Nouriel Roubini - PERFECT STORM

Nouriel Roubini  

7 July 2011

“My prediction for the perfect storm is 2013, because right now everybody is simply kicking the can down the road. In the U.S., we will have problems after the election if we don't resolve our fiscal issues. At the same time, Europeans are putting off their problems, while Greece, Ireland and Portugal need to restructure their debt to deal with insolvency. I see policy makers trying to push these problems to the future. Private debt, supranational debt and balance-sheet crises will all come to a head in 2015.”

1 AUGUST 2011

RGE DAILY.

Guns and Butter and Low Taxes: On Deficits, Debts, Debt Ceilings and the U.S. Fiscal Mess  

By Nouriel Roubini: The current U.S. fiscal path ensures that the already anemic economy will double dip by next year or at the latest 2013, and also ensures that eventually bond vigilantes will drive up long-term interest rates if no credible plan for medium-to-long-term fiscal consolidation is approved. The optimal path of fiscal consolidation is back-loaded rather than front-loaded, given that the economy is still very weak and growing anemically below trend. Still, a credible commitment to such a path needs to be made immediately.

Foreign Sovereigns Unlikely to Flee Treasurys  

By Rachel Ziemba : Concerns that major foreign holders will stop buying U.S. Treasuries, or sell off those they have, as a result of the U.S. debt ceiling negotiations are overdone. Domestic exchange-rate policies constrain diversification from USD assets in places like China, while other large reserve holders are restricted by portfolio size—there are few substitutes for Treasury’s. In addition, as central banks and sovereigns have already been diversifying away from Treasury’s, a knee-jerk reaction is less likely, while in the event of greater diversification, self-balancing effects could be seen as yields rise.

U.S. Growth: Q2 Growth at 1.3%; Q1 Revised Sharply Lower to 0.4%  

U.S. Q2 growth, at 1.3%, was slightly under our forecast of 1.5% and well below consensus expectations of 1.8% growth. Meanwhile, the Bureau of Economic Analysis revised the annual benchmark GDP for Q1 2011 down steeply, leaving the final figure at 0.4% q/q. The sharp downward revisions to prior data clearly reflect an underlying weakness that cannot be attributed only to temporary factors. Moreover, data in late Q2 and early Q3 show few signs of a rebound.

Switzerland Outlook Update: Continued Franc Strength to Dent Economic Growth  

By Sehaj Malik, James Mason and Katharina Jungen: Despite a sharp appreciation of the CHF, the Swiss economy continued to power ahead in H1 2011, but export performance will likely weaken over the forecast horizon as lagged effects of currency developments crimp business profit margins. There is a high probability that the Swiss central bank (SNB) will push a rate hike to next year, as the SNB finds itself at the mercy of the euro zone debt crisis and, as a safe haven, is likely to see persistent currency strength or even further appreciation.