While it would be an exaggeration to describe Dr. Doom as an optimist, economist Nouriel Roubini offered a nuanced view of the global economy that contained some upbeat expectations for investors together with a heavy emphasis on latent risks.
Speaking Wednesday at ETF.com’s InsideETFs conference in Hollywood, Fla., the head of Roubini Global Economics and NYU business professor said 2014 was likely to be a good year for stocks and not a disastrous year for bonds, as many fear.
As a result of the advanced economies’ very gradual tapering or increase of asset purchases, fears of a bond market rout are unwarranted, Roubini says, and asset reflation will be the order of the day.
The problem, he says, is that reflation risks a dangerous bubble, and a bursting bubble would lead to financial instability. Aggressive withdrawal from lose monetary policy risks a bond market rout and killing the recovery, but the consensus easy-money approach risks a larger bubble and financial instability.
“Exit slowly and create the mother of all bubbles,” he warned; “exit more quickly and you’re going to kill the patient.”
As he said more than once during his presentation, “You’re damned if you do, and damned if you don’t.”
He sees U.S. stocks gaining in the 8% to 10% range, double-digit gains for eurozone stocks, and still higher returns for Japanese equities in the 15 to 20% range. The benchmark U.S. 10-year bond won’t yield any more than 3.4% by year-end and should remain in “steady state” as the Fed tapers slowly, he says.
Commodities will continue their decline as supply continues to increase more than demand, he added.
The economist, just back from the annual meeting of world leaders in Davos, Switzerland, noted a reduced level of economic worry but increased concerns about geopolitical risks. While stating that the consensus can be and often is wrong, Roubini in this instance shared the perception that geopolitical and economic tail risk remains a threat to economies and markets, if not in 2014, then in the years beyond.
He noted that Prime Minister Shinzo Abe of Japan has signaled the threat of war with China, while China has made statements that such a conflict would be winnable.
He quoted financial historian Niall Ferguson’s description of the U.S. as engaged in “geostrategic tapering” — the idea that with its new shale gas and oil wealth it cares less about the Middle East and the world and is less involved in projecting its power.Regarding China, where experts some experts expect a soft landing and others a hard landing, Roubini described himself as being closer to the latter camp. On the one hand, he expects China to expand its economy at 7% (just below the bullish 8% consensus); on the other hand, he sees that continued expansion coming at the expense of structural reforms that China’s leadership continues to delay, thus increasing the risk of a hard landing later. Already, China’s credit-fueled investment boom is getting less bang for the yuan.
Even with an expanding U.S. economy, Roubini expects Federal Reserve tapering to proceed quite gradually, with the Fed not raising interest rates any earlier than the middle of next year — even if unemployment falls as low as 6%. The Bank of England will be similarly slow to exit its own zero-rate policy while the European Central Bank and Bank of Japan will likely continue to increase quantitative easing to head off deflationary risk. The ECB in particular sees the need to continue providing liquidity to its banking system, and even the hawks at the German Bundesbank are open to the idea of negative deposit rates, as low as 50 basis points below zero, to head off deflation and the appreciation of the euro. The Japanese will certainly make further moves to debase their currency, with the only debate being whether to do so immediately or wait till March to see the effects of Japan’s new consumption tax.
As for the dangers to the economy as the world eases off the monetary gas pedal, “The risk is not this year,” he said, “but certainly another couple of years down the line.”
Check out Roubini Frets Over ‘Slow-Motion Replay’ of Last Housing Bubble on ThinkAdvisor.