Monday, December 28, 2015

Technology breakthrough nearing that will change the world

In spite of innovations, we still have growth falling. However, I will be slightly optimistic for the following reason - we are on the cusp of a major technology revolution that will be changing the world: leading to increase in productivity. 

We have energy, technology, biotech with all major innovation in bio medical research; information technology: social media, Internet of things, as well as manufacturing technology, financial technology and finally defence technology.

Monday, December 21, 2015

High inflation has not been seen for a while

Monetary policies are still unconventional, with interest rates hovering around zero. While many have assumed that high inflation would be the outcome, in reality the reverse has happened.

Inflation has become lower and lower in the US and the UK. Next year in Eurozone and Japan, inflation is going to stay low, inflation in the US may go higher at the headline level. Growth is below potential. Real interest rates are going to be low.

Monday, November 30, 2015

Nouriel on Europe, Immigration and Nationalism

I am on a two-week European tour at a time that could make one either very pessimistic or constructively optimistic about Europe’s prospects.

First the bad news: Paris is sombre, if not depressed, after the appalling terrorist attacks earlier last month. France’s economic growth remains anaemic, the unemployed and many Muslims are disaffected, and Marine Le Pen’s far-right National Front is likely to do well in the upcoming regional elections. In Brussels, which was semi-deserted and in lockdown, owing to the risk of terrorist attacks, the European Union (EU) institutions have yet to devise a unified strategy to manage the influx of migrants and refugees, much less address the instability and violence in the EU’s immediate neighbourhood.

Outside the euro zone, in London, there is concern about negative financial and economic spillover effects from the monetary union. And the migration crisis and recent terrorist attacks mean that a referendum on continued EU membership—likely to be held next year—could lead the United Kingdom to withdraw. This would probably be followed by the break-up of the UK itself, as ‘Brexit’ would lead the Scots to declare independence.

In Berlin, meanwhile, German Chancellor Angela Merkel’s leadership is coming under growing pressure. Her decision to keep Greece in the euro zone, her courageous but unpopular choice to allow in a million refugees, the Volkswagen scandal, and flagging economic growth (owing to the slowdown of China and emerging markets) have exposed her to criticism even from her own party.

In this environment, the full economic, banking, fiscal and political union that a stable monetary union eventually requires is not viable: The euro zone core opposes more risk sharing, solidarity and faster integration. And populist parties of the right and left—anti-EU, anti-euro, anti-migrant, anti-trade and anti-market—are becoming stronger throughout Europe.

But of all the problems Europe faces, it is the migration crisis that could become existential. In West Asia, North Africa and the region stretching from the Sahel to the Horn of Africa, there are about 20 million displaced people; civil wars, widespread violence and failed states are becoming the norm. If Europe has trouble absorbing a million refugees, how will it eventually handle 20 million? Unless Europe can defend its external borders, the Schengen agreement will collapse and internal borders will return, ending freedom of movement—a key principle of European integration—within most of the EU. But the solution proposed by some—close the gates to refugees—would merely worsen the problem, by destabilizing countries like Turkey, Lebanon and Jordan, which have already absorbed millions. And paying off Turkey and others to keep the refugees would be both costly and unsustainable.

And the problems of the greater West Asia (including Afghanistan and Pakistan) and Africa cannot be resolved by military and diplomatic means alone. The economic factors driving these (and other) conflicts will worsen: global climate change is accelerating desertification and depleting water resources, with disastrous effects on agriculture and other economic activity that then trigger violence across ethnic, religious, social and other cleavages.

If economic solutions aren’t found, eventually these regions’ conflicts will destabilize Europe, as millions more desperate and hopeless people eventually become radicalized and blame the West for their misery.

But Europe is not doomed to collapse. The crises that it now confronts could lead to greater solidarity, more risk sharing and further institutional integration. Germany could absorb more refugees (though not at the rate of a million per year). France and Germany could provide and pay for military intervention against the Islamic State. All of Europe and the rest of the world—the US, the rich Gulf states—could provide massive amounts of money for refugee support and eventually funds to rebuild failed states and provide economic opportunity to hundreds of millions of Muslims and Africans.

This would be expensive fiscally for Europe and the world. But the alternative is global chaos, if not, as Pope Francis has warned, the beginning of World War III.

And there is light at the end of the tunnel for the euro zone. A cyclical recovery is underway, supported by monetary easing for years to come and increasingly flexible fiscal rules. More risk sharing will start in the banking sector (with EU-wide deposit insurance up next), and eventually more ambitious proposals for a fiscal union will be adopted. Structural reforms—however slowly—will continue and gradually increase potential and actual growth.

The pattern in Europe has been that crises lead—however slowly—to more integration and risk sharing. Today, with risks to the survival of both the euro zone (starting with Greece) and the EU itself (starting with ‘Brexit’), it will take enlightened European leaders to sustain the trend towards deeper unification. In a world of existing and rising great powers (the US, China and India) and weaker revisionist powers (such as Russia and Iran), a divided Europe is a geopolitical dwarf.

Fortunately, enlightened leaders in Berlin—and there are more than a few of them, despite perceptions to the contrary—know that Germany’s future depends on a strong and more integrated Europe. They, together with wiser European leaders elsewhere, understand that this will require the appropriate forms of solidarity, including a unified foreign policy that can address the problems in Europe’s neighbourhood.

But solidarity begins at home. And that means beating back the populists and nationalist barbarians within by supporting aggregate demand and pro-growth reforms that ensure a more resilient recovery of jobs and incomes.

Wednesday, November 4, 2015

Nationalism on the rise in Europe and why this might not be good for the EU

The recent victory of the conservative Law and Justice (PiS) party in Poland confirms a recent trend in Europe: the rise of illiberal state capitalism, led by populist right-wing authoritarians. Call it Putinomics in Russia, Órbanomics in Hungary, Erdoğanomics in Turkey, or a decade of Berlusconomics from which Italy is still recovering. Soon we will no doubt be seeing Kaczyńskinomics in Poland.

All are variations on the same discordant theme: a nationalist leader comes to power when economic malaise gives way to chronic and secular stagnation. This elected authoritarian then starts to reduce political freedoms through tight-fisted control of the media, especially television. Then, he (so far, it has always been a man, though France’s Marine Le Pen would fit the pattern should she ever come to power) pursues an agenda opposing the European Union (when the country is a member) or other institutions of supra-national governance.

He will also oppose free trade, globalization, immigration, and foreign direct investment, while favoring domestic workers and firms, particularly state-owned enterprises and private business and financial groups with ties to those in power. In some cases, outright nativist, racist parties support such government or provide an even deeper authoritarian and anti-democratic streak.

To be sure, such forces are not yet in power in most of Europe. But they are becoming more popular nearly everywhere: Le Pen’s National Front in France, Matteo Salvini’s Lega Nord in Italy, and Nigel Farage’s United Kingdom Independence Party (UKIP) all view Russia’s illiberal state capitalism as a model and its president, Vladimir Putin, as a leader deserving of admiration and emulation. In Germany, the Netherlands, Finland, Denmark, Austria, and Sweden, too, the popularity of populist, anti-EU, anti-migrant right-wing parties is on the rise.

Most of these parties tend to be socially conservative. But their economic policies – anti-market and fearful that liberal capitalism and globalization will erode national identity and sovereignty – have many elements in common with populist parties of the left, such as Syriza in Greece (before its capitulation to its creditors), Podemos in Spain, and Italy’s Five Star Movement. Indeed, just as many supporters of radical leftist parties in the 1930s made a U-turn and ended up supporting authoritarian parties of the right, the economic ideologies of today’s populist parties seem to converge in many ways.

In the 1930s, economic stagnation and depression led to the rise of Hitler in Germany, Mussolini in Italy, and Franco in Spain (among other authoritarians). Today’s brand of illiberal leaders may not yet be as politically virulent as their 1930s predecessors. But their economic corporatism and autocratic style are similar.

The reemergence of nationalist, nativist populism is not surprising: economic stagnation, high unemployment, rising inequality and poverty, lack of opportunity, and fears about migrants and minorities “stealing” jobs and incomes have given such forces a big boost. The backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that comes with it – that has now emerged in many countries is also a boon to illiberal demagogues.

If economic malaise becomes chronic, and employment and wages do not rise soon, populist parties may come closer to power in more European countries. Worse, the eurozone may again be at risk, with a Greek exit eventually causing a domino effect that eventually leads to the eurozone’s breakup. Or a British exit from the EU may trigger European dis-integration, with the additional risks posed by the fact that some countries (the UK, Spain, and Belgium) are at risk of breaking up themselves.

