Monday, December 29, 2014

Nouriel Roubini's economic outlook 2015 [VIDEO]



Nouriel Roubini on his predictions for 2015, Fed, Possibility of Rate Hike in June 2015, Monetary Easing and politics in Europe, Greece, France.

Monday, December 22, 2014

Roubini quote on Bubbles in the market

Having spent 10 years studying emerging markets, I know that you have patterns repeated over and over again. A bubble is like a fire which needs oxygen to continue... when you see there is no oxygen, things change.

Thursday, December 18, 2014

Why the US Dollar will continue its rally



The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way.

The BoJ’s effort to weaken the yen is a beggar-thy-neighbour approach that is inducing policy reactions throughout Asia and around the world. Central banks in China, South Korea, Taiwan, Singapore, and Thailand — fearful of losing competitiveness relative to Japan — are easing their own monetary policies — or will soon ease more.

The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.

All of this will lead to a strengthening of the dollar, as growth in the US is picking up and the Federal Reserve has signalled that it will begin raising interest rates next year. But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation.

The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth.

Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and thus private consumption.

In the Eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the EU, the International Monetary Fund, and the ECB have been a massive impediment to growth. In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year.

In the US, a budget sequester and other tax and spending policies led to a sharp fiscal drag in 2012-14. And in the UK, self-imposed fiscal consolidation weakened growth until this year.

Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking.

But most countries that were over-saving and underspending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and thus undermining growth.

As fiscal austerity and asymmetric adjustment have taken their toll on economic performance, monetary policy has borne the burden of supporting faltering growth via weaker currencies and higher net exports. But the resulting currency wars are partly a zero-sum game: If one currency is weaker, another currency must be stronger; and if one country’s trade balance improves, another’s must worsen.

Of course, monetary easing is not purely zero-sum. Easing can boost growth by lifting asset prices (equities and housing), reducing private and public borrowing costs, and limiting the risk of a fall in actual and expected inflation.

Given fiscal drag and private deleveraging, lack of sufficient monetary easing in recent years would have led to double and triple dip recession (as occurred, for example, in the Eurozone).

But the overall policy mix has been suboptimal, with too much front-loaded fiscal consolidation and too much unconventional monetary policy (which has become less effective over time). A better approach in advanced economies would have comprised less fiscal consolidation in the short run and more investment in productive infrastructure, combined with a more credible commitment to medium- and long-term fiscal adjustment — and less aggressive monetary easing.

You can lead a horse to liquidity, but you can’t make it drink. In a world where private aggregate demand is weak and unconventional monetary policy eventually becomes like pushing on a string, the case for slower fiscal consolidation and productive public infrastructure spending is compelling.

Such spending offers returns that are certainly higher than the low interest rates that most advanced economies face today, and infrastructure needs are massive in both advanced and emerging economies (with the exception of China, which has overinvested in infrastructure). Moreover, public investment works on both the demand and supply sides.

It not only boosts aggregate demand directly; it also expands potential output by increasing the stock of productivity-boosting capital.

Unfortunately, the political economy of austerity has led to suboptimal outcomes. In a fiscal crunch, the first spending cuts hit productive public investments, because governments prefer to protect current — and often inefficient — spending on public-sector jobs and transfer payments to the private sector.

As a result, the global recovery remains anaemic in most advanced economies (with the partial exception of the US and the UK) and now also in the major emerging countries, where growth has slowed sharply in the last two years.

The right policies — less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing — are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing.

In a sense, we are all Japanese now.

Monday, December 8, 2014

Nouriel Roubini says Market collapse in 2016

I think that this frothiness that we have seen in financial markets is likely to continue, from equities to credit to housing, and in a couple of years, most likely, this asset inflation is going to become asset frothiness and eventually an asset and a credit bubble and eventually any bubble ends up in a bust and a crash. 

I would say that valuations in many markets, whether it’s government bonds or credit, or real estate, or some equity markets, are already stretched. And they’re going to become more stretched as the real economy justifies the slow exit, and all this liquidity is going to go into more asset inflation. So two years down the line, we could have this shakeout … 2016 I would say.

Wednesday, December 3, 2014

Dr Roubini on currency wars by countries


The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world.

Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies – or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.

All of this will lead to a strengthening of the US dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year. But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation.

The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and thus private consumption.

In the Euro-Zone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the International Monetary Fund, and the ECB have been a massive impediment to growth. In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the US, a budget sequester and other tax and spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year.

Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and thus undermining growth.

As fiscal austerity and asymmetric adjustment have taken their toll on economic performance, monetary policy has borne the burden of supporting faltering growth via weaker currencies and higher net exports. But the resulting currency wars are partly a zero-sum game: If one currency is weaker, another currency must be stronger; and if one country’s trade balance improves, another’s must worsen.

Of course, monetary easing is not purely zero-sum. Easing can boost growth by lifting asset prices (equities and housing), reducing private and public borrowing costs, and limiting the risk of a fall in actual and expected inflation. Given fiscal drag and private deleveraging, lack of sufficient monetary easing in recent years would have led to double and triple dip recession (as occurred, for example, in the eurozone).

But the overall policy mix has been sub-optimal, with too much front-loaded fiscal consolidation and too much unconventional monetary policy (which has become less effective over time). A better approach in advanced economies would have comprised less fiscal consolidation in the short run and more investment in productive infrastructure, combined with a more credible commitment to medium- and long-term fiscal adjustment – and less aggressive monetary easing.

You can lead a horse to liquidity, but you can’t make it drink. In a world where private aggregate demand is weak and unconventional monetary policy eventually becomes like pushing on a string, the case for slower fiscal consolidation and productive public infrastructure spending is compelling.

Such spending offers returns that are certainly higher than the low interest rates that most advanced economies face today, and infrastructure needs are massive in both advanced and emerging economies (with the exception of China, which has overinvested in infrastructure). Moreover, public investment works on both the demand and supply sides. It not only boosts aggregate demand directly; it also expands potential output by increasing the stock of productivity-boosting capital.

Unfortunately, the political economy of austerity has led to sub-optimal outcomes. In a fiscal crunch, the first spending cuts hit productive public investments, because governments prefer to protect current – and often inefficient – spending on public-sector jobs and transfer payments to the private sector. As a result, the global recovery remains anemic in most advanced economies (with the partial exception of the US and the UK) and now also in the major emerging countries, where growth has slowed sharply in the last two years.

The right policies – less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing – are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing. In a sense, we are all Japanese now.

Monday, December 1, 2014

Captalism can be self destructive

Karl Marx had it right. At some point, capitalism can destroy itself. 

We thought that markets work. They are not working. What’s individually rational is a self-destructive process.

