Roubini: Fear of Bond Market Rout Is Overblown

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.”

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Check out Roubini Frets Over ‘Slow-Motion Replay’ of Last Housing Bubble on ThinkAdvisor.