In the 1930’s, the Great Depression brought to power authoritarian regimes in Europe and even Asia, eventually leading to World War II. Today’s resurgence of illiberal state capitalist regimes and leaders is nowhere close to inciting a war, because center-right and center-left governments still committed to liberal democracy, enlightened economic policies, and solid welfare systems still rule most of Europe. But the toxic brew of populism now gaining strength may yet open a Pandora’s box, unleashing unpredictable consequences.

This rising tide of illiberalism makes avoiding a break-up of the Euro-zone or the EU ever more vital. But, to ensure this, macro and structural economic policies that boost aggregate demand, job creation and growth, reduce income and wealth inequality, provide economic opportunity to the young, and integrate rather than reject refugees and economic migrants will be needed. Only bold policies can halt Europe’s slide toward secular stagnation and nationalist populism. Timidity of the type witnessed in the past five years will only increase the risks.

Failure to act decisively now will lead to the eventual failure of the peaceful, integrated, globalized, supra-national state that is the EU, and the rise of dystopian nationalist regimes. The contours of such places have been reflected in literary work such as George Orwell’s 1984, Aldous Huxley’s Brave New World, and Michel Houellebecq’s latest novel Submission. Let us hope that they remain confined to the printed page.

Monday, October 19, 2015

Brazil can avoid crisis by making needed adjustments

Brazil isn't destined to have a crisis, it's possible to avoid it.

If they make the necessary adjustments, there won't be any further downgrading and confidence in fiscal policy will improve. That will make people more comfortable about spending.

In 2016, if adjustments are made, I think there will be recession in the first six months, but the economy will bottom out midway through the year and then begin to recover. Brazil is not destined to have a crisis. There is a way out, although it is difficult and requires political courage from whoever is in power. For things to stabilize, fiscal adjustment is necessary, there's no other way,

Monday, October 5, 2015

US and Europe could suffer greatly by the Middle East crisis

Among today’s geopolitical risks, none is greater than the long arc of instability stretching from the Maghreb to the Afghanistan-Pakistan border. With the Arab Spring an increasingly distant memory, the instability along this arc is deepening. Indeed, of the three initial Arab Spring countries, Libya has become a failed state, Egypt has returned to authoritarian rule, and Tunisia is being economically and politically destabilized by terrorist attacks.

The violence and instability of North Africa is now spreading into Sub-Saharan Africa, with the Sahel — one of the world’s poorest and most environmentally damaged regions — now gripped by jihadism, which is also seeping into the Horn of Africa to its east. And, as in Libya, civil wars are raging in Iraq, Syria, Yemen, and Somalia, all of which increasingly look like failed states.

The region’s turmoil (which the United States and its allies, in their pursuit of regime change in Iraq, Libya, Syria, Egypt and elsewhere, helped to fuel) is also undermining previously secure states. The influx of refugees from Syria and Iraq is destabilizing Jordan, Lebanon, and now even Turkey, which is becoming increasingly authoritarian under President Recep Tayyip Erdoğan. Meanwhile, with the conflict between Israel and the Palestinians unresolved, Hamas in Gaza and Hezbollah in Lebanon represent a chronic threat of violent clashes with Israel.

In this fluid regional environment, a great proxy struggle for regional dominance between Sunni Saudi Arabia and Shia Iran is playing out violently in Iraq, Syria, Yemen, Bahrain, and Lebanon. And while the recent nuclear deal with Iran may reduce the proliferation risk, the lifting of economic sanctions on Iran will provide its leaders with more financial resources to support their Shia proxies. Further east, Afghanistan (where the resurgent Taliban could return to power) and Pakistan (where domestic Islamists pose a continued security threat) risk becoming semi-failed states.

And yet, remarkably, even as most of the region began to burn, oil prices collapsed. In the past, geopolitical instability in the region triggered three global recessions. The 1973 Yom Kippur War between Israel and the Arab states caused an oil embargo that tripled prices and led to the stagflation (high unemployment plus inflation) of 1974-1975. The Iranian revolution of 1979 led to another embargo and price shock that triggered the global stagflation of 1980-1982. And the Iraq invasion of Kuwait in 1990 led to another spike in oil prices that triggered the US and global recession of 1990-1991.

This time around, instability in the Middle East is far more severe and widespread. But there appears to be no “fear premium” on oil prices; on the contrary, oil prices have declined sharply since 2014. Why?

Perhaps the most important reason is that, unlike in the past, the turmoil in the Middle East has not caused a supply shock. Even in the parts of Iraq now controlled by the Islamic State, oil production continues, with output smuggled and sold in foreign markets. And the prospect that sanctions on Iran’s oil exports will be phased out implies significant inflows of foreign direct investment aimed at increasing production and export capacity.

Indeed, there is a global glut of oil. In North America, the shale-energy revolution in the US, Canada’s oil sands, and the prospect of more onshore and offshore oil production in Mexico (now that its energy sector is open to private and foreign investment) have made the continent less dependent on Middle East supplies. Moreover, South America holds vast hydrocarbon reserves, from Colombia all the way to Argentina, as does East Africa, from Kenya all the way to Mozambique.

With the US on the way to achieving energy independence, there is a risk that America and its Western allies will consider the Middle East less strategically important. That belief is wishful thinking: A burning Middle East can destabilize the world in many ways.

First, some of these conflicts may yet lead to an actual supply disruption, as in 1973, 1979, and 1990. Second, civil wars that turn millions of people into refugees will destabilize Europe economically and socially, which is bound to hit the global economy hard. And the economies and societies of frontline states like Lebanon, Jordan, and Turkey, already under severe stress from absorbing millions of such refugees, face even greater risks.

Third, prolonged misery and hopelessness for millions of Arab young people will create a new generation of desperate jihadists who blame the West for their despair. Some will undoubtedly find their way to Europe and the US and stage terrorist attacks.

So, if the West ignores the Middle East or addresses the region’s problems only through military means (the US has spent $2 trillion in its Afghan and Iraqi wars, only to create more instability), rather than relying on diplomacy and financial resources to support growth and job creation, the region’s instability will only worsen. Such a choice would haunt the US and Europe — and thus the global economy — for decades to come.

Monday, September 28, 2015

Robert Shiller bumped off flight due to overbooking

United Airlines is a bunch of idiots: they kicked out Nobel Prize Robert Shiller out of plane to the Aspen conference because of "overbooking".

Airlines provide lousy/rude service, treat passengers like cattle, overbook massively and overcharge as consolidation led to near monopoly.

via twitter

Monday, September 21, 2015

Greece was not ready to join EU | Flashback

5 Years ago Nouriel Roubini predicted that Greece debt was unsustainable and was not ready to join the EU. Watch the video to see his full commentary.

Monday, September 14, 2015

Bloomberg Tweet @Nouriel

Tuesday, September 8, 2015

China not in trouble


The slowdown in China is neither a hard landing or a soft landing, it's a bumpy landing. It could be better managed but growth is not likely to be worse than 6.5% this year and 6% next year. 

China is not in free fall.

US Fed rate hike

The US Federal Reserve should wait and see if it is a temporary storm, and not a gathering storm.

It may have to wait until May 2016 to raise rates, and the Bank of England may have to wait until the spring of next year.

Monday, August 31, 2015

More changes needed in the financial rating industry

Recent market volatility is showing once again how badly ratings agencies and investors can err in assessing countries’ economic and financial vulnerabilities.

Ratings agencies wait too long to spot risks and downgrade countries, while investors behave like herds, often ignoring the build-up of risk for too long, before shifting gears abruptly and causing exaggerated market swings.

Given the nature of market turmoil, an early-warning system for financial tsunamis may be difficult to create, but the world needs one today more than ever.

Few people foresaw the subprime crisis of 2008, the risk of default in the eurozone, or the current turbulence in financial markets worldwide. Fingers have been pointed at politicians, banks and supranational institutions. But ratings agencies and analysts who misjudged the repayment ability of debtors — including governments — have gotten off too lightly.

In principle, credit ratings are based on statistical models of past defaults; in practice, with few national defaults having occurred, ratings are often a subjective affair. Analysts at ratings agencies follow developments in the country for which they are responsible and, when necessary, travel there to review the situation.

This process means ratings are often backward-looking, downgrades occur too late, and countries are typically rerated based on when analysts visit, rather than when fundamentals change. Moreover, ratings agencies lack the tools to track vital factors such as changes in social inclusion, the country’s ability to innovate and private-sector balance-sheet risk.

And yet sovereign ratings matter tremendously. For many investors, credit ratings dictate where and how much they can invest. Ratings affect how much banks are willing to lend, and how much developing countries — and their citizens — must pay to borrow. They inform corporations’ decisions about whom to do business with, and on what terms.

