per cent.”

Ouch. And that is before the forecast for emerging economies has been revised down to reflect recent turmoil.


  • Posted by crgordon

    My casual observance is that markets get pumped the day before really dire news is delivered (but not the garden variety bad news of 16% y/y drop in house prices or a 38 consumer confidence number). I would categorize the JPM news as dire.

  • Posted by Tom Bombadil

    JP Morgan go on to predict that someday, man will walk on the moon.

  • Posted by Chidambaram

    In 2004 you predicted a hard landing for the US dollar to occur expectedly by 2008 but latest by 2010.
    Your predicted drop in the dollar value was not accepted by soft landing theorists who favored a gradual adjustment scenario with increasing fiscal stimuli in EMs offsetting reductions in their currency market interventions.
    It would be useful to know your latest opinion on this.

  • Posted by john

    Dude!! That’s like, totally great news! Let’s go buy some MORE stocks, dude!!!

  • Posted by Chidambaram

    Very interesting data in the Bank of England’s Financial Stability Report today.
    On page 14, Table 1 you’ll see the total losses on various financial instruments till close of business hours on October 20, 2008.
    Here we’re looking at mortgages, CDOs, etc … much more comprehensive and accurate loss estimates.
    UK: GBP 122.6 b
    US: USD 1577.3 b
    EU: EUR 784.6 b

    Where’s the money now?


  • Posted by Chidambaram
  • Posted by Willy2

    What took those guys at JP Morgan so long to acknowledge this fact ? Are they no longer able to hide the ugly facts ? Did the White House finally see the light that they could no longer deny the long sequence of facts of global slowdown ?
    Mr. Alan Greenspan already pointed to a recession in march 2007 !

  • Posted by Judy Yeo

    The real surprise is they took that long tosee things

    highly recommend ambrose evans piece in the telegraph – whoa, never quite expected that of greece and the IMF terms are starting to annoy people…

  • Posted by Twofish

    Where’s the money now?

    It was never there.

  • Posted by bsetser

    2fish — i lack your training in detecting anti-matter, but i would second your thought that “it was never there” … of course, lots of the street got paid as if what wasn’t there was, but that is a different story

  • Posted by Cedric Regula

    Aye, but the Warp engines Sir! Fractal banking has put the the losses in the future where we are bound to discover them later !

  • Posted by XvonZ

    JPMorgan IS the global recession.

  • Posted by DOR

    Greetings, after a long hiatus imposed by the cold, hard slap in the face that is the global economic reality, ca. 2007-08.

    My two cents:
    1. This is the worst economic environment of our lives.
    – 1a. It isn’t a slump.
    – 1b. It isn’t a contraction.
    – 1c. It isn’t a downturn.
    – 1d. It isn’t a correction.
    – 1e. It isn’t a buying opportunity.

    2. This week, cash up, hunker down and hope for the best.

    3. The floor, if there can be one, may come with an Obama victory that triggers rallies outside America while the Dow snoozes peacefully on election night.

  • Posted by df

    there lost my post again.
    I d be surprised if JPM announced something more dire than a 10 years depression.
    So far nothing new.
    That prediction laggs reality.

  • Posted by Chidambaram

    Can you change the title to “The Red Indians are collecting wood like crazy” ?

    It was autumn, and the Red Indians on the remote reservation asked their New Chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn’t tell what the weather was going to be.

    Nevertheless, to be on the safe side, he replied to his Tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared. But also being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked “Is the coming winter going to be cold?” “It looks like this winter is going to be quite cold indeed,” the meteorologist at the weather service responded. So the Chief went back to his people and told them to collect even more Wood.

    A week later, he called the National Weather Service again. “Is it Going to be a very cold winter?” “Yes,” the man at National Weather Service again replied, “It’s definitely going to be a very cold winter. ”

    The Chief again went back to his people and ordered them tocollect every scrap of wood they could find. Two weeks later, he called the National Weather Service again. “Are you absolutely sure that the winter is going to be very cold?” “Absolutely” , the man replied. “It’s going to be one of the coldest winters ever. ” “How can you be so sure?” the Chief asked. The weatherman replied, “The Red Indians are collecting wood like Crazy.”

