Tags: Roubini | Reasons | Doubt | Rally

Roubini: Plenty of Reasons to Doubt the Stock Rally

Friday, 17 February 2012 01:56 PM

Has the recent rise in the market got you worried? It should, says Nouriel Roubini, chairman of Roubini Global Economics and a professor of economics at the Stern School of Business in New York.

There are plenty of reasons to doubt the recent rally in the stock market, he says in an online column.

Roubini is celebrated for his anticipation of the U.S. housing crisis and the ensuing credit crisis and is often called “Dr. Doom” by the press. His latest warning isn't quite as drastic, but he does point out that major headaches loom for risk-oriented investors.

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The eurozone is in a “deep recession, especially in the periphery, but now also in the core economies” of Germany and France, he writes for Project Syndicate.

“The credit crunch in the banking system is becoming more severe as banks deleverage by selling assets and rationing credit, exacerbating the downturn.”

China is slowing down, too, along with the rest of Asia. “In China, the economic slowdown underway is unmistakable. Export growth is down sharply, turning negative vis-à-vis the eurozone’s periphery,” he writes.

Tellingly, import growth has fallen, too.

U.S. growth, meanwhile, seems to be peaking, he notes. Fiscal tightening to come in 2012 and 2013, along with the end of tax breaks, will have an impact. Plus, the U.S. expansion so far has been mostly inventory replacement, not improving sales, he warns. Oil prices are rising, too, which will hurt growth.

Finally, the Middle East is a tinderbox, particularly in terms of Iran, Israel, and the United States.

“Despite weak economic growth in advanced economies and a slowdown in many emerging markets, oil is already at around $100 per barrel,” he writes. “But the fear premium could push it significantly higher, with predictably negative effects on the global economy.”

End result: Liquidity could easily be back in fashion, damaging risk assets such as stocks, he concludes. “That is yet another reason to believe that the global economy remains far from achieving a balanced and sustainable recovery,” Roubini says.

Disaster scenarios seem to be playing into the plans of hedge funds as well.

Gold is back on the front burner after a relatively weak performance of late, hitting $1,721 in recent trading, after peaking at $1,889.70 on Aug. 22.

Funds have boosted their gold holdings since the middle of January by 57 percent, according to Bloomberg News.

“By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold,” hedge fund titan John Paulson told investors in a letter obtained by Bloomberg. Paulson is a large holder of gold via exchange-traded funds.

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