Tuesday, November 25, 2014

Some financial literacy is a must in todays world

Even in the United States you're affected by what happens in the rest of the world. You need to have a basic amount of financial literacy, not only about what the U.S. economy and the Fed will do, but what happens in Europe, what happens in China, what happens in Japan, what happens in emerging markets impacts the United States through trade channels, commodity channels, financial channels.

So, I think that any intelligent, sophisticated investor has to understand this very complicated, interdependent global economy where no country is an island, not even the United States.

Monday, November 24, 2014

Investors should invest for the long term

I believe investors should invest for the long run, so I don't buy and sell. I usually maintain the classic index of global equities, diversified U.S. and global and emerging markets, and when the risk is larger, I diminish the amount in global equities and put more into liquid assets - but very irregularly.

Thursday, November 20, 2014

Short term risks with long term benefits for investors in China

A rising China is, perhaps, the key center of gravity in developing Asia, which is now the fastest-growing region of the world.

From the perspective of investors, the size and scope of the Chinese economy mean great potential for both risk and opportunity: the risk is more short term as China needs to re-balance its economy and avoid a hard landing; while the opportunity is medium and long term as China will—in a few years—become the largest economy in the world and the largest market. 


Wednesday, November 19, 2014

Why Roubini is bullish the US Dollar

What's going to happen is that these competitive QE wars that are proxies for currency wars are going to lead to the dollar strengthening further and further.

Monday, November 17, 2014

Nouriel Roubini doesnt expect Fed to raise rates soon

Dr Doom thinks the Fed will play it safe with potential rate hikes

Even if growth, inflation and employment data are at the right level to start hiking, the Fed would like to wait a little bit longer just to make sure that if they start hiking with the liftoff, they're not going to abort and go back to zero because otherwise they lose their credibility. There will be a hard landing of the economy. So better be safe rather than sorry.

Why Roubini thinks the other central bank policies could affect US Fed decisions-

Suppose the rest of the world is worse than the Fed expects and suppose the dollar appreciates by another 5 to 7 percent, trade-weighted, at that point the impact on U.S. growth and on U.S. inflation could be worse than the Fed is currently expecting. That could lead the Fed to start later and much more slowly.

Monday, November 10, 2014

Roubini says QE has helped the Rich mostly

Rising inequality is redistributing income to those with a high propensity to save (the rich and corporations), and is exacerbated by capital-intensive, labor-saving innovation. 

This combination of high debt and rising inequality may be the source of the secular stagnation that is making structural reforms more politically difficult to implement. If anything, the rise of nationalistic, populist, and nativist parties in Europe, North America, and Asia is leading to a backlash against free trade and labor migration, which could further weaken global growth. 

Rather than boosting credit to the real economy, unconventional monetary policies have mostly lifted the wealth of the very rich—the main beneficiaries of asset reflation. But now reflation may be creating asset-price bubbles, and the hope that macro-prudential policies will prevent them from bursting is so far just that—a leap of faith. 

Fortunately, rising geopolitical risks—a Middle East on fire, the Russia-Ukraine conflict, Hong Kong’s turmoil, and China’s territorial disputes with its neighbours—together with geo-economic threats from, say, Ebola and global climate change, have not yet led to financial contagion. Nonetheless, they are slowing down capital spending and consumption, given the option value of waiting during uncertain times. 

So the global economy is flying on a single engine, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers. If only there were emergency crews on the ground.

Thursday, November 6, 2014

Fed must delay Rate hikes according to Roubii

Persistently low oil prices induce a fall in investment in new capacity, further undermining global demand. Meanwhile, market volatility has grown, and a correction is still underway. Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices. But recent bad macro news has been bad for markets, owing to the perception of policy inertia. 

Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further. 

As for fiscal policy, Germany continues to resist a much-needed stimulus to boost euro zone demand. And Japan seems to be intent on inflicting on itself a second, growth-retarding consumption-tax increase. Furthermore, the Fed has now exited quantitative easing and is showing a willingness to start raising policy rates sooner than markets expected.

If the Fed does not postpone rate increases until the global economic weather clears, it risks an aborted takeoff—the fate of many economies in the last few years. 



Wednesday, November 5, 2014

Nouriel worries about BRIC economies

Major emerging countries are also in trouble. Of the five BRIC's economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession. The biggest, China, is in the midst of a structural slowdown that will push its growth rate closer to 5% in the next two years, from above 7% now. 

At the same time, much-touted reforms to rebalance growth from fixed investment to consumption are being postponed until President Xi Jinping consolidates his power. China may avoid a hard landing, but a bumpy and rough one appears likely. The risk of a global crash has been low, because deleveraging has proceeded apace in most advanced economies; the effects of fiscal drag are smaller; monetary policies remain accommodative; and asset reflation has had positive wealth effects. Moreover, many emerging-market countries are still growing robustly, maintain sound macroeconomic policies, and are starting to implement growth-enhancing structural reforms. 

And US growth, currently exceeding potential output, can provide sufficient global lift—at least for now. But serious challenges lie ahead. 

Private and public debts in advanced economies are still high and rising—and are potentially unsustainable, especially in the euro zone and Japan.

Tuesday, November 4, 2014

Roubini compares economy to Jet Plane

The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the US and its close cousin, the UK). 

The second engine—the euro zone—has now stalled after an anaemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds—rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle—become headwinds. 

So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust. Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending. And, while increased supply—particularly from North American shale resources—has put downward pressure on prices, so has weaker demand in the euro zone, Japan, China, and many emerging markets. 

Monday, November 3, 2014

Large parts of population not benefiting from inflation

I would say the household sector is divided. Wealthy people are doing well. But you have a large number of households that have a very [few] assets so they don’t benefit much from inflation. They have a lot of debt that is being refinanced at low interest rates, but at some point rates are going to go higher, and while the labor market is improving, many people have jobs now that don’t create a lot of wage growth. Wage growth has been anemic. 

So the balance sheets of these households are fragile—lots of debt, very little assets and their P&L in terms of income generation is still sort of mediocre. You add to that $1.3 trillion of student loans, you add to that still a significant level of household debt for those who don’t have many assets, you add to that the sharp increase in sub-prime auto loans and so on, and you have a picture of where maybe the U.S. recovery is going to be more fragile than people make it. 

Wednesday, October 29, 2014

Factors that could ruin the US economic recovery

On the baseline, we see U.S. economic growth close to 3% in the second half of this year into next year. I would say that the things that could derail the U.S. recovery are either external factors or domestic factors.

External factors are [first] that the global economy looks like it’s running on a single engine, the one of the U.S.—the other three major ones are sort of stalling. The Eurozone is at risk of deflation and triple dip recession. Japan has been hurt by fiscal contraction following the consumption tax, and China is quite sharply slowing down. So of those four engines of global growth, the U.S. seems to be the only one that’s still running. And that’s a problem because eventually that’s not sufficient. Some of those global slowdowns can affect the United States.