  • Posted by charlie

    The numbers aren’t too bad. Not bad enough to cause a depression.

    It looks like everyone will be running the printing presses. China and Japan have been doing this for years and now it’s time for the US and Europe to join them. China’s policies require their printing presses to run faster than the US presses. I expect the next bubble to be even bigger than the current one. The trick is to figure out what the next bubble will be before everyone else does.

  • Posted by Chidambaram

    Various possiblilities:

    Infrastructure stocks in EMs and Infra stocks of cos which have such contracts in EMs.

    Stem Cell stocks which can be mythically connected up a new magic healthcare plan

    ‘Nuclear plants’

    The same banking stocks,first rebounding and then yielding good returns with better use of these engineered products

  • Posted by Chidambaram

    The mark to market losses reported by BoE on securities like ABS CDO can be correct numbers if it was a synthetic CDO created with CDS positions rather than an SPV.
    But there has to be a corresponding mark to market gain somewhere else in this case.
    Whether it’s a real loss or a ‘notional accounting loss’ there has to be a corresponding gain somewhere else.

    Best regards

  • Posted by Soxfan

    Actually, the money IS still there. In fact, there is more there now than there ever was. its just not flying around as freely and hence, not supporting the same level of asset prices.

  • Posted by Twofish

    bsetser says: of course, lots of the street got paid as if what wasn’t there was, but that is a different story

    Lots of people everywhere got paid as if there was real wealth being generated. There was some, but not at the values that were being quoted.

    Chidambaram Says: Whether it’s a real loss or a ‘notional accounting loss’ there has to be a corresponding gain somewhere else.

    No there doesn’t. You have a house that you thought was worth $500,000. Turns out that everyone now thinks it is worth $250,000. You lose money. No one makes money from the transaction.

    Also, investment banks don’t have any particular insight on whether there is going to be a recession or not. If you look at bank economic forecasts, they don’t turn out to be very good, so any forecast by JPM doesn’t tell you very much about conditions next year.

    It does tell you a lot about the mood and the planning assumptions within JPM right now, which is a useful bit of information.

  • Posted by Prakash

    Chidambaram Says: Whether it’s a real loss or a ‘notional accounting loss’ there has to be a corresponding gain somewhere else.

    Twofish Says: ‘No’ there doesn’t. You have a house that you thought was worth $500,000. Turns out that everyone now thinks it is worth $250,000. You lose money. No one makes money from the transaction.

    hmm! adding “NO” and telling the same!!

  • Posted by DJC

    Paulson’s $700 billion bailout becomes free-for-all giveaway scandal

    Give away $700 billion and you tend to attract a crowd, but a growing number of lawmakers and economists are criticizing the Bush administration for extending the massive Wall Street rescue plan far beyond what they had thought were its original limits.

    In the three weeks since President Bush signed the bailout bill, the Treasury Department has pledged to purchase at least $163 billion in preferred stock to boost the capital of nearly 35 national and regional banks. In addition, life-insurance companies, automakers, stockbrokers, privately held commercial banks and even hedge funds are lining up to make their pitches to an increasingly sympathetic government.

    Critics fear the expanded offer will lead to a free-for-all as rival industries fight for access to the bailout funds, while the federal government faces increasingly tough choices over which private companies to bailout and which to ignore.

    “There are already a lot of people sniffing around at this money, and it has become a real feeding frenzy,” said Bert Ely, an Alexandria-based banking consultant.

    The Financial Services Roundtable, a trade group for the country’s 100 largest financial services companies, has pushed hard for the Treasury program to expand beyond commercial banks to aid other credit-strapped industries, including stockbrokers, insurers, automakers and foreign-owned U.S. banks.

  • Posted by ttnk

    Patience. Not long now, when hats should change. But will the policy?

    It is not unreasonable to loose the grip, a bit.

