Stall Speed – Nouriel Roubini on the global Economy

Nouriel Roubini was right on the US housing bubble and its impact on the economy but unfortunately in being right on something as horrendous as what happened he got the moniker of Dr Doom. It is most unfair because his analysis was simply correct and he has continued to make warnings on the long-term impact of the Global Economic Crisis, in the same manner that Ken Rogoff does, undaunted by the hyperbole driven by the free money culture of QE’s 1 and 2.

Now as the US economy is slowing, in what we believe is a return to post crisis trend, not a soft patch Roubini is once again getting airplay for his views. Last night he published a piece in Project Syndicate on the stalling economy.

The full article is worth the few minutes it will take to read but here are a few excerpts.

He says that until recently markets had been able to soldier on with their bullish tendencies ignoring the myriad of shocks that have hit economies, countries and markets since the beginning of 2011. It truly has been an amazing 6 months when you think about it. But,

But, since the end of April, a more persistent correction in global equity markets has set in, driven by worries that economic growth in the United States and worldwide may be slowing sharply.

Data from the US, the United Kingdom, the periphery of the eurozone, Japan, and even emerging-market economies is signaling that part of the global economy – especially advanced economies – may be stalling, if not dropping into a double-dip recession. Global risk-aversion has also increased, as the option of further “extend and pretend” or “delay and pray” on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely.

This is nothing our readers don’t already know but Roubini believes, like us, that this is not a “soft patch” rather,

…there are good reasons to believe that we are experiencing a more persistent slump. First, the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity: large and rising public and private deficits and debt; damaged financial systems that need to be cleaned up and recapitalized; massive loss of competitiveness; lack of economic growth; and rising unemployment. It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured.

Second, the factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level.

Third, economic growth has been flat on average in the UK over the last couple of quarters, with front-loaded fiscal austerity coming at a time when rising inflation is preventing the Bank of England from easing monetary policy. Indeed, inflation may even force the Bank to raise interest rates by the fall. And Japan is already slipping back into recession because of the earthquake.

All of these economies were already growing anemically and below trend, as the ongoing process of deleveraging required a slowdown of public and private spending in order to increase saving rates and reduce debts. And now, in addition to the string of “black swan” events that advanced economies have faced this year, monetary and fiscal stimulus has been removed in most of them, or soon will be.

 This is vitally important for all investors. As Roubini says,

If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed. If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies.

I truly believe that Greece is less likely to take down global markets than the apparent global economic weakness which is only just filtering into the broader market psyche. Traders are simple beasts and they tend to focus on one thing at a time. Once Greece is resolved and we get a bounce, fingers crossed, then the market will be free to focus on the weakening data. It is not our wish for weak data, as investors we’d rather the economies be strong. But for now our analysis,like Roubini’s, tells us that the risks of stall speed are high.

There are clear implications for rates in Australia and returns on our assets markets from this. So the mantra continues – circumspection with regards to risk assets remains a must.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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One Comment on “Stall Speed – Nouriel Roubini on the global Economy”

  1. tristencosgrove Says:

    Excellent piece Greg! This kind of information from a reliable source admonishes us as investors to be certain of each investment we hold. It challenges us to make sure we are willing to hold our assets for the etheral concept of ‘long term’ yet ensure we have prepared, at least mentally, our plan b and plan c, if required. Thinking through actual events and potential scenarios and formulating a plan for these is sensible. A robust investment committee hopefully thinks along these lines with the intention of both protection and advancement of investors in its care.

    Reply

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