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State Capitalism to Rule the U.S.: Roubini Report

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Get ready for bigger government, no matter who you vote for this fall.

While voters may feel good this November about casting their ballots for Barack Obama or Mitt Romney, the reality is that the U.S. government will exercise ever greater control over the economy and markets regardless of which party occupies the White House, say economists at Roubini Global Economics in a report commissioned by Pershing LLC.

“State capitalism is coming to developed markets and will persist across emerging markets, where it has long held sway, especially in Asia,” the economists write in Elections and Economies: The Limits of Power in the Age of Deleveraging, a white paper available through Pershing Prime Services. “Rapidly growing government balance sheets and far greater financial regulation reflect widening doubt about the efficacy of unfettered markets to achieve economically optimal outcomes. Leviathan—the Hobbesian concept of a dominant state actor—has risen from the ashes of the financial crash to impose order on the free market.”

For investors, the rise of state capitalism will lead to more macro-driven markets and continued volatility, the Roubini economists predict.

The U.S. economy faces heavy fiscal drag in 2013, and either political gridlock or a withdrawal of stimulative policies could threaten growth, warn the Roubini economists. Nouriel Roubini, an economics professor at New York University’s Stern School of Business, is also chairman of Roubini Global Economics.

While the outcome in November may result in new policy decisions, “elections will not change the nature of the current balance-sheet recession and the consequent need for deleveraging; orderly, gradual rebalancing; and new growth models,” according to the economists.

Commissioned by Pershing, a BNY Mellon company, and written by senior economists at Roubini Global Economics, the independent study examines the impact that the U.S. and eurozone elections as well as China’s leadership change may have on markets and fiscal policy.

“Political officials elected in 2012 will face a difficult set of trade-offs,” Nouriel Roubini said in a statement. “Public policy engagement and central bank intervention have been necessary to avert a second Great Depression, but political gridlock has lowered the prospect of a faster recovery. While policymakers can influence the mix of spending cuts, stimulus and taxes, they should not assume that upward momentum will continue in the absence of accommodative monetary and fiscal policy.”

Advisors should watch for these macro events to continue to drive the value of their investments, according to the Roubini economists:

Stock: Equities are increasingly driven by macro-betas rather than fundamentals.

Fixed Income: Growing central bank balance sheets, bailouts and financial repression will continue to distort markets. Emerging Markets: “State capitalism remains the name of the game, which could impair returns,” and EMs aren’t immune to deleveraging—witness China’s property boom-and-bust cycle.

Currencies: Lower volumes and volatility are the new normal.

Commodities: Inefficient allocation of resources results from commodity intervention by the state, along with market distortions and higher prices.

Even before the downgrade of U.S. debt in the summer of 2011, political risk and gridlock were the main reasons for concern about policy mistakes, according to the Roubini economists, who predict that polarization in the U.S. government will persist even after the elections and make decision-making a difficult process that could result in a “front-loaded and growth-damaging fiscal adjustment,” during a still-fragile and not self-sustained recovery.

“Several programs due to expire in 2013 will have to be extended; failing to do so will result in an outright contraction,” the economists write. “Our baseline is therefore for the U.S. to begin fiscal consolidation in 2013, but avoid an outright recession as a consequence of it.”

Read Bankrupting the State: Anti-Government Ideology Brings Economic Peril by Alexei Bayer in the September 2010 issue of Research magazine at AdvisorOne.


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