  • Posted by credulous_prole

    Those who are forecasting the end of the world need to brush up on ‘netting’.

    All credit contracts are ultimately bilateral. The real issue is delivery of collateral, but then again, there was so much money made shorting or going long equities via CDS’… ahem ahem manipulation…

    When is China gonna buy our GSE paper? G20 meeting?

  • Posted by Twofish

    DJC: criticizing the Bush administration for extending the massive Wall Street rescue plan far beyond what they had thought were its original limits.

    You mean the government in general and Bush administration in specific would take a piece of legislation and use the powers in that legislation to its limits, far beyond its original intent.

    I’m *shocked*. It’s *never* happened before in history that a government would do that…. And especially President Bush who has shown traditionally shown lots of care and respect for implied unstated limits in legislation, and has *never* thought about using legislation in unexpected ways…

    Seriously folks….

    If you want to have limits, put them in the legislation. If a limit isn’t in the legislation then it doesn’t exist. While TARP was being drafted, I was going through line by line to think of all of the creative ways it could be used. The things that I came up with weren’t particularly objectionable, but I don’t have ideological objections to state ownership of industry, and it was obvious to me that TARP was going to lead to that.

    Once you recapitalized the banks, you’ve crossed the Rubicon and every other industry that runs into trouble will go to the Feds for a bailout. Autos, airlines. The thing about the banks is that there are a lot of industries that are quasi-banks, General Electric and General Motors for example.

  • Posted by DJC

    No Recession in China. Intel upping $150 million investment into China, after spending $2.5 billion for Advanced semiconductor fab in Dalian China. No doubt the Pentago Neo-cons will go ballistic over next-generation technology microprocessors made in China. 🙂 LOL.

    Intel said it was investing $150 million in 67 projects around China, some in conjunction with other companies including Lenovo, Haier, Neusoft and Tsinghua University. Intel Capital also announced an additional $20 million investment in three Chinese companies working on clean technology projects.

    “The biggest investment is that we will deploy 32-nanometer technology next year into production, well ahead of the rest of the industry,” he said, but did not give a date for the deployment.

    Otellini had spent the early part of Tuesday in the northeast Chinese city of Dalian, where the company is building Fab 68, a $2.5 billion, 300-mm wafer-fabrication plant, announced in March 2007. He said the facility’s construction was on track, and would open in 2010.

  • Posted by Twofish

    credulous_prole Says: Those who are forecasting the end of the world need to brush up on ‘netting’.

    The fact that the world hasn’t ended yet means that it is not likely to.

    The problem with netting is the time element. Suppose you have a $10,000 checking account with the bank and you own the bank in $10,000 in credit card debt, and you have a “netting” contract in place. The bank goes under.

    Great!!! You don’t lose anything from the deal since the credit card debt cancels the check account. Not great!!!! Since you no longer have a checking account to pay the bills, and your credit card doesn’t work any more. You are now totally hosed even though you and the bank owe each other nothing.

    This doesn’t happen with small investors because accounts are FDIC insured, and accounts aren’t netted. But add a few zeros and this is exactly the sort of chaos that happened the week after Lehman went under, but the fact that everything didn’t immediately fall apart means that we are in the situation were people are now figuring out how much everyone owes each other.

    credulous_prole Says: All credit contracts are ultimately bilateral.

    Credit contracts can very quickly become unilateral if someone defaults.

    The is also the issue of rehypothecation. You pledge collateral to Lehman. Lehman used this collateral as collateral to someone else. Lehman goes under. That other person now seizes the collateral that you gave Lehman. If you were a Lehman Europe prime brokerage customer, you are hosed. If you weren’t a prime brokerage customer, then you end up talking to your prime broker, the next day, wanting to withdraw all your money in small bills so you can put it into a mattress.

  • Posted by Rien Huizer

    These numbers are not bad at all. It would be more interesting to have a range, because forecasting GDP levels (an interesting statistic, rarely used) thus deltas is extremely difficult under the current circumstances. There should be at last three times the margin for error compared to more normal times. I would guess, for instance that JPM did not include the latest currency movements nor has a good idea of what to expect once the unwinding of trading positions has run its course (if ever).

