Roubini: China/Japan Tension A Threat

January 29, 2014

The world economy looks better than it has in years, but could tensions in Asia ruin the party?

Nouriel Roubini, whose career as an economist reached celebrity status when he predicted the subprime mortgage crisis, is generally much more sanguine about the outlook for the global economy than he was a few years ago, but is now voicing concern about the potential for geopolitical strife between Asia’s two powerhouse countries, Japan and China.

With China in transition and Japan flexing its muscles under Prime Minister Shinzo Abe, Roubini told attendees at ETF.com’s Inside ETFs conference that the possibility of conflict between the two nations was coursing through the meeting of the world’s economic movers and shakers in Davos, Switzerland last week.

“There’s a rise in concern over geopolitical issues,” Roubini told financial advisors at Inside ETFs, the world’s biggest ETF conference. Roubini was delivering one of the keynote addresses on the fourth and final day of the meeting, which is being held at the Westin Diplomat in Hollywood, Fla.

“A limited war between Japan and China is possible—and winnable from China’s perspective,” Roubini said, summarizing the nature of the scuttlebutt in Davos. He noted that Abe has been comparing current tensions to those in 1914, on the eve of the World War I—an ominous way to frame the entire situation, to be sure.

Such a turn of events pitting China and Japan, the world’s Nos. 2 and 3 economies, respectively, would be an enormous setback for the global economy. After all, it’s only been about five years since the market crash that Roubini predicted, and the macro situation, while stabilized, remains fragile.

Indeed, many of the so-called tail risks Roubini was focused on in the past few years, including the over-leveraged banking sector; a debt-gorged eurozone on the verge of collapse; and the legislative wrangling in Washington, D.C., are looking much less dicey.

Economic growth has been continuing around the world, though the fact that ultra-easy monetary policies are likely to continue reflects the delicate nature of the recovery. The job market is improving, but remains relatively weak. Moreover, bank lending remains muted, and the velocity of money is well below what might be associated with rising inflationary pressures.

Thus, bond yields are heading higher, but slowly. Still, there is an outside chance that the rise in asset prices associated with zero-interest-rate policies could lead to frothy markets, and some sort of bubble possibility, Roubini says.

Reprising his more bullish outlook, the man who now calls himself Dr. Reality said that growth in the developed world is likely to be differentiated this year, with U.S. and U.K. expansion seen at 2 percent, while growth in Japan and the eurozone likely to be around 1 percent and 1.6 percent, respectively.

But equities are likely to do better in Japan and the eurozone because of easy money in Japan and, in the case of the eurozone, the relatively low level of prices and resulting high levels of expected returns.

Also, emerging markets are likely to grow at a 5 percent rate this year—below year-earlier levels but at around trend.

He stressed that differentiation—as in developed markets—is also the order of the day, with countries like the Philippines and the Czech Republic relatively robust, and countries like South Africa that are dependent on commodities are relatively fragile.

“Even in the emerging markets, you cannot lump them together. There is a process of differentiation,” Roubini said.

He sees commodities continuing to correct downward and sees the dollar strengthening against a broad array of currencies in developed and developing countries.

 

 

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