Given the problems with ratings agencies, investors and regulators recognise the need for a different approach. Investors have tried to identify good alternatives — and have largely failed. Assessments of risk such as sovereign interest-rate spreads and credit default swaps react (and often over-react) fast; but, because they reflect only the market’s understanding of risk, they are not a systematic mechanism for uncovering hidden risks and avoiding crises. Indeed, the recent sudden rise in market volatility suggests that they are as bad as rating agencies at detecting early signs of trouble.

Regulators, meanwhile, are now starting to require banks to develop their own internal ratings processes. The problem is that few institutions have the tools and expertise to do this alone. A comprehensive assessment of a country’s macro investment risk requires looking systematically at the stocks and flows of the national account to capture all dangers, including risk in the financial system and the real economy, as well as wider risk issues. As we have seen in recent crises, private risk taking and debt are socialised when a crisis occurs. So, even when public deficits and debt are low before a crisis, they can rise sharply after one erupts. Governments that looked fiscally sound suddenly appear insolvent.

Using 200 quantitative variables and factors to score 174 countries on a quarterly basis, we have identified a number of countries where investors are missing risks — and opportunities. China is a perfect example. The country’s home developers, local governments, and state-owned enterprises are severely overindebted.

China has the balance-sheet strength to bail them out, but the authorities would then face a choice: embrace reform or again rely on leverage to stimulate the economy. Even if China continues on the latter course, it will fail to achieve its growth targets and will look more fragile over time.

Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing economy-wide debt burden, and a weak and worsening business environment. The corruption scandal at energy giant Petrobras is finally causing ratings agencies to reassess Brazil, but the move comes too late, and their downgrades will probably not be sufficient to reflect the true risk. Other emerging markets also look fragile and at risk of a downgrade.

In the eurozone, shadow ratings already signalled red flags in the late 2000s in Greece and other countries of the periphery. More recently, Ireland and Spain may deserve to be upgraded, following fiscal consolidation and reforms. Greece, however, remains a basket case. Even with reform to improve its growth potential, Greece will never be able to repay its sovereign debt and needs substantial relief.

An assessment of sovereign risk that is systematic and data-driven could help to spot the risks that changing global headwinds imply.

To that extent, it provides exactly what the world needs now: an approach that removes the need to rely on the ad hoc and slow-moving processes of ratings agencies and the noisy and volatile signals coming from markets.

via Project Syndicate

Monday, August 24, 2015

Roubini discusses Ronald Reagan vs Obama economic policies AND MORE..

Nouriel Roubini speaks on Fox Business.

Topics include the impact of government policies on economic growth, President Obama, Ronald Reagan, investing and importance of diversification.

Monday, August 10, 2015

95 percent of active funds underperform benchmark indexes [VIDEO]

Monday, July 27, 2015

Active trading vs Passive Investing

Even in normal times, individual and institutional investors alike have a hard time figuring out where to invest and in what. Should one invest more in advanced or emerging economies? And which ones? How does one decide when, and in what way, to rebalance one’s portfolio? 

Obviously, these choices become harder still in abnormal times, when major global changes occur and central banks follow unconventional policies. But a new, low-cost approach promises to ease the challenge confronting investors in normal and abnormal times alike. 

In the asset management industry, there have traditionally been two types of investment strategies: passive and active. The passive approach includes investment in indices that track specific benchmarks, say, the S&P 500 for the United States or an index of advanced economies or emerging-market equities. In effect, one buys the index of the market. 

Passivity is a low-cost approach – tracking a benchmark requires no work. But it yields only the sum of the good, the bad, and the ugly, because it cannot tell you whether to buy advanced economies or emerging markets, and which countries within each group will do better. You invest in a basket of all countries or specific regions, and what you get is referred to as “beta” – the average market return. 

By contrast, the active approach entrusts investment to a professional portfolio manager. The idea is that a professional manager who chooses assets and markets in which to invest can outperform the average return of buying the whole market. These funds are supposed to get you “alpha”: absolute superior returns, rather than the market “beta.” 

The problems with this approach are many. Professionally managed investment funds are expensive, because managers trade a lot and are paid hefty fees. Moreover, most active managers – indeed, 95% of them – underperform their investment benchmarks, and their returns are volatile and risky. Moreover, superior investment managers change over time, so that past performance is no guarantee of future performance. And some of these managers – like hedge funds – are not available to average investors. 

As a result, actively managed funds typically do worse than passive funds, with returns after fees even lower and riskier. Indeed, not only are active “alpha” strategies often worse than beta ones; some are actually disguised beta strategies (because they follow market trends) – just with more leverage and thus more risk and volatility. 

But a third investment approach, known as “smart” (or “enhanced”) beta, has become more popular recently. Suppose that you could follow quantitative rules that allowed you to weed out the bad apples, say, the countries likely to perform badly and thus have low stock returns over time. If you weed out most of the bad and the ugly, you end up picking more of the good apples – and do better than average. 

To keep costs low, smart beta strategies need to be passive. Thus, adherence to specific rules replaces an expensive manager in choosing the good apples and avoiding the bad and ugly ones. For example, my economic research firm has a quantitative model, updated every three months, that ranks 174 countries on more than 200 economic, financial, political, and other factors to derive a measure or score of these countries’ medium-term attractiveness to investors. This approach provides strong signals concerning which countries will perform poorly or experience crises and which will achieve superior economic and financial results. 

Weeding out the bad and the ugly based on these scores, and thus picking more of the good apples, has been shown to provide higher returns with lower risk than actively managed alpha or passive beta funds. And, as the rankings change over time to reflect countries’ improving or worsening fundamentals, the equity markets that “smart beta” investors choose change accordingly.
With better returns than passive beta funds at a lower cost than actively managed funds, smart beta vehicles are increasingly available and becoming more popular. (Full disclosure: my firm, together with a large global financial institution, is launching a series of tradable equity indices for stock markets of advanced economies and emerging markets, using a smart beta approach). 

Given that this strategy can be applied to stocks, bonds, currencies, and many other asset classes, smart beta could be the future of asset management. Whether one is investing in normal or abnormal times, applying a scientific, low-cost approach to get a basket with a higher-than-average share of good apples does seem like a sensible approach.

via Project Syndicate

Monday, July 20, 2015

Roubini partners with Barclays bank to launch equity indices

London-based bank Barclays has partnered with economist Nouriel Roubini and his Roubini Global Economics research firm to launch a suite of smart beta equity indices: the Roubini Barclays Country Insights Indices. As tradeable strategy indices, the suite is ideally suited to underlie index-linked investment products such as exchange-traded funds.

The engine behind the new indices is Roubini’s “Country Insights” model, which measures country risks and opportunities via a systematic rules-based approach. The model ranks countries based on four key pillars – external adjustment capacity, institutional robustness, growth potential and social inclusion – and incorporates some 200 distinct variables. Input data come from a variety of sources, including the Bank for International Settlements, the International Monetary Fund, the World Bank, the World Economic Forum and Gallup Polls.

The model aims for a granular assessment of each country across a variety of metrics and is designed to derive a country’s “Investment Attractiveness Score”. Inputs include a country’s ability to innovate, its demographic make-up, the quality of education and availability of healthcare. The model not only takes into consideration a country’s macroeconomic performance, but also other factors directly relevant to a nation’s growth potential in areas such as policy and political risk.

It is worth noting that, of the Eurozone countries, the model consistently ranked Greece, Portugal, Italy and Spain in the bottom four in terms of their investment attractiveness as far back as September 2005, clearly identifying them as countries with elevated levels of risk and low growth prospects. At this time, the Roubini Barclays indices would have significantly underweighted or avoided these countries entirely.

“The majority of investors would not invest in a company without first assessing its assets, liabilities and ownership structure. Investors may wish to perform a similar analysis when looking at the economic attractiveness of a country”, said Paul Domjan, Managing Director at Roubini Global Economics.

“The Roubini Barclays Country Insights Indices aim to do this. Instead of focusing entirely on a country’s ‘income statement’ – namely its short-term economic performance – the indices use current data attempting to understand the investment risk and benefits of a particular country or region. These data include factors that impact a country’s ‘balance sheet’, including the health of the banking system, the total debt of the economy, the age of the population and its ability to innovate, along with social factors including inequality and education.”

The indices are currently available in All-World, Developed Markets, Developed Markets ex-North America and Emerging Markets versions and use as their basis the MSCI AC World, the MSCI World, the MSCI EAFE, the FTSE Emerging indices, respectively, with country allocations re-weighted or excluded according their Investment Attractiveness Score, as calculated by the model. The indices are re-balanced quarterly.