    If it remains just a one-time shock caused by consumer budget constraints this may be OK. But I suspect the US, UK and a few other Western consumers will return to real consumption levels of the early 2000s, with residential construction, autos and consumer durables (in combination) possibly below that level. Not hard to figure out: just take a five years average of net household debt growth that will not occur during the next two years, and to be sure double that amount to take account of voluntary repayment and additional saving (assuming that tax refunds etc and effect of lower gas prices will be saved.

    Only when people are comfortable with their net asset position, debt service capacity under new lending standards and employment prospects would you see them consuming at 2005-2007 levels again. Europeans, Japanese and most Asian countries (except Korea) have ben less enthusiatically consuming (housing in Spain perhaps excepted) (sorry, I consider housing expenditure above a basic level consumption..). Given the enormous weight of household consumption in the anglosaxon economies, a 1 to 2% GDP decline there sems pretty bullish to me. If you look at the income composition in those countries, it becomes even more laughable: wages will stagnate, employment shrink and profits (with the demise of the financial sector and whole industries without easy sales, such as autos and appliances, plus the effect of declining commodity prices on agriculture and ming profits) will decline substantially… I think we will be lucky to see worldwide annual NOMINAL GDP growth (due to the effect of oil, commodities etc and discounting, little or no inflation) at better than minus 2%. between now and the end of 2009 and a return to 2008 levels perhaps in 2011. The Japanese were not that incompetent in the 1990, they just could not make people borrow to spend…

  • Posted by bsetser

    Rien — many hedge funds have a similar view re: the US, i.e. nominal GDP growth will be hard. I haven’t heard anyone argue that nominal GDP will fall globally tho.

    and I would note that a global recession is defined generally as global growth below 2%, so outright falls in real GDP would imply a very serious recession. obviously this is an unusual time — but the forecast you consider optimistic is still very dark

  • Posted by df

    I ve read over construction in ships is huge, car makers are slashing jobs, asian currencies are up and their export is going to suffer lots.
    Overcapacities in affordable housing are self evident worldwide, overcapacities in infrastructures in China are blatant.

    Btw can t remember if that post of me got erased or not. Does any one know how much of wall street the chinese will be able to buy with 2 trillions when the dow will be at 7000 ?
    Is that 10% 20% ? How many companies can you buy with 2 trillions ? THose numbers are so big that I can’t figure it out.

  • Posted by gillies

    “Does any one know how much of wall street the chinese will be able to buy with 2 trillions when the dow will be at 7000 ?”

    why be in such a hurry ?

  • Posted by Rien Huizer


    Right, but I do not see where the corporate profit growth to compensate for a pretty poor financial sector (plus the other ones mentioned) would come from. That is, nominal. And I do not think the employment portion is going to rise rapidly either. Of the rest of the world, only China seems like it will show measurable growth, but that will go to the 20-25 mm new participants in the modern economy who are unlikely to develop spending patterns of much use to the rest of the world. Per worker real growth will be about 2-3%, at best against perhaps 5% over the past three years . We will have to see what effect rural reform might have (possibly a lot, once the surplus people have gone, productivity is up and the remaining farmers rise above subsistence, but that is beyond our time horizon. In fact any early effects would be to increase the supply of rurals to the cities. And for China (taking into account the 1 for 1 principle (1% US GDP change results in the same size change in China), I personally would say with a 6 month lag)), my very reasonable (not a meltdown, just a good trim) scenario would result in 7-8% growth there in 2009 and the same for 2010, Europe and Japan remaining flat throughout). Not good news for laobaixing’s custodians. Their mandate might be questioned…

    The good news for politicians is perhaps that the bulk of these effects may not hurt the employed middle class that much. The fairly rich and the very poor seem to be the most affected and they are far from the median voter. Also, there is quite a bit to play with all of a sudden: state owned industries should bring a shine to the face of anyone with deserving friends and causes.

