Tags: Roubini | financial | contagion | geopolitical

Roubini: 'Financial Contagion Cannot Be Ruled Out'

By    |   Wednesday, 01 October 2014 10:06 AM

While geopolitical turmoil has coursed through the world this year, financial markets have seemingly been oblivious, rising — to record highs in some cases — despite the tumult.

That reaction is rational, says economist Nouriel Roubini of New York University. But the good times could easily come to an end.

"While global markets arguably have been rationally complacent, financial contagion cannot be ruled out," Roubini writes in an article for Project Syndicate.

"A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to World War I until late in the summer of 1914. Back then, markets were poor at correctly pricing low-probability, high-impact tail risks. They still are."

The geopolitical trouble has sprouted in Ukraine, the Mideast and China. But it has been ignored thanks in part to global central bank easing and falling oil prices, Roubini says.

That could change if there's a terrorist attack in the West or the geopolitical turmoil spreads, he writes.

"Or the U.S. Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up," Roubini notes.

"The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible."

Star real estate investor Barry Sternlicht, CEO of Starwood Capital Group, also is wary of market risk. "I hope we're . . . in 2005, with a couple of years," he tells CNBC.

Stocks hit record highs in October 2007, only to plunge from September 2008 through March 2009.

"There are more obvious light switches today or ticking time bombs" than in 2007, Sternlicht notes. "The whole macro global situation is not good, and it affects how we think about the world."

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Finance
While geopolitical turmoil has coursed through the world this year, financial markets have seemingly been oblivious, rising — to record highs in some cases — despite the tumult.
Roubini, financial, contagion, geopolitical
318
2014-06-01
Wednesday, 01 October 2014 10:06 AM
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