Based on back-tested data, each of the indices has produced superior Sharpe ratios (before fees, trading costs and expenses) since October 2005 relative to their parent index. Specifically, the Roubini Barclays Country Insights Developed Markets Equity Index has delivered a Sharpe ratio of 0.36 compared to 0.27 for the MSCI World Index; similarly, 0.29 for the Developed Markets ex North America Index versus 0.16 for the MSCI EAFE Index; 0.30 for the Emerging Markets Equity Index versus 0.24 for the MSCI EAFE Index; and 0.33 for the All-World Equity Index versus to 0.26 for the MSCI AC World Index.

With these kinds of track records, albeit simulated, coupled with the allure of the Roubini brand, the indices are likely to draw the attention of product development executives at ETF providers. Indeed, Barclays is thought to be in early-stage talks with a number of firms.

Monday, July 13, 2015

What will Greece do next ?

Now that the Greek people have overwhelmingly rejected the terms of the creditors’ proposed cash-for-reforms deal, either a new (short-term) deal will be reached by July 20 (when Greece is due to pay off €3.5 billion in bonds to the ECB) or the government will default on another key institution, dramatically raising the odds of "Grexit" once again.

Monday, June 29, 2015

US Fed's interest rates hike could cause Emerging markets to suffer

The prospect that the US Federal Reserve will start exiting zero policy rates later this year has fueled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. The concern is understandable: When the Fed signaled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum” sent shock waves through many emerging countries’ financial markets and economies.

Indeed, rising interest rates in the United States and the ensuing likely rise in the value of the dollar could, it is feared, wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households. Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.

But, although the prospect of the Fed raising interest rates is likely to create significant turbulence in emerging countries’ financial markets, the risk of outright crises and distress is more limited. For starters, whereas the 2013 taper tantrum caught markets by surprise, the Fed’s intention to hike rates this year, clearly stated over many months, will not. Moreover, the Fed is likely to start raising rates later and more slowly than in previous cycles, responding gradually to signs that US economic growth is robust enough to sustain higher borrowing costs. This stronger growth will benefit emerging markets that export goods and services to the US.

Another reason not to panic is that, compared to 2013, when policy rates were low in many fragile emerging economies, central banks already have tightened their monetary policy significantly. With policy rates at or close to double-digit levels in many of those economies, the authorities are not behind the curve the way they were in 2013. Loose fiscal and credit policies have been tightened as well, reducing large current-account and fiscal deficits. And, compared to 2013, when currencies, equities, commodity, and bond prices were too high, a correction has already occurred in most emerging markets, limiting the need for further major adjustment when the Fed moves.

Above all, most emerging markets are financially more sound today than they were a decade or two ago, when financial fragilities led to currency, banking, and sovereign-debt crises. Most now have flexible exchange rates, which leave them less vulnerable to a disruptive collapse of currency pegs, as well as ample reserves to shield them against a run on their currencies, government debt, and bank deposits. Most also have a relatively smaller share of dollar debt relative to local-currency debt than they did a decade ago, which will limit the increase in their debt burden when the currency depreciates. Their financial systems are typically more sound as well, with more capital and liquidity than when they experienced banking crises. And, with a few exceptions, most do not suffer from solvency problems; although private and public debts have been rising rapidly in recent years, they have done so from relatively low levels.

In fact, serious financial problems in several emerging economies – particularly oil and commodity producers exposed to the slowdown in China – are unrelated to what the Fed does. Brazil, which will experience recession and high inflation this year, complained when the Fed launched QE and then when it stopped QE. Its problems are mostly self-inflicted – the result of loose monetary, fiscal, and credit policies, all of which must now be tightened, during President Dilma Roussef’s first administration.

Russia’s troubles, too, do not reflect the impact of Fed policies. Its economy is suffering as a result of the fall in oil prices and international sanctions imposed following its invasion of Ukraine – a war that will now force Ukraine to restructure its foreign debt, which the war, severe recession, and currency depreciation have rendered unsustainable.

Likewise, Venezuela was running large fiscal deficits and tolerating high inflation even when oil prices were above $100 a barrel; at current prices, it may have to default on its public debt, unless China decides to bail out the country. Similarly, some of the economic and financial stresses faced by South Africa, Argentina, and Turkey are the result of poor policies and domestic political uncertainties, not Fed action.

In short, the Fed’s exit from zero policy rates will cause serious problems for those emerging market economies that have large internal and external borrowing needs, large stocks of dollar-denominated debt, and macroeconomic and policy fragilities. China’s economic slowdown, together with the end of the commodity super-cycle, will create additional headwinds for emerging economies, most of which have not implemented the structural reforms needed to boost their potential growth.

But, again, these problems are self-inflicted, and many emerging economies do have stronger macro and structural fundamentals, which will give them greater resilience when the Fed starts hiking rates. When it does, some will suffer more than others; but, with a few exceptions lacking systemic importance, widespread distress and crises need not occur.

VIA Project Syndicate

Monday, June 22, 2015

Wednesday, June 3, 2015

Greece may repay IMF somehow

Radical decisions like capital controls, like deposit freezes, like IOUs that have a lot of collateral damage, not just financially but also economic, can be prevented.

I see a sense of something more constructive, of moving in the right direction. I do expect that pots of money are going to be found in June to make sure [that IMF money is repaid]

Monday, June 1, 2015

Money printing could lead to bubbles and crashes

A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.

Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the US, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

And yet investors have reason to be concerned. Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

Likewise, in October 2014, US treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in 3bn years. The latest episode came just last month, when, in the space of a few days, 10-year German bond yields went from five basis points to almost 80.

These events have fuelled fears that, even very deep and liquid markets – such as US stocks and government bonds in the US and Germany – may not be liquid enough. So what accounts for the combination of macro liquidity and market illiquidity?

For starters, in equity markets, high-frequency traders (HFTs), who use algorithmic computer programs to follow market trends, account for a larger share of transactions. This creates, no surprise, herding behaviour. Indeed, trading in the US nowadays is concentrated at the beginning and the last hour of the trading day, when HFTs are most active; for the rest of the day, markets are illiquid, with few transactions.

A second cause lies in the fact that fixed-income assets – such as government, corporate, and emerging-market bonds – are not traded in more liquid exchanges, as stocks are. Instead, they are traded mostly over the counter in illiquid markets.

Third, not only is fixed income more illiquid, but now most of these instruments – which have grown enormously in number, owing to the mushrooming issuance of private and public debts before and after the financial crisis – are held in open-ended funds that allow investors to exit overnight. Imagine a bank that invests in illiquid assets but allows depositors to redeem their cash overnight: if a run on these funds occurs, the need to sell the illiquid assets can push their price very low very fast, in what is effectively a fire sale.

Fourth, before the 2008 crisis, banks were market makers in fixed-income instruments. They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility. But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity. So, in times of surprise that move bond prices and yields, the banks are not present to act as stabilisers.

In short, though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action.

As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast. Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales.

This combination of macro liquidity and market illiquidity is a timebomb. So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.

This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.

Wednesday, May 20, 2015

Art market is example of frothiness in markets

What I'm seeing is that these asset prices, even for art ... is a signal of how many asset prices are too high today.

Monday, May 18, 2015

Markets not in a bubble yet

As the economy recovers, as inflation goes higher, gradually long-term interest rates are going to go higher. In the short run, lack of market liquidity, lack of market makers can imply that when there are some surprises—economic and otherwise—or inflation, then you're in a very volatile environment for bond yields in the U.S. and Europe

Soon enough asset reflation can become asset inflation, asset inflation can become asset frothiness and eventually you have asset and credit bubbles."

My worry is the real economy justifies a slow exit—low inflation, still low growth, unemployment is still high—but then all this liquidity is going to go to asset inflation and eventually in frothiness and financial bubbles.

Read more at:

Wednesday, May 13, 2015

Canada housing market correction could happen but not a bubble

The similarities are that there has been a good deal of home price inflation. There are increases in household debt related to mortgages.

But there are differences related to your financial system, which is slightly better regulated and supervised. So the excesses of subprime lending that occurred in the United States have not occurred in Canada.

In the U.S., a massive glut of supply led to the prices falling. Here, especially in Vancouver, some of the demand is driven by foreigners coming from Asia and buying property as a long-term investment. That demand is going to stay.

So I wouldn’t say the Canadian market is in a bubble. I would say there is some frothiness in terms of excessive price inflation and the valuation of homes compared to rentals.

I don’t see a housing bust in Canada. But there may be some correction in prices.

Monday, May 11, 2015

More Women in business needed

"There has been progress in the direction of gender equality, but it’s still very limited. The case for having a stronger role of women in the business world is compelling. Lots of work has been done, but more needs to be done."