  • Posted by Cedric Regula

    Glad to see the discussion of Austrian economics vs. Keynesian-Monetarist-Supply Side Economics Forever Stuck in Down Cycle Counter Cyclical Policy Mode (KMSSFSDCCCPM) is over.

    There is Indian Economics(IE). IE of course has been working swimmingly in India, and over the centuries has transformed this country into the Nirvana we see today.

    But can the rest of the world benefit from similar advances in bookkeeping?

    I think not. If it were the case, the concept of “deflation” would be nonsensical and could not happen. The CBs would constantly be fighting “inflation”.

    Since we do have KMSSFSDCCCPM(coined Dinosaur Economics for short), there are some real world bookkeeping constraints holding us back from stellar growth in GDP reporting, corporate profit reporting, and gains in the personal net worth statement. Some think this can be solved going to a global currency(The Tulip), but for now lets see what we’ve got.

    The credit crunch is very real, because the banking system made this boo-boo about real estate prices, securitized the high prices, then insured them, and the knock-on effect of seemingly impossible falls in real estate prices(the surprising negative effect on the corresponding securities, and nervousness among the security insurers) has resulted in the “money multiplier” acting like a “money divider” with bad effects on those in fractional banking, and even worse effects on those in 30:1 fractal banking, hedgekeeping and bookkeeping insurance businesses.

    If anyone is wondering why this is a problem now all of a sudden, it’s because the rulebook says we have “mark to market” accounting, and the really big spoiler is:

    Assets = Liabilities !!!!!!!!!!!!!

    So of course the world CBs and governments are doing what they do to combat this problem; borrow from the future. We must save our wealth creators.

    So in theory this should return the money multiplier back to it’s boomtime value and resort the health of all our wabbits. Er, I mean net worth, balance sheets, income statements, etc… valued in dollars, or whatever is used as currency in the country of your choice.

    The one hitch is liabilities(our money) need to vastly increase at our wealth creators(banks).

    This is to come from ideally from the US worker/consumer/taxpayer/saver/investor(WCTSI), but others may help if they want.

    In the US case, the consumer has been helped by roughly 3% of GDP home equity withdrawal a year for almost this entire decade.

    The consumer looks like they are borrowing out, the savings rate is still zero, and distaste for the “wage-price spiral” among our policy makers has kept wages flat or possibly falling. But we may need a tax cut, or tax hike if the IMF gets their way.

    S&P has now slashed corporate profit projections in half for 2009.

    Unemployment data is creeping up steadily.

    The USG appears to need to borrow more money than all global CBs combined actually have. Worse yet, Assets = Liabilities could be a local problem for them as well.

    The above view puts me firmly in the recession camp.

  • Posted by Cedric Regula

    Aye. I’m an engineer, not an economist, so I would have expected Chid, and possibly even Twofish to tell me I’m full of kacky by now.

    So I can only assume they lay in ambush for me in a different thread of the blogoshere, enticing me to commit the error of off topic posting.

    So in response to this strategic lack of response, I reply:

    …Aye, but I take my orders from Captain Brad, an’a if he say banks dinae, nor canea cause a problem, traveling at Warp Speed ahead of us lads, lassies, zeenty-teenty,even snoofmadrune, like a rigwiddie-nag… ahead the of rest us at our implulse speed, lasting only ’till tinkle-sweetie time then doz’n off to dreamland.

    An’ if Captain Brad say the speed’n bankers a drop’n kacky, elf-girse, idioticals, quinkins, verter water, and other merry-begotten financial waste, with a beacon a Poot-poot-poot’ing to attract a Netty, the Yamph, the non-japanese Hizzie-fallow, an’ other idiots of our crew… dinea, nor canea, cause an arse-cockle in his view…

    Then it is my duty to obey, but waesuck, would resign my post and find another Enterprise out of this space.

    Translation dictionary:

  • Posted by Alfred Forsberg

    JP Morgan Chase is under criminal investigation by the US Attorney General. They operate a scam with Lexon Insurance and oil companies to defraud innocent Americans.