Permabear to pussycat: The taming of 'rock star' Roubini

The global financial crisis of 2008 brought misery and toil to markets and people around the world, but it also elevated permabear economists like Nouriel Roubini, who had predicted how the US housing bubble would collapse, to rock-star status.

“The recession has been great for me,” Roubini said in a 2009 interview, as he flitted from one party to another, almost always with a drink and two eye-candy girls attached to his beefy arms. “I am ugly, but they’re attracted to the brains. I’m a rock star among geeks, wonks and nerds.”

Part of the enduring appeal that bearish economists hold is that they are seen to be “contrarians” who go against the stampeding herds of overly bullish analysts and commentators. They stand out in a crowd.

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Since 2008, however, the trickle of doomsayers who have sketched apocalyptic visions about the global economy, and particularly the US economy, has grown into a flood. No longer is the ‘permabear cave’ so lonely as it was in the run-up to 2008, when Roubini was laughed off at investment summits to which he took his tale of impending doom.

That ‘fear factor’ has manifested itself in several ways. As the US Federal Reserve stepped up with unprecedented monetary easing in response to a weak US economy, it sent cheap money out into the world, which washed up on the shores of emerging markets, including India. Three successive rounds of quantitative easing by the US Fed forced the permabears to crawl out of their caves with warnings of an imminent collapse of the dollar.

That in turn triggered a manufactured hysteria about “hyperinflation” that would be set off by all this ceaseless “money-printing” - and a stampeding into the “safety” of gold. Conservative Republicans in the US bought too readily into the fear-mongering, backed by economic theory from renowned economists like Kenneth Rogoff and Carmen Reinhart, which suggested that Keynesian economics - and the running up of deficits - would meet with grave consequences.

But in recent times, there has been a discernible shift in the mood, with more and more analyses suggesting that the US economy may be on the mend. “Get ready, America: the economy is about to take off,” prophesies commentator Robin Harding, noting that the US economy is “running out of icebergs to hit.”

Citing a string of passably good news - a lower budget deficit (4 per cent of GDP, against 10 percent in 2009), a revival in US housing prices, a more cheery consumer outlook, and an end to the crippling austerity in the eurozone - Reading predicts that even given the capacity of US politicians to botch things up, 2014 should be a year of greater cheer, when the US economy grows by more than 3 per cent.

In fact, the recent signalling by the US Federal Reserve Board that it could possibly begin to slowly wind down the monetary easing was intended as a measure of policymakers’ confidence in the growth engines of the US economy. But the market reaction to the likelihood of the turning off of the liquidity tap has been severe: US bond yields surged and stock markets around the world skipped a beat. The US dollar index spiked in recent days, causing emerging market currencies, including the Indian rupee, to slide against it.

Even Roubini, who enjoyed rock-star status in recent years for his permabear outlook, is beginning to concede that things may be looking up for the US economy - and that this may be bad news for gold.

Despite the successive rounds of “quantitative easing”- which has doubled or even trebled money supply in most advanced economies - global inflation is actually low and falling further, notes Roubini. “The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.”

Roubini also points out that “some extreme political conservatives, especially in the US, hyped gold in ways that ended up being counterproductive.” For this “far-right fringe”, he adds, “gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth. These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money. But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained.

Roubini has been wrong about gold prices on earlier occasions: for instance, in 2009, he said that that predictions that gold would touch $2,000/ounce were “ utter nonsense”. (It did come pretty close to that threshold last year, largely on fear-mongering about the coming hyperinflation.) But this time around, the accretion of facts that Roubini marshalls appears to be based on more solid economic logic.

[caption id=“attachment_837175” align=“alignleft” width=“380”] The capitulation of permabears like Roubini is illustrative of the fact that even in the best of times, the wisdom of “experts” isn’t quite the gospel truth. Reuters[/caption]

The capitulation of permabears like Roubini is illustrative of the fact that even in the best of times, the wisdom of “experts” isn’t quite the gospel truth. It now turns out that investors like Marc Faber, a regular talking head on the television studio circuit, were invested in stocks about the same time that they were predicting doom for the stock markets.

A gradual recovery of the US economy - which would, of course, need to be validated over the next few months - and a slow winding-down of US quantitative easing would of course spoil the liquidity-driven party that emerging markets, including India, have been on. Perhaps the permabears - and the commentators who amplify their sentiments in India - should be careful what they wish for.