On women's pay slowly increasing compared to men's pay 

"But it’s too slow. At the present rate, it will take 80 years to reach full equality"

Monday, May 4, 2015

USA re-enters currency war

In a world of weak domestic demand in many advanced economies and emerging markets, policy makers have been tempted to boost economic growth and employment by going for export-led growth. This requires a weak currency and conventional and unconventional monetary policies to bring about the required depreciation.

Since the beginning of the year, more than 20 central banks around the world have eased monetary policy, following the lead of the European Central Bank and the Bank of Japan. In the eurozone, countries on the periphery needed currency weakness EURUSD, -0.32%  to reduce their external deficits and jump start growth.

But the euro weakness triggered by quantitative easing has further boosted Germany’s current-account surplus, which was already‎ a whopping 8% of gross domestic product last year. With external surpluses also rising in other countries of the eurozone core, the monetary union’s overall imbalance is large and growing.

In Japan, quantitative easing was the first “arrow” of “Abenomics,” Prime Minister Shinzo Abe’s reform program. Its launch has sharply weakened the yen USDJPY, +0.00%  and is now leading to rising trade surpluses.

The upward pressure on the U.S. dollar from the embrace of quantitative easing by the ECB and the BOJ has been sharp. The dollar has also strengthened against the currencies of advanced-country commodity exporters, like Australia and Canada, and those of many emerging markets. For these countries, falling oil and commodity prices have triggered currency depreciations that are helping to shield growth and jobs from the effects of lower exports.

The dollar has also risen relative to currencies of emerging markets with economic and financial fragilities: twin fiscal and current-account deficits, rising inflation and slowing growth, large stocks of domestic and foreign debt, and political instability. Even China briefly allowed its currency USDCNY, -0.05%  to weaken against the dollar last year, and slowing output growth may tempt the government to let the renminbi weaken even more. Meanwhile, the trade surplus is rising again, in part because China is dumping its excess supply of goods — such as steel — in global markets.

Until recently, U.S. policy makers were not overly concerned about the dollar’s strength, because America’s growth prospects were stronger than in Europe and Japan. Indeed, at the beginning of the year, there was hope that U.S. domestic demand would be strong enough this year to support GDP growth of close to 3%, despite the stronger dollar. Lower oil prices and job creation, it was thought, would boost disposable income and consumption. Capital spending (outside the energy sector) and residential investment would strengthen as growth accelerated.

But things look different today, and U.S. officials’ exchange-rate jitters are becoming increasingly pronounced. The dollar appreciated much faster than anyone expected; and, as data for the first quarter of 2015 suggest, the impact on net exports, inflation, and growth has been larger and more rapid than that implied by policy makers’ statistical models. Moreover, strong domestic demand has failed to materialize; consumption growth was weak in the first quarter, and capital spending and residential investment were even weaker.

As a result, the U.S. has effectively joined the “currency war” to prevent further dollar appreciation. Fed officials have started to speak explicitly about the dollar as a factor that affects net exports, inflation, and growth.‎ And the U.S. authorities have become increasingly critical of Germany and the eurozone for adopting policies that weaken the euro while avoiding those — for example, temporary fiscal stimulus and faster wage growth — that boost domestic demand.

Moreover, verbal intervention will be followed by policy action, because slower growth and low inflation — partly triggered by a strong dollar — will induce the Fed to exit zero policy rates later and more slowly than expected. That will reverse some of the dollar’s recent gains and shield growth and inflation from downside risks.

Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars. And that could spell trouble for the U.S. as it tries to conclude the mega-regional Trans-Pacific Partnership. Uncertainty about whether the Obama administration can marshal enough votes in Congress to ratify the TPP has now been compounded by proposed legislation that would impose tariff duties on countries that engage in “currency manipulation.”

If such a link between trade and currency policy were forced into the TPP, the Asian participants would refuse to join.

The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar-thy-neighbor export measures. But that would require them to rely less on monetary policy and more on appropriate fiscal policies (such as higher spending on productive infrastructure). Even income policies that lift wages, and hence labor income and consumption, are a better source of domestic growth than currency depreciations (which depress real wages).

The sum of all trade balances in the world is equal to zero, which means that not all countries can be net exporters — and that currency wars end up being zero-sum games. That is why America’s entry into the fray was only a matter of time.


Wednesday, April 29, 2015

The Next Billion conference speaker Nouriel Roubini

Nouriel Roubini will deliver the keynote address at the May 7, 2015 "The Next Billion: Women & The Economy of the Future" conference in Vancouver, Canada.

The conference be held on May 7th where senior corporate leaders will come together to discuss concrete, practical ways in which women - as consumers, employees, entrepreneurs and executives - can contribute to the continuing success of companies in the international economy.

"Women represent one of the biggest emerging markets – they make up 40% of the world's workforce, surpassing China and India combined, and account for 65% of all spending decisions globally," noted Roubini. "In the past decade, the increased employment of women in developed economies has contributed to more global growth than China has. This is a serious economic driver, one that banks, businesses and countries can no longer afford to ignore. I look forward to sharing thoughts with industry leaders and discussing how organizations can take advantage of this next great market frontier."

Tuesday, April 28, 2015

Expensive Art could be used for money laundering

You can buy something [an art] for half a million, not show a passport and ship it. Plenty of people are using it for laundering.

Friday, April 17, 2015

Greece will likely not exit Euro Zone [VIDEO]

Monday, March 16, 2015

Nouriel Roubini on Monetary Policies and actions central banks need to take

Monetary policy has become increasingly unconventional in the last six years, with central banks implementing zero-interest-rate policies, quantitative easing, credit easing, forward guidance, and unlimited exchange-rate intervention. But now we have come to the most unconventional policy tool of them all: negative nominal interest rates.

Such rates currently prevail in the euro-zone, Switzerland, Denmark, and Sweden. And it is not just short-term policy rates that are now negative in nominal terms: about $3 trillion of assets in Europe and Japan, at maturities as long as ten years (in the case of Swiss government bonds), now have negative interest rates.

At first blush, this seems absurd: Why would anyone want to lend money for a negative nominal return when they could simply hold on to the cash and at least not lose in nominal terms?

In fact, investors have long accepted real (inflation-adjusted) negative returns. When you hold a checking or current account in your bank at a zero interest rate – as most people do in advanced economies – the real return is negative (the nominal zero return minus inflation): a year from now, your cash balances buy you less goods than they do today. And if you consider the fees that many banks impose on these accounts, the effective nominal return was already negative even before central banks went for negative nominal rates.

In other words, negative nominal rates merely make your return more negative than it already was. Investors accept negative returns for the convenience of holding cash balances, so, in a sense, there is nothing new about negative nominal interest rates.

Moreover, if deflation were to become entrenched in the eurozone and other parts of the world, a negative nominal return could be associated with a positive real return. That has been the story for the last 20 years in Japan, owing to persistent deflation and near-zero interest rates on many assets.

One still might think that it makes sense to hold cash directly, rather than holding an asset with a negative return. But holding cash can be risky, as Greek savers, worried about the safety of their bank deposits, learned after stuffing it into their mattresses and walls: the number of armed home robberies rose sharply, and some cash was devoured by rodents. So, if you include the costs of holding cash safely – and include the benefits of check writing – it makes sense to accept a negative return.

Beyond retail savers, banks that are holding cash in excess of required reserves have no choice but to accept the negative interest rates that central banks impose; indeed, they could not hold, manage, and transfer those excess reserves if they were held as cash, rather than in a negative-yielding account with the central bank. Of course, this is true only so long as the nominal interest rate is not too negative; otherwise, switching to cash – despite the storage and safety costs – starts to make more sense.

But why would investors accept a negative nominal return for three, five, or even ten years? In Switzerland and Denmark, investors want exposure to a currency that is expected to appreciate in nominal terms. If you were holding Swiss franc assets at a negative nominal return right before its central bank abandoned its euro peg in mid-January, you could have made a 20% return overnight; a negative nominal return is a small price to pay for a large capital gain.

And yet negative bonds yields are also occurring in countries and regions where the currency is depreciating and likely to depreciate further, including Germany, other parts of the eurozone core, and Japan. So, why are investors holding such assets?

Many long-term investors, like insurance companies and pension funds, have no alternative, as they are required to hold safer bonds. Of course, negative returns make their balance sheets shakier: a defined-benefit pension plan needs positive returns to break even, and when most of its assets yield a negative nominal return, such results become increasingly difficult to achieve. But, given such investors' long-term liabilities (claims and benefits), their mandate is to invest mostly in bonds, which are less risky than stocks or other volatile assets. Even if their nominal returns are negative, they must defer to safety.

