Tags: Roubini | markets | Fed | QE

Roubini: 'A New Period of Uncertainty and Volatility Has Begun'

Friday, 28 Jun 2013 10:24 AM

By Michael Kling

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Prepare for more volatility and uncertainty, warns economist Nouriel Roubini.

"A new period of uncertainty and volatility has begun, and it seems likely to lead to choppy economies and choppy markets," Roubini, an economics professor at New York University, writes in an article for Project Syndicate. "Indeed, a broader de-risking cycle for financial markets could be at hand."

Until the recent financial market turbulence, risky assets had rallying since last summer even while economic growth remained slow, he says.

Editor's Note:
The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

"Now the global economy’s chickens may be coming home to roost."

Roubini provides a worldwide economic view befitting his nickname of "Dr. Doom."

Japan had to turn to Abenomics after decades of stagnation, the United Kingdom is flirting with a triple-dip recession and recession in the eurozone periphery is spreading to its core.

U.S. economic growth has been an anemic — around 1.5 percent the last few quarters — and economic growth in emerging markets — including China and India — is slowing.

So why are asset prices rising despite poor economic performance, which Roubini calls a huge "gap between Wall Street and Main Street?"

Roubini cites three factors.

First, tail risks — or low-probability, high-impact events, such as a eurozone breakup — are lower now than a year ago.

Second, financial markets remain hopeful of recovery later this year and next year.

"Optimists repeat the refrain that 'this year is different': after a prolonged period of painful deleveraging, the global economy supposedly is on the cusp of stronger growth."

And third, central banks around the world have pursued more unconventional monetary easing, fueling temporary asset-price reflation. But there are risks to that strategy, Roubini writes. If growth does not rebound, slow growth will eventually push asset prices lower. In addition, "some central banks — namely the [Federal Reserve] — could pull the plug (or hose) by exiting from QE [quantitative easing] and zero policy rates."

A combination slow global growth and the Fed's early QE have hit emerging markets with a correction in commodity prices and equities and a repricing of currencies and both local- and foreign-currency fixed-income assets, Roubini explains.

"The consequences — sharp capital-flow reversals that are now hitting all risky emerging-market assets — have not been pretty."

Richmond Fed President Jeffrey Lacker says financial markets should get ready for more volatility as the Fed announces its plans to wind down QE, Reuters reports.

"This type of volatility is a normal part of the process of incorporating new information into financial asset prices and should not interfere with the moderate-growth scenario that I have presented," Lacker notes, according to Reuters.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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