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The only thing investors have to fear is fear itself – well, and these six things

Nouriel Roubini outlines his six favourite downside risks

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Apr 9, 2014

by Max Fawcett

With most major global indices at all-time highs, some watchers are trying to figure out what might finally tip them into the long-overdue correction everyone seems to be waiting for. And who better to identify those potential risks than Nouriel Roubini? Dr. Doom, who’s actually been reasonably upbeat of late, wrote a piece for Project Syndicate in which he outlines his biggest worries.

First up is China, and the risk of a “hard landing” for its economy as it tries to transition from command-oriented, infrastructure-driven growth to more consumer spending. The problem, he says, is government policy makers don’t know how to make that happen. “The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward seven per cent, the authorities panic and double down on another round of credit-fueled capital investment,” he writes. “This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can.”

Then there’s the U.S. Federal Reserve’s ongoing attempt to scale back its monthly bond purchases. “Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a ‘taper’ tantrum in global financial markets and emerging markets,” Roubini writes. “This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility. Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves.”

Or, he says, it might wait too long to raise rates, and abet the inflation of another asset bubble that would then have to be pricked – or popped. “The Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4 per cent only by 2018), thus causing another asset-price boom – and an eventual bust,” he writes. “Indeed, unconventional monetary policies in the U.S. and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets.”

Has he forgotten about the looming risks in emerging markets, as rising yields in the U.S. suck capital out of those economies? He hasn’t. “Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth. Moreover many of these emerging markets face political and electoral risks.”

And finally, how about some geopolitical risk? The fifth and sixth items on Roubini’s list pertain to that, first in Ukraine and then in Asia. “There is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country. The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense,” he writes. “[And] there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict. Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact.”

So, given all of these potential catastrophes, why are markets still happily bouncing higher? Because, as always, markets are anything but rational. “Investors may be right that these risks will not materialize in their more severe form, or that loose monetary policies in advanced economies and continued recovery will contain such risks,” Roubini writes. “But investors may be deluding themselves that the probability of these risks is low – and thus may be unpleasantly surprised when one or more of them materializes.”


One Response to The only thing investors have to fear is fear itself – well, and these six things

  1. Philip Uglow says:

    Thanks for an interesting article Max.

    I had not followed Mr. Roubini before and it looks like I should.

    Anyway, I don’t agree nor disagree with Mr. Rubini’s comments.

    Economists excel at analyzing past events but have a poor record of predicting the future. It’s to complex.

    If we think of complexity as the norm then perhaps investors are acting rationally as the information they have, or they perceive that they have, allows them to rank these risk as low.

    Who knows what will happen? Even Mr. Roubini states investors “may be unpleasantly surprised”. He can’t be held accountable for this statement because he uses the words “may be”. If we don’t know what will happen in the future then how can we agree or disagree?

    In a world of complexity and our inability to predict the future companies should protect themselve by becoming more flexible. Nicholas Taleb explains this in his book “Antifragile: Things That Gain from Disorder”.  It’s a good read.

    Thanks again Max for getting me thinking about Mr. Roubini and the economic state of the world.