Two, one of the manifestations of that global slowdown and the relative growth differential between the U.S. and the rest of the world has been the appreciation of the U.S. Dollar. So far it’s orderly and the impact on growth is modest, but if the appreciation of the U.S. Dollar were to accelerate, then the impact on growth could be, over time, more significant.

The third aspect of the global economy that might affect the U.S. is, of course, geopolitical risk. Those risks so far with the Middle East or Russia/Ukraine have not had an impact on the markets, but I would say so far the impact has been contained because there hasn’t really been a shock to the supply of gas and oil. But you can see a scenario if those geopolitical risks were to escalate, then the impact on the U.S. could become more significant. So those are the global factors.

Among the domestic factors that can derail the recovery is, first of all, the recovery is still not exceptional in spite of all this monetary stimulus. It has been so far anemic...So there’s a question mark of whether the U.S., like other advanced economies, may be at risk of secular stagnation, a combination of high levels of private and public debt, and a rise of inequality and debt redistributing from those who spend to those who save. An additional point is that as the Fed now ends QE and gradually starts raising rates, there’s a question of whether the U.S. economy can tolerate the rising short rates and long rates that the exit from QE and from zero policy rates will trigger. There is still too much private debt, and there is still too much public debt. We think that the U.S. economy can withstand it, but it’s an open question mark.

Monday, October 27, 2014

Fed could raise rates next year

I think that the lifting of zero policies is going to be around June of next year. That would be my point estimate. It could occur slightly sooner if the economy really recovers strongly. It could be a little bit later if global factors justify waiting until July or so, but I would say sometime in the year. 

Monday, October 20, 2014

Roubini predicts 5 percent upside to stocks

I would say U.S. stock prices have risen significantly since the global financial crisis. Earnings growth is slowing down. Even top line revenues are somehow slowing down. P/E ratios are slightly above historical averages if you take Shiller’s CAPE. [In other sectors] they’re meaningfully above historical averages, and in some sub-sectors—like tech, biotech, social media—they have P/E ratios that just don’t make any sense.

So, there are three forces that are going to be driving the U.S. Stock Market ahead. Some acceleration of growth should be positive for earnings. Some slowdown in earnings in top line and bottom line because they cannot keep on growing much faster than GDP forever. And the global factors might imply that the components of earnings of S&P that come from the rest of the world are going to disappoint. And three, however slowly short and long rates might go higher, that would be a headwind to U.S. equities. 

So, the net of it would be, say, next year U.S. equities going up maybe by 5%, not more than that. So still positive returns, but not the kind of returns we have seen in the last couple of years. That will be our baseline on U.S. equities. 

Monday, October 13, 2014

Markets could suffer in the following scenario

Nouriel Roubini cites the reasons he believes the stock markets around the world could get ugly.

The Middle East turmoil could affect global markets if one or more terrorist attack were to occur in Europe or the US - a plausible development, given that several hundred Islamic State jihadists are reported to have European or US passports. Markets tend to disregard the risks of events whose probability is hard to assess, but which have a major impact on confidence when they do occur. Thus, a surprise terrorist attack could unnerve global markets.

Markets could be incorrect in their assessment that conflicts, like that between Russia and Ukraine, or Syria's civil war, will not escalate or spread. Russian President Vladimir Putin's foreign policy may become more aggressive in response to challenges to his power at home, while Jordan, Lebanon and Turkey are all being destabilised by Syria's ongoing meltdown.

Geopolitical and political tensions are more likely to trigger global contagion when a systemic factor shaping the global economy comes into play. For example, the mini-perfect storm that roiled emerging markets earlier this year - even spilling over for a while to advanced economies - occurred when political turbulence in a few countries - Turkey, Thailand and Argentina - met bad news about Chinese growth. China, with its systemic importance, was the match that ignited a tinderbox of regional and local uncertainty.

Today (or soon), the situation in Hong Kong, together with the news of further weakening in the Chinese economy, could trigger global financial havoc, or the US Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. The Eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up. The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible.

While global markets arguably have been rationally complacent, financial contagion cannot be ruled out. A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to World War I until late in the summer of 1914.

Back then, markets were poor at correctly pricing low-probability, high-impact tail risks. They still are.

Wednesday, October 8, 2014

Reasons why markets have performed well so far

An increasingly obvious paradox has emerged in global financial markets this year. Despite the fact that geopolitical risks - the Russia-Ukraine conflict, the rise of the Islamic State and growing turmoil across the Middle East, China's territorial disputes with its neighbours and now mass protests in Hong Kong and the risk of a crackdown - have multiplied, markets have remained buoyant, if not downright bubbly.

Indeed, oil prices have been falling, not rising. Global stock markets have, overall, reached new highs. And credit markets show low spreads, while long-term bond yields have fallen in most advanced economies.

Yes, financial markets in troubled countries - for example, Russia's currency, equity and bond markets - have been negatively affected. But the more generalised contagion to global financial markets that geopolitical tensions typically engender has failed to materialise.

Why the indifference? Are investors too complacent or is their apparent lack of concern rational, given that the actual economic and financial impact of current geopolitical risks - at least so far - have been modest?

Global markets have not reacted for several reasons. For starters, central banks in advanced economies - the United States, the Eurozone, the United Kingdom and Japan - are holding policy rates near zero and long-term interest rates have also been kept low. This is boosting the prices of other risky assets, such as equities and credit.

Markets have taken the view that the Russia-Ukraine conflict will remain contained, rather than escalating into a full-scale war. So, though sanctions and counter-sanctions between the West and Russia have increased, they are not causing significant economic and financial damage to the European Union or the US. More importantly, Russia has not cut off natural-gas supplies to Western Europe, which would be a major shock for gas-dependent European Union (EU) economies.

The turmoil in the Middle East has not triggered a massive shock to oil supplies and prices like those that occurred in 1973, 1979 and 1990. On the contrary, there is excess capacity in global oil markets. Iraq may be in trouble, but about 90pc of its oil is produced in the south, near Basra, which is fully under Shia control, or in the north, under the control of the Kurds. Only about 10pc is produced near Mosul, now under the control of the Islamic State.

Finally, the one Middle Eastern conflict that could cause oil prices to spike - a war between Israel and Iran - is a risk that, for now, is contained by ongoing international negotiations with Iran to contain its nuclear program.

So, there appears to be good reasons why global markets have so far reacted benignly to today's geopolitical risks.

Monday, September 15, 2014

Nouriel Roubini vs Karl Marx

Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. 

As Marx argued, unregulated capitalism can lead to regular bouts of overcapacity, under consumption, and the recurrence of destructive financial crises fueled by credit bubbles, and asset-price booms and busts. 

