Roubini: This Will Trigger the Next Crisis

Nouriel Roubini became a household name in the finance and economics arena over a decade ago for his warnings about the coming global financial crisis. Many of his concerns manifested as a perfect storm of excess lending, exorbitant leverage and the inter-connectedness of the financial system—all coming together as a historic financial crisis that led to a painful recession in 2008 and 2009. The NYU Professor of Economics who was dubbed ‘Dr. Doom’ by the media (although he never refers to himself that way) sees the makings of the next crisis that will emerge by 2020. In a Sep. 11, 2018 op-ed in the Financial Times, Roubini and research partner Brunello Rosa, an LSE economist with whom Roubini operates a research firm, outlined those factors. They include: Slowing economic growth, ill-timed fiscal stimulus, trade frictions that could turn into all-out trade wars, domestic politics and frothy asset prices.

While the US and other countries are currently enjoying economic growth, Roubini and Rosa write that the US economic stimulus that has fostered that growth will fade and a modest fiscal drag will push growth below 2 percent. The two economists argue that the Fed will have to tighten fiscal policy, raising rates to around 3.5 percent by early 2020, the headwinds of economic growth will have faded completely. This, combined with the normalization of policy stances in other major global economies, will lead to weaker expansion and higher inflation.

The current trade frictions between the US, China, Europe and our NAFTA partners are what Roubini calls “…symptoms of the much deeper rivalry to determine global leadership on the technologies of the future.” Roubini and Rosa cite curbs on foreign direct investments and technology transfers, as well as restrictions on migration that could help countries with aging populations.

Apart from current trade skirmishes with the US and inside the EU, Roubini and Rosa warn that China, in particular, will be slow to deal with over-capacity and excessive leverage. China has been revving its economic growth engines for years and has set extremely high goals for technological development and productivity. Slowing growth there or among its trading partners could deliver a harsh reckoning to the economic powerhouse. Europe, meanwhile, is experiencing trade tensions inside the continent and political unrest in a number of countries. It has lost its economic momentum, which Roubini and Rosa see continuing as the European Central Bank attempts to undo its unconventional policies.

Roubini and Rosa see a repeat of the same tune that played a part in the 2008-09 financial crisis. They cite high valuations for US equities, which have a P/E ratio 50 percent above historical averages. They also cite high prices for real estate in the US and around the world, as well as high-yield credit. As prices for these investment vehicles have climbed, government bond yields have remained too low. They see a repricing of risky assets by the middle of 2019 in anticipation of a broader slowdown in 2020.

Roubini and Rosa see the US President as antagonistic and a major risk factor in the next crisis. They cite his attacks on the Federal Reserve even as economic growth is about 4 percent and wonder how he will react when growth slows below 1 percent and job losses ensue. They fear that instead of attacking the problem at hand, Trump will create a foreign policy crisis to deflect attention. Since we are already in a trade war with China and the US is unlikely to attack a nuclear-armed North Korea, they see Iran as a potential target. The result, they write, “…would trigger a stagflationary geopolitical shock (like in) 1973, 1979 and 1990 leading to a spike in oil prices…”

Whether you believe any of these factors will manifest themselves over the coming years, Roubini’s track record in identifying elements of past crises, cannot be ignored.