Moreover, in a “risk-off" environment, when investors are risk-averse or when equities and other risky assets are subject to market and/or credit uncertainty, it may be better to hold negative-yielding bonds than riskier and more volatile assets.

Over time, of course, negative nominal and real returns may lead savers to save less and spend more. And that is precisely the goal of negative interest rates: In a world where supply outstrips demand and too much saving chases too few productive investments, the equilibrium interest rate is low, if not negative. Indeed, if the advanced economies were to suffer from secular stagnation, a world with negative interest rates on both short- and long-term bonds could become the new normal.

To avoid that, central banks and fiscal authorities need to pursue policies to jump-start growth and induce positive inflation. Paradoxically, that implies a period of negative interest rates to induce savers to save less and spend more. But it also requires fiscal stimulus, especially public investment in productive infrastructure projects, which yield higher returns than the bonds used to finance them. The longer such policies are postponed, the longer we may inhabit the inverted world of negative nominal interest rates.


Wednesday, March 11, 2015

Roubini compares bubble to fire and oxygen

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.

Monday, February 23, 2015

Nouriel Roubini warns of Art market bubble

There is a lack of a fundamental pricing model for art.

This lack of a fundamental pricing model means that art is subject to fads, fashions, manias—and potentially bubbles. (Markets sometimes run into major challenges even when assets have fundamental pricing models—let alone without them.)

Is the art market now in a bubble? Is the bubble about to burst? These questions are now being raised about the art market. As I mentioned earlier, the fact that art trades in a way that cannot be reduced to a fundamental valuation makes answering these questions more complicated. Despite this uncertainty, there are those who say, "This time is different." Those who believe that often cite the rising forces of globalization, which are now enriching a whole new class of wealthy individuals, whom they believe are going to demand art both for its aesthetic value and for investment purposes.

However, it's worth mentioning that we've had booms and busts in the art world in the past. There was a major bust in the early 1990s. In the late 1980s there were a group of star artists whose stars ultimately dimmed, and the value of their art fell sharply. In the end, there are always fads. Everyone wants to own the work of the latest 'It' artist. In art, like in everything else, everyone wants the new shiny thing.

Tuesday, February 17, 2015

Roubini sees Stagnation and deflation ahead

Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup—ZIRP, QE, CE, FG, NDR, and U-FX Int—of unconventional monetary policies? 

No central bank had considered any of these measures (zero interest rate policy, quantitative easing, credit easing, forward guidance, negative deposit rate, and unlimited foreign exchange intervention, respectively) before 2008. Today, they have become a staple of policymakers’ toolkits. Indeed, just in the last year and a half, the European Central Bank adopted its own version of FG, then moved to ZIRP, and then embraced CE, before deciding to try NDR. In January, it fully adopted QE. 

Indeed, by now the Fed, the Bank of England, the Bank of Japan, ECB, and a variety of smaller advanced economies’ central banks, such as the Swiss National Bank, have all relied on such unconventional policies. 

One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts. None of these dire predictions has been borne out by events. 

Inflation is low and falling in almost all advanced economies; indeed, all advanced-economy central banks are failing to achieve their mandate—explicit or implicit—of 2% inflation, and some are struggling to avoid deflation. Moreover, the value of the dollar has been soaring against the yen, euro, and most emerging-market currencies. Gold prices since the fall of 2013 have tumbled from $1,900 per ounce to around $1,200. And Bitcoin was the world’s worst-performing currency in 2014, its value falling by almost 60%. To be sure, most of the doomsayers have barely any knowledge of basic economics. But that has not stopped their views from informing the public debate. So it is worth asking why their predictions have been so spectacularly wrong. The root of their error lies in their confusion of cause and effect. 

The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anaemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

In most advanced economies, for example, there is still a very large output gap, with output and demand well below potential; thus, firms have limited pricing power. There is considerable slack in labour markets as well: Too many unemployed workers are chasing too few available jobs, while trade and globalization, together with labour-saving technological innovations, are increasingly squeezing workers’ jobs and incomes, placing a further drag on demand. Moreover, there is still slack in real-estate markets where booms went bust (the US, the UK, Spain, Ireland, Iceland, and Dubai). And bubbles in other markets (for example, China, Hong Kong, Singapore, Canada, Switzerland, France, Sweden, Norway, Australia, New Zealand) pose a new risk, as their collapse would drag down home prices. Commodity markets, too, have become a source of disinflationary pressure. North America’s shale-energy revolution has weakened oil and gas prices, while China’s slowdown has undermined demand for a broad range of commodities, including iron ore, copper, and other industrial metals, all of which are in greater supply after years of high prices stimulated investments in new capacity. China’s slowdown, coming after years of over-investment in real estate and infrastructure, is also causing a global glut of manufactured and industrial goods. With domestic demand in these sectors now contracting sharply, the excess capacity in China’s steel and cement sectors—to cite just two examples—is fuelling further deflationary pressure in global industrial markets. 

Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall. So has the asymmetric adjustment between over-saving creditor economies that face no market pressure to spend more, and over-spending debtor economies that do face market pressure and have been forced to save more. Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing. The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies. Perhaps more important has been a profound mismatch with fiscal policy. 

To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the euro zone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation. Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking—or crumbling—in most advanced economies and emerging markets (with the exception of China). 

With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling. But a variety of political constraints—particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending—are holding back the needed infrastructure boom. All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. 

That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape

Thursday, January 22, 2015

QE may be the best option

QE may be helping the rich, but the alternative would be much, much worse for the middle and lower class.

Monday, January 12, 2015

9 problems facing Euro Zone economies

I may be best known for predicting the global financial crisis and the housing bust of 2008 — but I made another key economic prediction when I warned of major structural risks threatening the Eurozone in 2006.

My remarks proved as prophetic as I'd feared. The crisis I predicted then is still casting shock-waves through the world economy, and may do so for generations to come.

At the World Economic Forum in Davos, Switzerland that year, I said that imbalances in the Eurozone would come to a climax — which might lead to a disaster in Europe within 5 years. In a nutshell, I explained that some countries within the Eurozone — especially Italy, Portugal, and Greece — would experience weaker growth than the economically strong countries at the core of the Eurozone, such as Germany.

This kind of economic divergence would be a major threat to a currency union like the Euro-zone, where countries’ inflation rates and interest rates converge.

As I was explaining all this, the Italian finance minister threw a temper tantrum: He interrupted my remarks and began shouting, "Go back to Turkey!" (The minister was making reference to my being born in Turkey — despite having spent two decades living in Italy.)

Unfortunately, by the Spring of 2010, many of the concerns I expressed during that panel discussion in 2006 turned out to be well founded.

Let's take a look at some of the highlights — or, perhaps more accurately said, the low lights — of the last five years in the Eurozone to set the context.

   - In May of 2010, the Greek government was thrown into chaos by a debt crisis; ultimately, Greece was forced to accept a bailout from the IMF and EU, to agree to implement austerity measures in return, and eventually in 2012 to restructure in a coercive way its public debt.
   - By June of 2010 the member states of the Eurozone were forced to create The European Financial Stability Facility (EFSF) a temporary crisis fund that had to lend over €100 billion to Ireland, Portugal, and Greece after those countries made formal requests for much needed assistance.
   - In the autumn of 2012, the member states of the Eurozone created an additional fund called the European Stability Mechanism (ESM). The ESM lent nearly €50 billion to Spain and Cyprus to backstop their banking crises by recapitalizing their banks.
   - Perhaps even more significant, earlier in the summer of 2012 Mario Draghi, the president of the European Central Bank, pledged to do "whatever it takes to preserve the euro." This was a very strong commitment on the behalf of the ECB to use the full force of monetary policy to save the Eurozone.
   - By 2013 several Eurozone economies received various forms of bailouts from the troika (IMF, ECB and EU): among them on top of Greece were Portugal, Ireland, Cyprus and Spain.

As a consequence of these interventions and Band-Aids, the Eurozone has survived — but now, as we enter 2015, the Eurozone has a host of economic problems that emergency stopgap measures simply cannot fix.