Tuesday, September 9, 2014

China will be ok

China's lower PMI is unlikely to foreshadow a meaningful slowdown

via Twitter

Tuesday, September 2, 2014

Nouriel Roubini on Abenomics vs Draghinomics

Two years ago, Shinzo Abe’s election as Japan’s prime minister led to the advent of “Abenomics,” a three-part plan to rescue the economy from a treadmill of stagnation and deflation. Abenomics’ three components – or “arrows” – comprise massive monetary stimulus in the form of quantitative and qualitative easing (QQE), including more credit for the private sector; a short-term fiscal stimulus, followed by consolidation to reduce deficits and make public debt sustainable; and structural reforms to strengthen the supply side and potential growth.

It now appears – based on European Central Bank President Mario Draghi’s recent Jackson Hole speech – that the ECB has a similar plan in store for the eurozone. The first element of “Draghinomics” is an acceleration of the structural reforms needed to boost the eurozone’s potential output growth. Progress on such vital reforms has been disappointing, with more effort made in some countries (Spain and Ireland, for example) and less in others (Italy and France, to cite just two).

But Draghi now recognizes that the eurozone’s slow, uneven, and anemic recovery reflects not only structural problems, but also cyclical factors that depend more on aggregate demand than on aggregate supply constraints. Thus, measures to increase demand are also necessary.

Here, then, is Draghinomics’ second arrow: to reduce the drag on growth from fiscal consolidation while maintaining lower deficits and greater debt sustainability. There is some flexibility in how fast the fiscal target can be achieved, especially now that a lot of front-loaded austerity has occurred and markets are less nervous about the sustainability of public debt. Moreover, while the eurozone periphery may need more consolidation, parts of the core – say, Germany – could pursue a temporary fiscal expansion (lower taxes and more public investment) to stimulate domestic demand and growth. And a eurozone-wide infrastructure-investment program could boost demand while reducing supply-side bottlenecks.

The third element of Draghinomics – similar to the QQE of Abenomics – will be quantitative and credit easing in the form of purchases of public bonds and measures to boost private-sector credit growth. Credit easing will start soon with targeted long-term refinancing operations (which provide subsidized liquidity to eurozone banks in exchange for faster growth in lending to the private sector). When regulatory constraints are overcome, the ECB will also begin purchasing private assets (essentially securitized bundles of banks’ new loans).

Now Draghi has signaled that, with the eurozone one or two shocks away from deflation, the inflation outlook may soon justify quantitative easing (QE) like that conducted by the US Federal Reserve, the Bank of Japan, and the Bank of England: outright large-scale purchases of eurozone members’ sovereign bonds. Indeed, it is likely that QE will begin by early 2015.

Quantitative and credit easing could affect the outlook for eurozone inflation and growth through several transmission channels. Shorter- and longer-term bond yields in core and periphery countries – and spreads in the periphery – may decline further, lowering the cost of capital for the public and private sectors. The value of the euro may fall, boosting competitiveness and net exports. Eurozone stock markets could rise, leading to positive wealth effects. Indeed, as the likelihood of QE has increased over this year, asset prices have already moved upward, as predicted.

These changes in asset prices – together with measures that increase private-sector credit growth – can boost aggregate demand and increase inflation expectations. One should also not discount the effect on “animal spirits” – consumer, business, and investor confidence – that a credible commitment by the ECB to deal with slow growth and low inflation may trigger.

Some more hawkish ECB officials worry that QE will lead to moral hazard by weakening governments’ commitment to austerity and structural reforms. But in a situation of near-deflation and near-recession, the ECB should do whatever is necessary, regardless of these risks.

Moreover, QE may actually reduce moral hazard. If QE and looser short-term fiscal policies boost demand, growth, and employment, governments may be more likely to implement politically painful structural reforms and long-term fiscal consolidation. Indeed, the social and political backlash against austerity and reform is stronger when there is no income or job growth.

Draghi correctly points out that QE would be ineffective unless governments implement faster supply side structural reforms and the right balance of short-term fiscal flexibility and medium-term austerity. In Japan, though QQE and short-term fiscal stimulus boosted growth and inflation in the short run, slow progress on the third arrow of structural reforms, along with the effects of the current fiscal consolidation, are now taking a toll on growth.

As in Japan, all three arrows of Draghinomics must be launched to ensure that the eurozone gradually returns to competitiveness, growth, job creation, and medium-term debt sustainability in the private and public sectors. By the end of this year, it is to be hoped, the ECB will start to do its part by implementing quantitative and credit easing.



VIA http://www.project-syndicate.org/commentary/nouriel-roubini-supports-ecb-president-mario-draghi-s-plan-to-revive-eurozone-growth

Tuesday, August 19, 2014

Kicking the can has its limits

The re-balancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. 

This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can.

Thursday, August 14, 2014

Roubini on Putin and Russia's grand plan

The escalating conflict in Ukraine between the western-backed government and Russian-backed separatists has focused attention on a fundamental question: what are the Kremlin's long-term objectives? Though the Russian president Vladimir Putin's immediate goal may have been limited to regaining control of Crimea and retaining some influence in Ukrainian affairs, his longer-term ambition is much bolder.

That ambition is not difficult to discern. Putin once famously observed that the Soviet Union's collapse was the greatest catastrophe of the 20th century. Thus, his long-term objective has been to rebuild it in some form, perhaps as a supra-national union of member states like the European Union.

This goal is not surprising. Declining or not, Russia has always seen itself as a great power that should be surrounded by buffer states. Under the czars, imperial Russia extended its reach over time. Under the Bolsheviks, Russia built the Soviet Union and a sphere of influence that encompassed most of central and eastern Europe. And now, under Putin's similarly autocratic regime, Russia plans to create, over time, a vast Eurasian Union (EAU).

While the EAU is still only a customs union, the EU's experience suggests that a successful free-trade area leads over time to broader economic, monetary and eventually political integration. Russia's goal is not to create another North American Free Trade Agreement (Nafta). It is to create another EU, with the Kremlin holding all of the real levers of power. The plan has been clear. Start with a customs union – initially Russia, Belarus, and Kazakhstan – and add most of the other former Soviet republics. Indeed, now Armenia and Kyrgyzstan are in play.

Once a broad customs union is established, trade, financial and investment links within it grow to the point that its members stabilise their exchange rates vis-a-vis one another. Then, perhaps a couple of decades after the customs union is formed, its members consider creating a true monetary union with a common currency - the Eurasian ruble? - that can be used as a unit of account, means of payment and store of value.

As the eurozone experience proves, sustaining a monetary union requires banking, fiscal and full economic union. And, once members give up their sovereignty over fiscal, banking, and economic affairs, they may eventually need a partial political union to ensure democratic legitimacy.

Realising such a plan may require overcoming serious challenges and the commitment of large financial resources over a period of many decades. But the first step is a customs union, and, in the case of the Eurasian Union, it had to include Ukraine, Russia's largest neighbour to the west. That is why Putin put so much pressure on former president Viktor Yanukovych to abandon an association agreement with the EU. It is also why Putin reacted to the fall of Yanukovych's government by taking over Crimea and destabilising eastern Ukraine.

