Despite a modest recovery from the nadir of the financial crisis, the global economy still faces tail risks, according to Nouriel Roubini. Roubini’s forecast is not as gloomy as the one that earned the moniker “Doctor Doom,” when he correctly predicted the housing market collapse and the ensuing global recession. But, in a talk May 1, he identified today’s biggest danger points in Europe, the U.S., China and geopolitics which he said threaten to destabilize the global economy.
Roubini, an economist, teaches at the N.Y.U. School of Business. He is also the cofounder and chairman of Roubini Global Economics, an independent, global macroeconomic strategy research firm based in New York. He spoke at the Strategic Investment Conference in Carlsbad, CA, which was sponsored by Altegris Investments and John Mauldin.
“The global economy has some signs of revival, especially in emerging markets,” he said. “Things are more fragile in advanced economies. Tail risks in the global economy have not gone away. Policymakers in advanced economies are running out of policy bullets on the market side, on the fiscal side, and in terms of backstopping a defense for the financial system.”
Bold action by the European Central Bank averted a crisis in Europe, and concerns about the U.S. were allayed when we steered clear of the fiscal cliff. For the time being, China seems to have avoided a hard landing, and tensions in the Middle East have not escalated to a full-scale war. The reductions in those risks, according to Roubini, explain the rally in global equities over the last nine months. But the question investors must ask – and which Roubini attempted to answer – is whether those risks have gone away or been forestalled.
I’ll look at the four reasons why Roubini said investors should be worried, then turn to his assessment of the likely path to recovery.
Europe’s tension between bailouts and austerity
Talk of a triple-dip recession in Europe is moot, according to Roubini, because most of the continent is still mired in a double-dip recession that is spreading from the periphery to the core, including France and Germany. Growth is slow, he said, due to aging demographics and, more importantly, because productivity is low and the implementation of reforms has been very slow.