He's made accurate bearish calls on the United States before but now economist Nouriel Roubini is bulling on the US. Is he right?
He's known for having made bearish – and profoundly correct – calls on the US economy and the financial crisis half a decade ago. Now economist Nouriel Roubini is bullish on the United States.
The man called "Dr. Doom" by the New York Times (not to be confused with the other Dr. Doom, Marc Faber) appeared on CNBC's "Squawk on The Street" Monday, saying there are risks to the US economy but there's also some promise. Roubini said:
"I see the United States growth improving, but… Q4 is going to be significantly damaged by the government shutdown. It has affected government spending and by, uncertainty, affected [capital expenditures] and retail sales. If we are going to reach the debt limit and there is not an agreement, the economic and finance damage could tip us even into a recession."
What would spark that recession? Roubini believes it's a potential reduction in government spending as a result of hitting the debt ceiling without a deal:
"The US right now is growing between 1.5% [and] 2%. Suppose you reach a debt limit and you're constrained to spend only up to your revenues. Suddenly you go from a 4% of GDP budget deficit overnight to zero, the economic impact in terms of fiscal drag is the difference between growing 1.5% and 2% to growing close to zero. So, that's enough to tip you into a recession."
Yet, even with that gloomy prediction and with an expectation of higher rates, Roubini seems fairly optimistic, particularly with the United States:
"As a long-term investor, I would say that gradually over time, there will be a rise in long-term interest rates in the US and globally. Therefore, you might want to start to be underweight in government bonds even if the Fed is going to exit [quantitative easing] very gradually and normalize rates very slowly. That drive in the long-term interest rates is going to be very gradual. I would say there's going to be a general global economic recovery, especially in the United States in the next few years."
How would Roubini invest? He is bullish on US stocks over the medium term (with a caveat, of course):
“I would play that by being overweight in developed markets equity and underweight emerging markets, right now, of significant twin deficits, slowing growth, and rising inflation. And, within advanced economies, I would say probably the United States economic prospects – unless we make a total mess out of our fiscal and political issue – is a better outlook than other advanced economies like the Eurozone or Japan or the United Kingdom. So, in relative terms, over the medium term, you can be bullish about the United States stock market but I would say there are significant downside risks in the short run, especially coming from the political impasse in Washington.”
(Watch the interview: Roubini: Overweight developed markets)
Commenting on Roubini's outlook is CNBC contributor Gina Sanchez, founder of Chantico Global. Sanchez worked for Roubini and Chantico Global was spun out of Roubini Global Economics in 2012. According to Sanchez, Roubini has been a US stock bull but the world wasn't listening. But, she doesn't completely agree with Roubini.
"From an economic perspective, Nouriel is absolutely right," says Sanchez. "All of those points are exactly correct if all you're going to take into account is the economic perspective. But, there's also valuation to take into account."
It's on relative valuation between the US and Europe where Sanchez and Roubini don't see eye-to-eye.
While Sanchez isn't as bullish on the US market compared to Roubini, what do the charts say, particularly when it comes to the closely-followed Dow Jones Industrial Average?
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, also says maybe Roubini should be a little more pessimistic about the US markets. Ross says the charts are making a bearish case at the moment that could see a significant correction.
Are Roubini and Sanchez on the fundamentals correct about the market's direction or should investors heed the caution Ross sees in his charts? Watch the video above to see Sanchez and Ross analyze the market's next move.
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