Recent events have further weakened market-oriented, western-leaning factions in Russia and strengthened the state-capitalist, nationalist factions, which are now pushing for faster establishment of the EAU. In particular, the tension with Europe and the United States over Ukraine will shift Russia's energy and raw material exports – and the related pipelines – toward Asia and China.

Likewise, Russia and its Brics partners (Brazil, India, China, and South Africa) are creating a development bank to serve as an alternative to the western-controlled International Monetary Fund and the World Bank. Revelations of electronic surveillance by the US may lead Russia – and other illiberal states – to restrict internet access and create their own nationally controlled data networks. There is even talk of Russia and China creating an alternative international payment system to replace the Swift system, which the US and Europe can use to impose financial sanctions against Russia.

Creating a full EAU – one that is gradually less tied to the west by trade, financial, economic, payments, communications and political links – may be a pipe dream. Russia's lack of reform and adverse demographic trends imply low potential growth and insufficient financial resources to create the fiscal and transfer union that is needed to bring other countries in.

Putin, however, is ambitious and – like other autocrats in central Asian nations – he may remain in power for decades to come. And like it or not, even a Russia that lacks the dynamism needed to succeed in manufacturing and the industries of the future will remain a commodity-producing superpower.

Revisionist powers such as Russia, China and Iran appear ready to confront the global economic and political order that the US and the west built after the collapse of the Soviet Union. But now one of these revisionists powers – Russia – is pushing ahead aggressively to recreate a near-empire and a sphere of influence.

Unfortunately, the sanctions that the US and Europe are imposing on Russia, though necessary, may merely reinforce the conviction among Putin and his nationalist Slavophile advisers that Russia's future lies not in the west, but in a separate integration project in the east. Barack Obama says that this is not the beginning of a new cold war; current trends may soon suggest otherwise.

Monday, August 4, 2014

Raise taxes and cut spending

We're going to have to raise taxes and cut spending. Ultimately, both the public and private sectors will have to spend less and save more, and that implies that economic growth is going to be weak.

Wednesday, July 30, 2014

Traders had incentives to take huge risks in Wallstreet

For what concerns bankers and traders, one of the biggest problems in the crisis was the way they were compensated. 

There were huge incentives for them to take on a lot of risk and leverage. If the risky investments turn out right, they get large profits and bonuses, and if they turn out to be wrong further down the line, they've already pocketed their bonuses. 

The worst thing that happens is you don't get another bonus.

Monday, July 28, 2014

Too many companies were Bailed out with taxpayer money

Many of the things that were done were in fact appropriate. We learned the lessons of the Great Depression and we used monetary policy, we used fiscal stimulus, and even some backstopping of the financial sector was ultimately probably necessary. If Wall Street would have actually collapsed, the damage to Main Street would have been even more severe.

However, I think we still bailed out too many institutions, and we kept too many zombie banks alive. We could have taken the unsecured credit of some of these banks—their debts—and converted them into equity. That's what you do in bankruptcy. You take a firm that's in Chapter 11, and you take some of their debts and you convert them into equity.

If we'd done that, some of the creditors of the banks would have become equity holders, and that would have recapitalized the banks without using public money. We would not have had to bailout the creditors and the shareholders of the banks. I would have done that as part of the solution in order to limit the amount of public money and taxpayer money used for bailouts.

Wednesday, July 23, 2014

Nouriel Roubini Quote on Too Big to Fail

If they're too big to fail, they're also becoming too big to be saved, too big to be bailed out, and too big to be managed. 

Monday, July 14, 2014

Roubini on China hard landing risk

The official debt of China is only 17% of GDP at the central level, but when you add the banks, the state and local governments and all the other liabilities, we're already estimating that the public debt of China is 80% of GDP, that's why we're going to have a hard landing in China.

Thursday, July 10, 2014

Downside risks could surprise us

It’s still a relatively risky world in which things could go wrong down the line. I am still of the view that most economic growth might surprise to the downside. It’s not a problem today, but it’s something to get concerned about [in the future]

Monday, July 7, 2014

Nouriel Roubini on Debt payments and US court system

Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction. But the ongoing legal saga of Argentina’s fight with holdout creditors shows that the international system for orderly sovereign-debt restructuring may be broken.

Individuals, firms, or governments may end up with too much debt because of bad luck, bad decisions, or a combination of the two. If you get a mortgage but then lose your job, you have bad luck. If your debt becomes unsustainable because you borrowed too much to take long vacations or buy expensive appliances, your bad behavior is to blame. The same applies to corporate firms: some have bad luck and their business plans fail, while others borrow too much to pay their mediocre managers excessively.

Bad luck and bad behavior (policies) can also lead to unsustainable debt burdens for governments. If a country’s terms of trade (the price of its exports) deteriorate and a large recession persists for a long time, its government’s revenue base may shrink and its debt burden may become excessive. But an unsustainable debt burden may also result from borrowing to spend too much, failure to collect sufficient taxes, and other policies that undermine the economy’s growth potential.

When the debt burden of an individual, firm, or government is too high, legal systems need to provide orderly ways to reduce it to a more sustainable level (closer to the debtor’s potential income). If it is too easy to default and reduce one’s debt burden, the result is moral hazard, because debtors gain an incentive to indulge in bad behavior. But if it is too difficult to restructure and reduce debts when bad luck leads to unsustainable debts, the result is bad for both the debtor and its creditors, who are better off when a reduced debt ratio is serviced than when a debtor defaults.

Finding the right balance is not easy. Formal legal bankruptcy regimes for individuals and firms have evolved over time to accomplish this.

Because a formal bankruptcy regime for governments does not exist (though Anne Krueger, the International Monetary Fund’s then-deputy managing director, proposed one more than a decade ago), countries have had to rely on a market-based approach to resolve excessive debt problems. Following this approach, the country offers to exchange old bonds for new bonds with a lower face value and/or lower interest payments and longer maturities. If most investors accept this offer, the restructuring occurs successfully.

But this implies a key problem: Whereas a bankruptcy court can force holdout creditors to accept the exchange offer as long as a significant majority of creditors have already done so (a so-called “cram down”), the market-based approach allows some creditors to continue to hold out and sue to be paid in full.

That is why, over the last decade, governments have augmented the market-based approach with a contractual approach that resolves the holdout problem by introducing collective-action clauses (CACs) that can also cram down on holdouts the terms accepted by a majority of creditors. These clauses became standard in sovereign bonds but were missing in those issued by Argentina before 2001, when the crisis hit. Though 93% of Argentina’s creditors accepted new terms for their bonds in 2005 and 2010 in two exchange offers, a small group of holdouts sued Argentina in the United States, and, with the US Supreme Court recently ruling on the issue, have now won the right to be paid in full.