So what, exactly, is happening inside the Eurozone now? The problems of the Eurozone are, of course, complex, but for the sake of brevity let's take a look at a few of the most disturbing facts that seem to highlight the key difficulties that now exist there:

   - The overall inflation rate in the Eurozone now stands at 0.3% — which demonstrates insufficient demand for goods and services – and now the EZ is at risk of outright deflation.
   - The overall rate of unemployment in the Eurozone is 11.5%.
    While 11.5% unemployment is shockingly high by American standards, it doesn't really give you a true sense of just how bad the problem is in the so-called PIGS nations (Portugal, Italy, Greece, Spain) of Europe. In Greece & Spain, for example, the unemployment rate is 25%; even more disturbing, though, the rate of youth unemployment in both of those countries is about 50%, which gives you some sense of the level of desperation and hopelessness among young people there.
    In Italy, the rate of youth unemployment is above 30%. Italy's output is 8% below pre-crisis levels, but industrial production has collapsed 25%.  In Italy, this is not just economic stagnation — it's industrial depression.

In fact, it would be fair to say that the Eurozone is just one shock away from outright deflation — a nightmarish state of affairs where a sustained lack of demand and economic growth causes prices to fall.

Some people say Europe is going to get 'Japanified' — a reference to Japan's dismal economic performance over the last twenty years, which is sometimes referred to as 'The Lost Two Decades'.

But, in fact, the risks in Europe are even worse. While the Japanese have stagnated, Japan has not suffered the sort of debt crisis that’s affected the Eurozone. This is because, unlike the Eurozone, the Bank of Japan has the flexibility and willingness to monetize debt and print money. It's much easier for a national, independent central bank to act to bail out one country than for Frankfurt to attempt to bail out the divergent economies of the Eurozone, where there is no easy one-size-fits-all monetary policy solution to save the day.

Rather than get lost in the wonky math of the Eurozone, as macroeconomists so often do, I’d like to tell you about the challenges the Eurozone faces in a slightly more interesting way: By comparing it to a familiar organization of states—the United States of America.

The Eurozone & The United States

1) Rise of Extreme Political Parties
If the 20th Century has taught us anything, it’s that difficult economic times often lend themselves to political radicalism. Both the left and right seized this opportunity last century and wreaked havoc. The Bolsheviks rose to power after the Russian empire collapsed following economic decline and WWI. Enthusiasm for the National Socialists in Germany followed a prolonged and intense period of deflation and depression.

Seventy-five years later, we would be wise to worry if it might happen again. Among the most troubling concerns on the horizon for the Eurozone is the rise of Eurosceptic extremist parties. Most of these parties tend to come from the political right, but there are examples on the left as well, such as Podemos in Spain or—more worrisomely—Syriza in Greece, a well-organized left coalition that is leading in polls and poised to win a majority in the upcoming election late in January.

Marine La Pen’s National Front party in France is a perfect example of how such extreme national movements must be taken seriously. For decades, the National Front was merely a nuisance, a hotbed for rightwing cranks and malcontents. Suddenly, in 2014, the National Front won a significant number of mayoralties, and their national numbers continue to grow. (In fact, if presidential elections in France, which are scheduled for 2017, were held today, current polls show that the National Front would win the first round.) They're no longer fringe—they’re now players in a very dangerous game. But, just as we saw in the 1930s, stagnation and insecurity breed resentment. When hard times hit, the public looks for someone to blame: foreigners, globalization, or budget cuts from Brussels.

Even in Italy populist anti-Euro parties of the right and left could beat moderate centrist parties of the right and left if the current prime minister Renzi fails in his reform drive.

We should not underestimate the potential power of these movements. The United States is not free of such disgruntlement, of course, but the Tea Party in the U.S. is now more of a nuisance and a political sideshow than a threat.

In short, Europe has a very different kind of history — one it ought to take seriously.

2) Europe's Aging Population

Not long ago Jared Diamond popularized the phrase “geography is fate.” I would pair a phrase of my own beside this wise remark: demographics are fate too.

According to a recent article in the Economist, in the next fifty years the working-age population of Europe will drop considerably, from last year’s peak of about 300 million to 265 million. This will be a significant blow to nearly every aspect of the Eurozone economy.

At the same time, the old-age dependency ratio--a fraction or percentage expressing the ratio of residents over the age of 65 to those under that age--will rise from 28% (recorded earlier this decade) to a staggering 58% by 2060.

This situation is, in a word, unsustainable.  

The causes of this challenge are in Europe are manifold: declining fertility, advances in old-age care, the residue of baby-boom demographics. But the impact will be serious.

The United States has managed to combat many of those challenges of an aging population through immigration. In the U.S., Immigrants now make up more than 13% of the total. population. In 2013, the number of immigrants living in the United States, both legally and illegally, topped 40 million.

Immigration may help to mitigate Europe's aging challenge, as it has in the United States — and then again it may not. Immigration is a controversial topic in Europe — and it is one of the many issues that extremist parties in the Eurozone have seized upon to attempt to lend themselves legitimacy within their own cultures.  Foreigners, after all, have always made easy targets for extremist political parties seeking to scapegoat others for their domestic economic woes in times of high unemployment.

3) Susceptibility to External Shocks
One of the reasons the Eurozone is more fragile than the United States is pure geography. America is surrounded by huge oceans, with relatively stable and like-minded countries to the north and south. Europe, on the other hand, is only a peninsula off the much larger and much less stable continent of Eurasia.

And Africa and the Middle East are right there too, a short skip across the Mediterranean. Thousands of refugees drown in that sea trying to reach Europe each year. Pope Francis recently made reference to this tragedy when he described the continent as a “vast graveyard.”

The aging population of Europe grows resentful of the influx. And because of a wide variety of social and historic reasons, Europe does not function as a melting pot, the way America, at its best, can do. (We see this drive toward assimilation in President Obama’s recent executive action, removing penalties for undocumented residents who aim to attain citizenship.) Whereas Germany, by contrast, contains plenty of Turks who have lived in that country for fifty years and still cannot apply for a German passport. They don’t feel like citizens. They can’t own a part of the dream.

Europe still has not finished the task of absorbing the former  Iron Curtain countries of Central and Eastern Europe within the EU. Problems there still persist—as recent events involving Mr. Putin have made clear.

Eurasia is not an easy neighborhood in which to live. And because Europe cannot make centralized decisions to the same extent that a country like the United States can, coordinating responses to these periodic crises is always a struggle.

4) Labor Mobility & Capital Mobility

There is less labor mobility in the Eurozone than in the United States, since cultural barriers exist between nations with thousands of years of independent history. In the US, workers may flee a recession in North Carolina to seek work in the Northern cities. If there’s a bad shock in Michigan, people can pack up and move to New York. The borders are open between US states and the language is the same. Benefits are often portable.  Whereas in the Eurozone, a number of obstacles prevent this.  

While there are mechanisms to allow for free movement between Eurozone countries, such as the establishment of the Schengen Area, which allows people to travel without passports between 26 European nations, the Eurozone still has a number of constraints that aren't present in the US which make movement more difficult. The Eurozone is a motley collection of competing languages, cultures, and legal restrictions. In consequence, Europe lacks the crucial shock absorber of a truly open labor market.

Since the time of Alexander Hamilton, the United States has had an integrated, federalized banking system which allows for the free flow of capital. This advantage has made the US a good deal more nimble and resilient than the Eurozone. While capital mobility exists in the Eurozone, there is not enough of it. Investing abroad in other Eurozone countries means navigating different tax systems, legal systems, often in different languages and cultures. As a U.S. citizen, if you live in Connecticut and want to buy stock in a California tech company, you don't even need to think about it. You don't have to call a different broker.  You simply buy the stock. The absence of free movement of capital, in fact, is entirely alien to the American way of thinking.

5) Asymmetric Adjustment

Asymmetric adjustment is a wonky phrase but it’s fairly straightforward to understand. Basically, what it means is that there is an asymmetry between creditors and lenders, borrowers and debtors when it comes time to adjust to economic shocks to the economy.

In the Eurozone, this means that countries that tend to spend too much (for example, Greece and Italy) and those that tend to save too much (for example, Germany and The Netherlands) both get hurt when the flow of money ceases.

When a shock to the economy arrives, the lending tends to dry up. In this scenario, debtor countries are forced to spend less — but nothing forces the lending countries to adjust and save less. This is what is meant by the phrase 'asymmetric adjustment.

For both sides, though, an unstable equilibrium is thrown out of balance. The so-called PIGS countries bristle against austerity, while the core countries, on the other hand, are left in the position of someone playing tug-of-war when the other side suddenly drops the rope.

In the U.S., such a scenario could never arise. We are one unified economy. It's difficult to even draw the same metaphor. New York may lend more money that West Virginia, as we know, but both are states are parts of the same union.

6) Great Recession Response

After the banking crisis of 2008, the United States did three crucial things that were required to fix the economy right.

First, The United States took the bull by the horns and recapitalized the banking system. The U.S. Treasury department committed trillions of dollars to support US banks and other financial institutions, such as investment banks, money market funds and credit unions.

