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Roubini: Investors Blissfully Ignore Geopolitical Risks

Roubini: Investors Blissfully Ignore Geopolitical Risks
Nouriel Roubini (Getty/OLIVIER MORIN)

By    |   Tuesday, 09 May 2017 12:37 PM

Financial guru Nouriel Roubini wonders if investors are whistling past the geopolitical graveyard, ignoring all the “black swans” on the economic horizon.

“Geopolitical risks are continuing to proliferate,” he explained in an article for Project Syndicate.

“The populist backlash against globalization in the West will not be stilled by Macron’s victory, and could still lead to protectionism, trade wars, and sharp restrictions to migration,” wrote Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates.

“At the same time, Russia has maintained its aggressive behavior in the Baltics, the Balkans, Ukraine, and Syria. The Middle East still contains multiple near-failed states, such as Iraq, Yemen, Libya, and Lebanon. And the Sunni-Shia proxy wars between Saudi Arabia and Iran show no sign of ending,” explained Roubini, who was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration.

In Asia, U.S. or North Korean brinkmanship could precipitate a military conflict on the Korean Peninsula. "And China is continuing to engage in — and in some cases escalating — its territorial disputes with regional neighbors," said Roubini, who has worked for the International Monetary Fund, the Federal Reserve, and the World Bank.

“Despite these geopolitical risks, global financial markets have reached new heights . So it is worth asking if investors are underestimating the potential for one or more of these conflicts to trigger a more serious crisis, and what it would take to shock them out of their complacency if they are,” he said.

There are many explanations for why markets may be ignoring geopolitical risks.

“That the world has so far been spared from the tail risks associated with today’s geopolitical conflagrations. There has not yet been a direct military conflict between any major powers, nor have the EU or eurozone collapsed. President Donald Trump’s more radical, populist policies have been partly contained. And China’s economy has not yet suffered from a hard landing, which would create sociopolitical instability,” he said.

“Moreover, markets have trouble pricing such black-swan events: “unknown unknowns” that are unlikely, but extremely costly. For example, the market couldn’t have predicted 9/11. And even if investors think that another major terrorist attack will come, they cannot know when.”

The black swan theory is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

But some investors may be paying attention and are preparing for the worst.

Investors' risk aversion was on display in mid-April as geopolitical tensions sent new money into safe-haven assets such as government-Treasury as well as gold funds, Lipper data revealed.

Taxable bond funds attracted $1 billion in new cash to mark their fourth straight week of inflows, with $396 million going into U.S.-based government-Treasury funds, Lipper data in the seven days through April 12 showed, Reuters reported.

U.S.-based corporate investment-grade bond funds attracted $96 million in the latest week, continuing their inflow streak since December, according to Lipper.

For their part, non-taxable U.S. municipal bond funds attracted $1.6 billion for the reporting period, the strongest weekly flows since the week ended Dec. 30, 2013, Lipper added.

"Investors are questioning whether the market has gotten a little ahead of itself against the geopolitical risks and concerns with North Korea and Syria and China's Xi Jinping visit," said Tom Roseen, head of research services at Thomson Reuters Lipper.

"Treasuries and munis are just a safe-haven play, with the 10-year yield getting pushed down as these safe-haven plays rallied. Interestingly though, munis got a big boost...maybe because its tax season."

(Newsmax wires services contributed to this report).

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Nouriel Roubini wonders if investors are whistling past the geopolitical graveyard, ignoring all the “black swans” on the economic horizon.
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Tuesday, 09 May 2017 12:37 PM
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