Roubini: China & Fed Errors Are New Risks

May 12, 2014

The subprime mortgage crisis may be fading, but new risks are rising.

[The following interview originally appeared on our sister site, Europe.ETF.com.]

Worries over a eurozone breakup, the U.S. fiscal crisis and deflation in advanced economies may be easing, but that doesn’t mean there aren’t a new set of risks rising.

Earning the moniker Dr. Doom for his bearish calls on the market, including the accurate prediction of the American housing collapse in 2005, Nouriel Roubini acknowledges that some of the risks are now receding, but importantly there are others rising.

Roubini is keynote speaker at this year’s Inside ETFs Europe conference in June this year. He talks to Rebecca Hampson, European Editor, about what these risks are, how to mitigate them and what he would be invested in right now.

ETF.com: What are the global risks we are now facing?

Nouriel Roubini: Firstly, there are some risks that are waning in importance and others that are rising.

There are five things that I would consider as lower risks now. They are:

  1. The risk of a Eurozone break up, or a Greek exit, of Italy and Spain losing market access.
  2. The fiscal crisis in the U.S. as a result of government shut down or another fight over the debt ceiling.
  3. The third is the public-debt crisis in Japan, which is slowing, as a result of the success of Prime Minister Shinzo Abe’s economic strategy now working, which includes monetary easing and fiscal expansion. These have boosted growth and stopped deflation.
  4. Deflation in advanced economies is reducing thanks to very aggressive unconventional easing by central banks.
  5. Then there are the two geo-political risks in Iran and the Middle East. The war in Iran has been stemmed as a result of the intermediary agreement between the great powers in Iran. Secondly, while the Middle East is a mess from a geo-political point of view it is not systemically important from a financial point of view so long as there is not a shock to the global supply of oil and energy.

However, there are more rising risks emerging.

  1. The first is China and whether there will be a soft or a hard landing. I worry that the landing is not going to be very soft in China and it is going to be very bumpy and there will be a sharp slowdown, which is more than people are expecting.
  2. Secondly, there is the risk that the Fed is going to make policy mistakes as it exits monetary easing and adds a zero policy rate. When the Fed announced that last year that it would wind down its monthly purchases of long-term financial assets we saw a ‘taper’ tantrum in financial and emerging markets. While tapering is now priced in, there remains uncertainty about the timing and speed of the Fed’s actions.
  3. The third risk is that the Fed will exit zero rates too late. If you make the mistake of doing it too soon, then you have a hard landing of the economy. If it’s too late you take the risk of an asset price bubble.
  4. The next risk is arising from emerging markets being so fragile, particularly if you look at Russia, Hungary, Ukraine, Venezuela, and Thailand among others.
  5. Then there are two rising geo-political risks. One is the cold war in Russia (and Ukraine) and this cold war could end up becoming a full war, which is likely to try and destabilise Eastern Ukraine.
  6. The other geo-political problem would be the consequence of the rise in China where it sits in a world - in Asia - where you have a group of countries that have nationalist leaders (China, Japan, Korea, and India) and these countries also have major economic transformation issues to deal with. It could mean that if things go wrong on the economics side there is a risk they will blame the foreigners and all the territorial disputes that are ongoing between China in power and from its neighbours.

So those are the things I worry about today, from financial risk to geo-political risk.

 

 

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