(While trillions of dollars were pledged to help the banks, far less capital was actually committed, and the government has collected billions of dollars in dividends and fees for their investment.)

Once government capital was injected into U.S. banks, those banks could continue lending — as opposed to selling assets, deleveraging, or contracting credit. In addition, the Federal Reserve in the U.S. forced banks to engage in stress tests to determine their solvency. Five years down the line, the ECB eventually performed similar stress tests.

But even after the stress tests, European banks don't have adequate capital, which means that if the banks need to shore themselves up, they are going to start retrenching and contracting credit — which risks further damage to the Eurozone economy.

Second, the US did aggressive monetary and quantitative easing, while the ECB is now still thinking about doing quantitative easing. I've written before in Roubini's Edge about how monetary policy can help soften the blow of recessions and economic slowdowns but here I'd like to just focus on the big picture. By quadrupling the size of the money supply from its pre-recession levels, the Fed freed up desperately needed credit and helped keep the U.S. economy from crashing into a full-blown depression.

Third, the US back-loaded its fiscal consolidation, meaning it postponed measures aimed at balancing its fiscal budget. (This is because, in the short run, raising taxes and cutting spending reduce disposable income and therefore reduce consumption.) In the Eurozone,  however, the decision was made to front-load fiscal consolidation, which put additional pressure on their already beleaguered economies. This front-loading, which amounted to imposing budgetary austerity, reduced the total demand in the economy — the last thing the countries of the Eurozone needed at the time of a serious recession.

7) The Eurozone isn't a Fiscal Union

One of the key challenges to the Eurozone is a lack of fiscal union. A fiscal union is something Americans take for granted and rarely think about. In the US, when there is a shock to the output of one of our fifty states, fiscal transfers from the rest of the union help to cushion the blow.  As an example, let's say there is a negative shock to the economy of Texas, perhaps due to a fall in oil prices. Economic output in Texas would fall. But for every dollar in lost output, the fall in income in Texas isn't a dollar but only about 60-65 cents.

Because when there are bad times in Texas the federal government transfers economic assistance there — on the premise that when there are bad times somewhere else, booming oil prices in Texas might help out another state in the union. It's a kind of risk pooling and insurance. In the scenario we've been discussing, Texans who were laid off from their jobs would be eligible for unemployment benefits. Those same unemployed Texans might also be eligible for federal welfare benefits. Also, when the earnings of Texans decrease due to bad economic times they would automatically pay less federal income tax.  Conversely, when Texans are doing well, their federal taxes automatically rise. This serves as a kind of automatic stabilizer for the economy. Finally, the federal government can decide to cushion an economic shock to Texas by spending more money on Texan infrastructure or by funding federal projects at, say, the Johnson Space Center in Houston.

In the U.S. those shock absorbers at the federal level are considerable, since the federal government accounts for 25% to 30% of our GDP. In Europe, where the EU government only accounts for 1% of GDP, there simply isn't capacity for it to lend substantive assistance when countries are in trouble . So what winds up happening in the Eurozone is that when you have a $1 shock to the GDP of one country, that country's income goes down, effectively, by $1.

Unless there is a full fiscal union in the Eurozone — on spending, taxation, and even common debt issuance —the funds that the central government will have to assist countries in trouble will remain just spare change. Of course there are many reasons why citizens of some countries in the Eurozone don't want a fiscal union.

8) Banking Union: The Eurozone's Stumbling Block

In the United States, we take for granted that every state in the union has banks that are insured by the FDIC. In Europe, however, German deposit insurance pays only for German banks, and Italian deposit insurance pays only for Italian banks.

In the U.S., on the other hand, when a bank goes bankrupt in California, we use the same pool of money to fix the problem as we would for a bank that goes bust in New York. Furthermore, in the United States, we have a banking system where the Federal Reserve, at the central level, not at the state level, decides which banks are in trouble and need assistance, or in the worst case, require resolution.

A banking union, in fact, is an important kind of risk sharing — a kind of subset of a fiscal union.

What concerns the Germans about a fiscal union — or, for that matter, a banking union — is that it pledges German citizens to support peripheral Eurozone economies and banks that are at risk of outright collapse. The fear in Germany is that risk-sharing will become risk-shifting — and that a fiscal union will become a transfer union.

In short, Germany, and other core Eurozone nations like The Netherlands, don't want to get stuck in a transfer union where they might be forced to subsidize Portugal and Italy and Greece and Spain forever. Fiscal unions and banking unions only work when shocks occur randomly. (One day I have bad luck in Texas; the next day you have bad luck in New York. Sometimes I help you out; other times, you help me.) If the economies within a fiscal union are not balanced — it's not a two-sided risk-sharing alliance but, rather, a risk-shifting scheme where one side passes money to the other forever.

That is why the Germans, among other core European nations, have been saying, in essence, unless the PIGS countries do reform in the form of fiscal austerity, structural reform, boost their growth, and make progress on avoiding future debt crises, we’re  not going to sign on to a fiscal union or a banking union that may become an economic suicide pact.

9) Political Union — And Democratic Legitimacy in the Eurozone

While Americans are accustomed to political squabbling — such as the commentary we hear from talking heads every presidential election about Red States and Blue States — the fundamental democratic legitimacy of American politics is rarely questioned by those within the political mainstream in the United States.

Supranational unions like the Eurozone — at there very core — are about transferring national sovereignty to the center.

In the case of the Eurozone, decisions that were once made at the national level get made at the supranational level. What was once decided by national legislatures of countries gets decided at the European Parliament in Strasbourg, France, while the executive powers of the EU are in Brussels within the European Commission. Decisions that were formerly handed down by national supreme courts get judged at The European Court of Justice in Luxembourg. And monetary policy that was executed by national central banks gets made by the ECB in Frankfurt, Germany.

What impact does this have on the political legitimacy of democracies?

If you are transferring national sovereignty from the nation state toward super-national authority, then you need a political union where those decisions being made at the super-national level are done in a democratic way. Otherwise, there are great challenges: For example the EU tells you that your country's budget is not acceptable and needs to be cut, or the ECB informs you that several of your national banks need to be shut down.

Decisions on budgets and bank supervision have already moved away from national capitals to the central authority — but the risk sharing component of fiscal and economic union never arrived. You might say that countries like Greece have lost their sovereignty on supervision and regulation without truly receiving the benefits of solidarity, i.e. risk-sharing.

Bureaucrats that were never elected by Greek citizens have begun making decisions that most Greeks would prefer to be made democratically in Athens, and many have already begun to blame their woes on the EU and the ECB and the Eurozone.

The issue, of course, brings us back to where we began our list: The rise of extremist political parties within the Eurozone.

Beyond Greece — in Spain and Italy and France and The Netherlands — populist parties on the right and the left are rising. And their rage is being channeled toward many of the same targets that extremist politics railed against during The Great Depression: Against globalization, against immigration, against reform, against austerity. They are saying, "Enough is enough." So far, they have not come to power. But after five years of recession, low growth, high unemployment, little job creation, little income creation, more and more people have begun to say, "Enough is enough."

As their voices grow louder, and the political legitimacy of the Eurozone is questioned in more places, those with a keen sense of history begin to worry about the causes that made Europeans feel powerless within the political order of the 1930s— economic depression, stock market shocks, the wrong monetary and fiscal policies leading to deflation — that led to Europe falling into the clutches of authoritarian regimes and culminating in the Second World War.

The Future of the Eurozone

As 2014 drew to a close, I started thinking about all the things I've written about the Eurozone over the last decade. One of the more provocative ways of summing up the challenges that the Eurozone faces would be to say that in this world, economies can grow either because they have lots of young people willing to work long hard hours, or grow because people are creative and innovate.

Barring a few exceptions, these are, essentially, the two different paths economies can take to growth. Asia, broadly speaking, has taken the path of working very hard. (Though Americans work quite hard, they don’t work as many hours as their counterparts in Asia do.) But, in many key ways, Americans continue to lead the world in innovation and technological advances.

Europe, at this moment in history, is “the worst of both worlds” in this respect. Leisure and vacation time are of paramount importance to Europeans, but there is a dearth of innovation to make up for those losses in productivity. (Only isolated elements in core Eurozone nations follow American-style work patterns.) What Europe does have—and what continues to drive the major engine of European tourism—is high culture. Rich Chinese and Indian vacationers flock there to soak up churches and concerts and ruins.

If Europe wants to avoid becoming the Florida of the world—a peninsula full of vacationers and retirees—then it must urgently consider radical reforms. All of the nine points noted above are worthy of serious action by policymakers. And all should be in the minds of investors considering taking a risk on the Eurozone and its future.