Is Dr Doom Nouriel Roubini now too optimistic about the global economic outlook?
Posted on 08 March 2011 with 6 comments from readers
New York University’s Professor Nouriel Roubini was so balanced in his presentation to Hedge Funds World Middle East today that he faced almost perfectly in both directions and came out almost an optimist, in contradiction of his fame as the Dr Doom who first warned on subprime housing back in 2006.
Perhaps that is a part of the problem. You can make a reputation on a single observation but not a career. Professor Roubini is now extremely perceptive in listing the pros and cons of the global economy in a glass half-full, glass half-empty exercise. But you are left to make your own judgment on where the global economy might be heading.
‘The global economy is going well compared to 2007/8′, he states, not the most original insight. The US double-dip recession – that he predicted soon after the global financial crisis of that time – has not appeared, nor has the euro zone broken up. Company profits are high with $3 trillion in cash on global balance sheets.
Emerging markets
The shift in the balance of power has created ‘multiple engines of growth’ in emerging markets. And even the modest correction in financial markets in the wake of the Arab revolts can be seen as showing the economy is more robust than a year ago. We even have the possibility of a further virtuous circle of rising asset values feeding the recovery.
On the other hand – an expressive Roubini uses frequently these days – you have the potential downside: there is too much debt and leverage in the system with a deleveraging of the private sector and a releveraging of the public sector; sovereign debt risk is rising with 10 per cent budget deficits in the US, UK and Japan; there is ‘chronic’ trouble in the periphery of the euro zone with high debt levels, a lack of competitiveness and the appreciation of the euro.
US weaknesses
Then the US economy has four major weaknesses: the weak labour market; housing is already in a double-dip recession with 40 per cent of homes set for negative equity; state and municipal governments are in funding crises; and the federal government is ‘in grid lock until 2013 risking a bond market revolt’.
Emerging markets have grown too fast and are overheating with inflation already up, and food and energy significant, though a hard landing for China is a ‘low probability’. And finally, last but by no means least oil and energy prices are now ‘the biggest risk’.
Professor Roubini weighs up these pros and cons and comes up with his verdict that the oil price hike will lead to a ‘modest reduction’ in rates of economic growth with the risk of a double dip recession in the UK and Japan. The interesting point is that his presentation also contained a final series of observations that explained why this scenario might not work out.
Rising interest rates
He pointed out that bond markets are already pushing up interest rates, and that the European Central Bank will almost certainly raise rates in April. Then again the stimulus and liquidity injections are coming to an end. Roubini thinks QE2 is ‘not likely’ to be followed by a QE3 because of the shift in the balance of power in Washington.
Will the US private sector be able to fill this gap? Roubini seems to think it will work. ArabianMoney wonders if he is not over-estimating the current strength of the world economy, and the impact of an oil shock whose size is impossible to predict in advance of Saudi protests scheduled for this Friday.
Perhaps the truth is that this is a terribly difficult time to make forecasts. But relying simply on the projection of current trends is a very well known route to poor predictions. In 2006 with his then controversial views on subprime Professor Roubini could shock the world with his insight. Now we are left with a balanced view that is most probably either too optimistic or too pessimistic.
6 Comments posted by readers:
Three interesting charts can be found in his latest ‘Investment Outlook’ by William H. Gross of Pimco at http://pimco.com.us entitled, “Two Bits,-Four Bits,-Six Bits, -a Dollar.” I don’t think we can completely rule out QE 3. It shouldn’t be needed unless oil goes to $130 and stays there. Louisiana light sweet crude is now about $119. The stuff smells so sweet, you want to drink it. Don’t.
Greek CDSs are at a new record high today. Ireland has to pay $20 billion in interest payments. They only take in about $24 billion in income. That can’t work for long. Those Germans are going to have to work a lot harder.
The Saudi’s are sending weapons to the rebels in Libya.
Have a drink for me for Mardi Gras. Alcohol gives me an instant headache. Go figure.
Over the past year, Roubini, who is Keynesian in his economic perspective, has cleverly side-stepped criticism of the Obama administration’s disastrous economic policy decisions.
No doubt, geo-political events are now significantly complicating the economic landscape and the economic outlook for the remainder of 2011.
Spin the clock ahead to October 2011:
Whatever the economic situation is at that time, Roubini doesn’t want to be seen as “being wrong.” Ditto, for most of the other US economists, all of whom are Keynesian. They simply don’t know what will happen, as the US and the entire world are in “unchartered territory.”
Ed Note: Sadly we do have a chart for this, the 30s depression.
A$..here is the USA situation report..$9.50 is the new American working wage – consumer GDP is dead..housing will never recover as the industry it was..the young cannot afford the property tax let alone bank lending..magically, low mort rates don’t grow $!!..Americans are absolutely dependant upon disappearing gas prices..
food is becoming prohibitably expensive for the household budget..the college diploma is WORTHLESS..jobless graduates are drowning in debt..i can go on, but to what point?..American politicians are worse then Khmer Rouge..i don’t say that hyperbolically..no solution is forthcoming to confront this national demise..our stars & stripes is sold out to highest bid, crushed underfoot the 3piece suits wearing lapel pins..a collapse is sure..how hard makes you optim or pessim..sadly, 9 out of 10 Americans don’t have a nickel to invest
People are looking for a visionary, not someone who can merely make lists of what we already know. Another Media Created Guru bites the dust!
@ tim mckee, Here’s the Point:
You’ve painted a very accurate picture of middle America; but then you say, “but to what point?”
Here’s Why Your Assessment is Important:</b.
I believe it's very important for informed Americans to tell the "uninformed" Americans the truth about what is truly going on; many folks in the US are clueless about what is really going on, and they believe the propaganda that is broadcast on news media; they also believe the government propaganda about jobs being created.
Yesterday, I spoke to an old friend who lives and works in the DC area. When I mentioned what is really happening "outside the DC Beltway", she was in disbelief. The people who live in MD and VA, in close proximity to DC, are truly clueless.
As a college graduate, I can honestly say that a college education today is practically worthless (unless it is in engineering or science), especially when you consider the costs for tuition.
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@ H Cook:
well said. Roubini’s many public appearances are not insightful at all; he merely states the obvious.
@ tim mckee, Here’s the Point:
You’ve painted a very accurate picture of middle America; but then you say, “but to what point?”
Here’s Why Your Assessment is Important:
I believe it’s very important for informed Americans to tell the “uninformed” Americans the truth about what is truly going on; many folks in the US are clueless about what is really going on, and they believe the propaganda that is broadcast on news media; they also believe the government propaganda about jobs being created.
Yesterday, I spoke to an old friend who lives and works in the DC area. When I mentioned what is really happening “outside the DC Beltway”, she was in disbelief. The people who live in MD and VA, in close proximity to DC, are truly clueless.
As a college graduate, I can honestly say that a college education today is practically worthless (unless it is in engineering or science), especially when you consider the costs for tuition.
==============
@ H Cook:
well said. Roubini’s many public appearances are not insightful at all; he merely states the obvious.