Roubini Predicts More Unavoidable Financial Doom

Posted by Mike Tirone - Monday, June 13th, 2011

It seems like each day another financial head or economist is coming out and saying we are on the road to another financial crisis. Last week it was Mark Mobius...

This week it's New York University professor Nouriel Roubini.

In an interview on June 11, Roubini said there is a one-in-three chance that “a perfect storm” will combine to stunt growth from 2013 and put the global economy in a stronghold.

The three factors he claims are the economic slowdown in China; the European debt restructuring; and the stagnation in Japan.

And beyond this trifecta of financial woe, Roubini pressed the negative even further...

The U.S. unemployment is elevated, a jump in oil and food prices is apparent, interest rates in Asia are rising and trade disruption from Japan's earthquake are all even more factor which Roubini is looking into his crystal ball and seeing a glass even more than half empty.

More from Bloomberg:

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

The economy looks to be losing momentum once again, as the MSCI AC World Index has dropped 4.9 percent this month due to recent data, like the concerning U.S. unemployment rate jumping to 9.1 percent in May.

The Obama administration has been negotiating with Republicans controlling the House of Representatives on cutting the federal government's long-term shortfall and raising the debt ceiling. Roubini feels that a failure to place attention on this budget deficit risks a bond market “revolt”...

Since the beginning of May, stocks worldwide have lost more than $3.3 trillion and if that wasn't bad enough, Roubini says that financial markets by the middle of next year could start worrying about a series of risks in 2013.

From Bloomburg:

“We're still running over a trillion-dollar budget deficit this year, next year and most likely in 2013,” Roubini said. “The risk is at some point, the bond market vigilantes are going to wake up in the U.S., like they did in Europe, pushing interest rates higher and crowding out the recovery.”

In Europe, officials need to restructure the debt of Greece, Ireland and Portugal, and waiting too long may result in a “more disorderly” process, Roubini also said.

European official are racing to find a plan to stem Greece's debt crisis by June 24 while sharing the cost of the new rescue with bondholders. Saddled with the euro area's heaviest debt load, Greece is seeking additional loans after last year's 110 billion-euro ($159 billion) bailout.

Things are still looking pretty bad in Japan's economy, the world's third-largest, as they slid into a recession last quarter with consecutive quarterly declines in GDP, after the March 11 earthquake and tsunami which lead to a nuclear crisis. An initial 4 trillion yen ($50 billion) is being spent by the government to clean up from the disaster, which already has caused more than 25 trillion yen in economic damages.

Lastly, in China, the government is trying to boost growth by over-investment which Roubini says will causes excess capacity. A record $2.7 trillion of loans were extended in China over two years, pushing property prices to all-time highs. And this is already with authorities setting price ceilings, demanded higher deposits and limited second-home purchases.

He thinks that by relying heavily on fixed investments – which have accounted for about 50 percent of GDP -“down the line, you are going to have two problems; a massive non-performing loan problem in the banking system and a massive amount of overcapacity is going to lead to a hard landing.”

This is not the first time Roubini has come out and projected the “gloom and doom”, lest we not forget he was among analysts who predicted the global financial crisis of 2007-2009...

Back in January he gave an interview to Spiegel Online on what Europe needed to do to prevent a foreseeable collapse.

And after the Japan earthquake he came out and said “this is certainly the worst things that could happen to Japan, at the worst time.”

It may look a bit dark and dreary up ahead, Nouriel, but look the bright side for once.

For investors, it is always smart to take the good with the bad, and although Roubini is riding the terror train, he has made inaccurate predictions in the past.


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