The US court decision is dangerous for two reasons. First, the court ruled for the first time that a country cannot continue to pay those creditors who accepted a big reduction (or “haircut”) on their claims until the holdouts are paid in full. So, why would any future creditor who benefits from an orderly restructuring vote for it if its new claims can be blocked by even a single holdout creditor?

Second, if the holdouts are paid in full, the majority of creditors who accepted a haircut can request to be paid in full, too. If that happens, the country’s debt burden will surge again, become unsustainable, and force the government – in this case Argentina, which is servicing most of its debt – to default again on all creditors.

The inclusion of CACs in new bond contracts may help other countries avoid the holdout problem in the future. But even CACs may not fully help, because they are designed in a way that still allows a small minority of creditors to hold out and thus prevent an orderly restructuring.

Either super-CACs need to be designed and introduced (though it will take years to include them in all new bond contracts) or the international community may want to reconsider whether the 2002 IMF proposal for a formal bankruptcy court for sovereign borrowers should be resurrected. Holdouts must not be permitted to block orderly restructurings that benefit debtors and creditors.


Article via http://www.project-syndicate.org/commentary/nouriel-roubini-criticizes-recent-us-court-rulings-that-impede-orderly-restructuring-of-sovereign-debt

Wednesday, July 2, 2014

Nouriel Roubini praises Twitter

Among the social media - I've tried them all - Facebook is a bit of a game, but Twitter is a productivity tool. I use it regularly and I'm addicted to it.

Monday, June 30, 2014

How Nouriel invests himself

I believe investors should invest for the long run, so I don't buy and sell. I usually maintain the classic index of global equities, diversified U.S. and global and emerging markets, and when the risk is larger, I diminish the amount in global equities and put more into liquid assets - but very irregularly.

Thursday, June 26, 2014

Stocks and Bond markets are not in agreement

The stock and bond markets have offered conflicting indications for the economy this year, giving investors a case of "schizophrenia". 

I am still of the view that most economic growth might surprise to the downside

Wednesday, June 25, 2014

Positive mood surrounding Eurozone

On the surface things have improved and the mood is positive about the Eurozone. However potential growth is slow, the actual recovery is anaemic and debt ratios are rising, and the region still faces long term competitiveness issues.

People are willing to tighten their belts if they can see light at the end of the tunnel from austerity with the creation of jobs, incomes and investment.

Thursday, June 19, 2014

Roubini on Middle East, War and more

The Middle East remains a region mired in backwardness. The Arab Spring — triggered by slow growth, high youth unemployment and widespread economic desperation — has given way to a long winter in Egypt and Libya, where the alternatives are a return to authoritarian strongmen and political chaos. 

In Syria and Yemen, there is civil war; Lebanon and Iraq could face a similar fate; Iran is both unstable and dangerous to others; and Afghanistan and Pakistan look like failed states.

In these cases, economic failure and a lack of opportunities and hope for the poor and young are fueling political and religious extremism, resentment of the West and, in some cases, terrorism.

In the 1930's, the failure to prevent the Great Depression empowered authoritarian regimes in Europe and Asia, eventually leading to the Second World War. This time, the damage caused by the Great Recession is subjecting most advanced economies to stagnation and creating structural growth challenges for emerging markets.

This is ideal terrain for economic and political nationalism to take root and flourish. Today’s backlash against trade and globalization should be viewed in the context of what, as we know from experience, could come next.

Wednesday, June 18, 2014

Why nationalism is on the rise

The main causes of these trends [of Nationalism and anti-globalization] are clear. Anaemic economic recovery has provided an opening for populist parties, promoting protectionist policies, to blame foreign trade and foreign workers for the prolonged malaise. 

Add to this the rise in income and wealth inequality in most countries, and it is no wonder that the perception of a winner-take-all economy that benefits only elites and distorts the political system is widespread.


Tuesday, June 17, 2014

Nationalism rising in Asia... War could follow

In Asia,, nationalism is resurgent. New leaders in China, Japan, South Korea, and now India are political nationalists in regions where territorial disputes remain serious and long-held historical grievances fester. 

These leaders — as well as those in Thailand, Malaysia, and Indonesia — must address major structural reform challenges if they are to revive falling economic growth and, in the case of emerging markets, avoid a middle-income trap. 

Economic failure could fuel further nationalist, xenophobic tendencies, and even trigger military conflict.

Monday, June 16, 2014

Nouriel Roubini says Commodities super cycle is over

The commodity super-cycle is over. This is not just because China is slowing; years of high prices have led to investment in new capacity and an increase in the supply of many commodities. Meanwhile, emerging-market commodity exporters failed to take advantage of the windfall and implement market-oriented structural reforms in the last decade; on the contrary, many of them embraced state capitalism, giving too large a role to state-owned enterprises and banks.

These risks will not wane any time soon. Chinese growth is unlikely to accelerate and lift commodity prices; Fed has increased the pace of its QE tapering; structural reforms are not likely until after elections; and incumbent governments have been similarly wary of the growth-depressing effects of tightening fiscal, monetary, and credit policies. Indeed, the failure of many emerging-market governments to tighten macroeconomic policy sufficiently has led to another round of currency depreciation, which risks feeding into higher inflation and jeopardizing these countries ability to finance twin fiscal and external deficits.

Friday, June 13, 2014

Tea Party and extreme right factions gaining in USA

In the US, the economic insecurity of a vast white underclass that feels threatened by immigration and global trade can be seen in the rising influence of the extreme right and Tea Party factions of the Republican Party. Economic nativism, anti-immigration and protectionist leanings, religious fanaticism, and geopolitical isolationism characterizes them.

Thursday, June 12, 2014

Nouriel Roubini on Eurozone economic and political effects

Economic insecurity for the working and middle classes is most acute in Europe and the euro-zone, where in many countries populist parties, mainly on the far right, outperformed mainstream forces in last weekend’s European Parliament election. As in the 1930s, when the Great Depression gave rise to authoritarian governments in Italy, Germany, and Spain, a similar trend may now be under way.

If income and job growth do not pick up soon, populist parties may come closer to power at the national level in Europe, with anti-European Union (EU) sentiments stalling economic and political integration. 

Worse, the eurozone may again be at risk: some countries, such as the UK, may exit the EU; others (Spain and Belgium) eventually may break up.

Wednesday, June 11, 2014

Nationalism on the rise

In the immediate aftermath of the 2008 global financial crisis, policy makers’ success in preventing the Great Recession from turning into another Great Depression held in check demands for protectionist and inward-looking measures. But now the backlash against globalisation — and the freer movement of goods, services, capital, labour, and technology has arrived.

