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.