Nouriel Roubini is about to become a household name almost as recognizable as Warren Buffett. The NYU Economics Professor is known for his eerily accurate market predictions, although he has many critics. For example, he correctly foresaw that at some point soon stock markets would be suspended in order to curb trading panic. And last Friday, it happened to the US futures markets. Right now Roubini is in demand worldwide as a top advisor on the global financial crisis.
In an interview just this past Friday, which you can listen to on his blog (The RGE Monitor), he noted that markets are currently in a “free fall” and that there is a significant risk that the US will end up like Japan in the 1990’s (a common sentiment among market analysts, including David Smick of the recent book The World is Curved). Roubini forecasts prolonged, multi-year stagnation for the US and world economies unless a genuine fix can be found. He surmises that there is a rising risk that “this is not going to be a two-year recession but something more protracted.”
Where’s the bottom?
“I think that stock prices can fall another 20 to 30 percent per share,” he surmised. Panic could add to the amount of these losses, he said.
Roubini predicts that the recession will last through all of next year and that stock prices could keep falling for 9-12 months before they bottom. More disturbingly, if nothing about the fundamentals are fixed, this could be the situation we see for years.
On top of the market mayhem, Roubini is part of a growing chorus of analysts who have stated that the US dollar has appreciated too much relative to its fundamentals. This means it’s a good time to get out of the US dollar (something I wrote about in a previous post myself).
“The geostrategic power of US will be reduced over time,” for sure, he says. The relative decline in role of dollar as world currency will happen but might still take decades. As for what can be done now, Roubini says we need more regulation. The free market solutions are not working right now and cannot work in this situation. Partly because of this, Roubini thinks Obama’s a better choice for the economy, as he has a “more consistent and comprehensive approach” on how to deal with this crisis. Unfortunately, though, Roubini sees nothing positive on the immediate horizon no matter who gets into the White House.
Roubini’s forecast sounds pretty dire, which is why he’s considered “Dr. Doom,” but when asked whether he had any doubts about his forecasts, he commented that “what has happened in the last few months has been worse than I expected, actually.” Back in February 2008, Roubini wrote a paper on the crumbling of the US economy. He predicted that a “national bank” would go bankrupt within about 2 years, but in reality it took only 7 months.
“I’ve been surprised by the speed, actually, that it has taken for these things to happen.”
So, what does Roubini recommend that average investors do? This is what’s really interesting. Apparently Roubini is not and has never been an investor! One has to wonder how he is planning for his own financial future. Regardless, he has some suggestions for everyone else: put your money in short-term government debt and treasuries, but not those denominated in US dollars. Put it into Europe or Japan, he says. This is also interesting since quite a few analysts cite the awful outlooks for those regions as well.
Which makes me wonder why more people don’t invest in Canadian bonds. Canada has a very well managed economy, even if its trade is dominated by commodities. Domestically, there is very good money management. Two of Canada’s provinces are currently debt-free (Alberta and Newfoundland). Canada has also been recently judged to have the soundest banks in the world. Anyone basing their investment decisions on the perception that Canada is only good for commodities is not working with a full set of tools (sorry for the lack of a good metaphor there).
I think I’m going to start paying a lot more attention to this Roubini guy.