This new nationalism takes different economic forms: trade barriers, asset protection, reaction against foreign direct investment, policies favouring domestic workers and firms, anti-immigration measures, state capitalism, and resource nationalism. In the political realm, populist, anti-globalisation, anti-immigration, and in some cases outright racist and anti-Semitic parties are on the rise.

These forces loathe the alphabet soup of supranational governance institutions — the EU, the UN, the WTO, and the IMF, among others — that globalisation requires. 

Even the internet, the epitome of globalisation, is at risk of being balkanised as more authoritarian countries, such as Russia, China, Iran and Turkey, seek to restrict access to social media and crack down on free expression.

Tuesday, June 10, 2014

Roubini worries about China growth effects

If my view about China growing below 6 percent were to materialise in the next 24 months, a number of surprises are not priced in to markets like commodities or yen equities in Asia.

Monday, June 9, 2014

Managing a rising China wont be easy

Dr. Nouriel Roubini
Of course people worry about the Middle East, people worry about Iran, North Korea or they worry about what’s going on in Ukraine and Russia – but if you’re thinking about what is the biggest geopolitical challenge of our time, there is one that is bigger than all of them: it’s the rise of China and how to manage that peacefully.

Tuesday, June 3, 2014

Nouriel Roubini: How to protect your portfolio

If you’re an investor in this low volatility environment, then buying insurance against tail events such as a 10-20 percent correction in U.S. and global equities is reasonably cheap. So, you would buy insurance if you’re concerned about this risk materialising and you can then get the reassurance.

If you worry about China hard landing - and that it could have a negative implication on commodities, like copper and others - then buying options against those kinds of risks is something one can do relatively cheaply.

Wednesday, May 28, 2014

Economic danger averted by US

The threat of a fiscal crisis in the United States is done. The Fed's unconventional monetary policy has worked.

Tuesday, May 27, 2014

Peter Schiff wrong on inflation

He [Peter Schiff] has been predicting a collapse of the dollar, gold going through the roof and inflation rising sharply. I just see the opposite. I see the U.S. economy—which, in spite of QE1, QE2, QE3 — there's going to be an economic recovery.

Monday, May 26, 2014

Nouriel Roubini sees himself as Dr Boom compared to Peter Schiff

He [Peter Schiff] has been predicting a collapse of the dollar, gold going through the roof and inflation rising sharply. I just see the opposite. I see the U.S. economy — which, in spite of QE1, QE2, QE3 — there's going to be an economic recovery, there's not going to be much inflation. We're printing a lot of money, but not creating credit and inflation, so inflation is going to stay low.

Friday, May 23, 2014

Good and bad markets all can get affected by one another


Discrimination and differentiation goes away when there is a risk-off environment and everybody is lumping emerging markets together. 

So unfortunately, even the ones with the better fundamentals get affected by those concerns with weaker fundamentals. 

We have seen this general contagion in emerging markets last year with the taper tantrum and earlier this year when there was a period of risk-off following the troubles with Argentina and a number of other emerging markets in late January, early February.

Thursday, May 22, 2014

Nouriel Roubini: Peter Schiff wrong on Deflation

I'm in favor of low inflation, a target of 2 percent. You [Peter Schiff] were arguing that deflation was good. Deflation is a symptom of lack of growth and aggregate demand. Why do you think deflation is good? That's nonsense.

Monday, May 19, 2014

Nouriel Roubini says buy Global Equities

I would be slightly overweight global equities and underweight global bonds. I would be a bit underweight commodities, long dollar and short euro, yen, commodity currencies and some of the other fragile currencies.

In terms of global bonds I would prefer to be in Europe rather than the U.S. in spite of growth being slow in both because I think that this year European equities are going to do better than U.S. equities. This is based on P.E. ratios in the U.S., which are below historical averages and combine with the Eurozone now coming out of the recession. 

So, there is an improvement, tail risks are lower and risk aversion towards European assets is lower.


Friday, May 16, 2014

Nouriel Roubini vs Peter Schiff

Usually they call me 'Dr. Doom,' but next to Peter I am not Dr. Doom.

There are some risks in the global economy that are actually receding. There are other risks that are rising. You have to look at the balance of the two.

Thursday, May 15, 2014

Roubini: Three problems with Euro Zone

The risks of a break up, Greek exit or Italy and Spain losing market access are lower, thanks to the "Whatever it Takes" policy (In July 2012 Mario Draghi, President of the European Central Bank pledged to do "whatever it takes" to protect the Eurozone from collapse), the adjustment of austerity, the gradual economic recovery and other things.

However, I worry that over the long term the problems on the periphery of the Eurozone remain unresolved. 

Firstly, potential growth is low because the structural reforms are coming in slowly.

Secondly, the recovery is going to be so anaemic that the unemployment rate is going to remain very high in the peripheral Eurozone. 

Thirdly, the public debt in terms of GDP is still high and rising - in Spain, Italy, and Portugal and it eventually may become unsustainable.

And on top of everything else now there is austerity.

The Eurozone is not out of the woods yet, even if financial markets are all excited and spreads for the periphery have fallen sharply. For the medium term the fundamental problem is that the periphery remains unresolved.

Wednesday, May 14, 2014

Eurozone recession if Russia cuts off Gas supply

For the situation here to have a systemic effect on the global economy there needs to be a full escalation war on eastern and western Ukraine. That would imply that the west is going to impose a range of other sanctions on Russia and then sanctions will also be imposed by Russia on the west. 

You then have the risk that Russia might decide to cut off the supply of gas, not only to the Ukraine, but also to the rest of Europe. Western Europe is barely getting out of a recession and it can’t afford a shock to the price of the supply of gas on which it relies. It will damage the recovery of the Eurozone and might kick it back into recession.

However, this is only if there is a full escalation. If there isn’t a full escalation I would say that the economic and financial consequences remain contained. However, if it does escalate fully with people supporting the government in Kiev, then things could get really ugly.

Tuesday, May 13, 2014

China vs neighbhours Japan, Malaysia, India, Vietnam

Firstly, it is the hard landing, because they [the Chinese] have to re-balance their growth from investment to consumption and they may be doing their reforms that lead to re-balancing too slowly. Why too slowly? Because the interest groups that are in favour of the old growth model based on expanding and investment are powerful, whereas those who are all going to be benefiting from labour intensive and consumption-orientated growth are not powerful because it is not a democracy and the country is not politically organised.

Secondly, there is a financial risk in China from rebalancing as they liberalise financial markets and stabilise – for example - their own shadow banking system. They could have a view on the shadow banks and decide to implement market discipline.

Finally, China has tense relations with a number of its own neighbours. Notably, with Japan, Malaysia, India, and Vietnam on a range of territorial issues and all of these countries in China have leaders that are very nationalistic. So, all these countries face challenges of structural economic and full transformation. Suppose they fail to do the right thing in China, Japan or India, what’s the risk that they will blame it on the foreigners and the geo-political tensions are going to become more fierce?

Monday, May 12, 2014

Roubini: Five risks markets could face

There are more rising risks emerging.

1.    The first is China and whether there will be a soft or a hard landing. I worry that the landing is not going to be very soft in China and it is going to be very bumpy and there will be a sharp slowdown, which is more than people are expecting.

2.    Secondly, there is the risk that the Fed is going to make policy mistakes as it exits monetary easing and adds a zero policy rate. When the Fed announced that last year that it would wind down its monthly purchases of long-term financial assets we saw a ‘taper’ tantrum in financial and emerging markets. While tapering is now priced in, there remains uncertainty about the timing and speed of the Fed’s actions.

3.    The third risk is that the Fed will exit zero rates too late. If you make the mistake of doing it too soon, then you have a hard landing of the economy. If it’s too late you take the risk of an asset price bubble.

4.    The next risk is arising from emerging markets being so fragile, particularly if you look at Russia, Hungary, Ukraine, Venezuela, and Thailand among others.

5.   Then there are two rising geo-political risks. One is the cold war in Russia (and Ukraine) and this cold war could end up becoming a full war, which is likely to try and destabilize Eastern Ukraine.

6.    The other geo-political problem would be the consequence of the rise in China where it sits in a world - in Asia - where you have a group of countries that have nationalist leaders (China, Japan, Korea, and India) and these countries also have major economic transformation issues to deal with. It could mean that if things go wrong on the economics side there is a risk they will blame the foreigners and all the territorial disputes that are ongoing between China in power and from its neighbours.

So those are the things I worry about today, from financial risk to geo-political risk.

Wednesday, May 7, 2014

Asian tensions are getting more serious

Why are such tensions among Asia’s great powers becoming more serious, and why now?

For starters, Asia’s powers have recently elected or are poised to elect leaders who are more nationalistic than their predecessors. Japanese Prime Minister Shinzo Abe, Chinese President Xi Jinping, South Korean President Park Geun-hye, and Narendra Modi, who is likely to be India’s next prime minister, all fall into this category.

Second, all of these leaders now face challenges stemming from the need for structural reforms to sustain satisfactory growth rates in the face of global economic forces that are disrupting old models. Different types of structural reforms are vital in China, Japan, India, Korea, and Indonesia. If leaders in one or more of these countries were to fail on the economic front, they could feel politically constrained to shift the blame onto foreign “enemies”.

Third, many US allies in Asia (and elsewhere) are wondering whether America’s recent strategic “pivot” to Asia is credible. Given the feeble US response to the crises in Syria, Ukraine, and other geopolitical hot spots, the American security blanket in Asia looks increasingly tattered. China is now testing the credibility of US guarantees, raising the prospect that America’s friends and allies—starting with Japan—may have to take more of their security needs into their own hands.

Finally, unlike Europe, where Germany accepted the blame for the horrors of WWII and helped to lead a decades-long effort to construct today’s European Union, no such historical agreement exists among Asian countries. As a result, chauvinist sentiments have been instilled in generations that are far removed from the horrors of past wars, while institutions capable of fostering economic and political cooperation remain in their infancy.

This is a lethal combination of factors that risks eventually leading to military conflict in a key region of the global economy. How can the US credibly pivot to Asia in a way that does not fuel Chinese perceptions of attempted containment or US allies’ perceptions of appeasement of China? How can China build a legitimate defensive military capability that a great power needs and deserves without worrying its neighbors and the US that it aims to seize disputed territory and aspires to strategic hegemony in Asia? And how can Asia’s other powers trust that the US will support their legitimate security concerns, rather than abandon them to effective Finlandization under Chinese domination?

It will take enormous wisdom on the part of leaders in the region—and in the US—to find diplomatic solutions to Asia’s multitude of geopolitical and geo-economic tensions. In the absence of supporting regional institutions, there is little else to ensure that the desire for peace and prosperity prevails over conditions and incentives that tend toward conflict and war.

Monday, May 5, 2014

China disputes with neighboring Asian countries could lead to military conflict

The biggest geopolitical risk of our times is not a conflict between Israel and Iran over nuclear proliferation. Nor is it the risk of chronic disorder in an arc of instability that now runs from the Maghreb all the way to the Hindu Kush. It is not even the risk of Cold War II between Russia and the West over Ukraine.

All of these are serious risks, of course; but none is as serious as the challenge of sustaining the peaceful character of China’s rise. That is why it is particularly disturbing to hear Japanese and Chinese officials and analysts compare the countries’ bilateral relationship to that between Britain and Germany on the eve of World War I.

The disputes between China and several of its neighbours over disputed islands and maritime claims (starting with the conflict with Japan) are just the tip of the iceberg. As China becomes an even greater economic power, it will become increasingly dependent on shipping routes for its imports of energy, other inputs, and goods. This implies the need to develop a blue-water navy to ensure that China’s economy cannot be strangled by a maritime blockade.

But what China considers a defensive imperative could be perceived as aggressive and expansionist by its neighbours and the US. And what looks like a defensive imperative to the US and its Asian allies—building further military capacity in the region to manage China’s rise—could be perceived by China as an aggressive attempt to contain it.

Historically, whenever a new great power has emerged and faced an existing power, military conflict has ensued. The inability to accommodate Germany’s rise led to two world wars in the 20th century; Japan’s confrontation with another Pacific power—the US—brought World War II to Asia.

Thursday, May 1, 2014

If Russia decides to invade Ukraine...

 Suppose that Russia at this point decides to effectively either to destabilize, invade the eastern province of Ukraine, two things will happen. 

The stance of the West will have to become more Russia and Russia could have going as far as limiting the supply of gas not just to Ukraine but also to Western Europe. 

Secondly, the NATO, even if they’re not going to have a military intervention, they will have certainty provide some military support to the government in Kiev. And that means that this war could escalate for quite a while. And therefore from a financial market point of view, there may be contagion deriving two advanced economy’s financial market, especially in the euro-zone.

Wednesday, April 30, 2014

Ukraine - Russia standoff could continue for a while

The situation is such that even if he wanted to use force there first of all. 

Secondly, he’s not going to invade all of Ukraine. And you don’t know for how long a military conflict of this sort is going to continue, especially if the US and Europe were then to support militarily the government in Kiev. This war could continue and last for a while. So I’m saying this is not my baseline, but there is certainly downside risk that that will happen.

Tuesday, April 29, 2014

Ukraine, Russia could tip Euro Zone to recession

There is the beginning now of a new cold war between the West and Russia, and this cold war could actually become a hot war if it’s possible Russia were to effectively destabilize and invade the eastern provinces of Ukraine, in which case things would escalate. You could have another episode of global risk aversion. 

If this were to become a real war, even a situation in which the supply of gas to Europe may be cut off from Russia. The European economy is barely now recovering from a recession. That could tip back the euro-zone into a recession.