Two days of weakness in stocks after the Fed hinted it might “vary the pace of asset purchases” has some folks ready to declare the bull market over and done.
“Exit any and all bullish constructed positions and rush to the sidelines,” declares veteran trader and newsletter writer Dennis Gartman.
Others, including Pimco’s Mohammed El-Arian, “Gloom Boom and Doom” author Marc Faber and hedge fund manager Doug Kass have made similar comments in recent days, albeit sans Gartman’s dramatics.
Given this backdrop and with the economy facing myriad headwinds from the payroll tax hike, rising gasoline prices and the pending sequester it may come as a surprise that one notable guru is very bullish on financial assets, at least for the near term: Nouriel Roubini.
As with most financial issues these days, the NYU Professor and chairman of Roubini Global Economics says it all come down to the aggressive policies of the Federal Reserve and other global central bankers, notably Japan.
“The risk of the end game from QE is not going to be goods inflation, it’s not going to be a rout in the bond market,” Roubini says. “The risk is like during the 2003-06 [cycle] – we’re exiting very slowly and we got an asset bubble.”
Actually, Roubini predicts the coming (arguably ongoing) asset bubble is going to be “bigger than the one we had in 2003-06,” which is somewhat shocking given the massive excesses that occurred in that era, especially in housing and related finance.
Roubini’s rationale for “the mother of all asset bubbles,” is that Federal Reserve is going to be even more reluctant to pull back now vs. the prior cycle, when they executed a steady stream of 25 basis point rate hikes in 2004-2006.
That’s because unemployment is much higher today in most ‘developed’ economies and there’s more debt on both public and private balance sheets: “So if you exit very fast you’re going to kill the bond market [and] you’re going to kill the consumer in terms of debt servicing,” he says.
Roubini being Roubini, he doesn’t predict a happy ending to the Fed’s current experiment. ”We could create an asset bubble worse than the previous one which could lead to another financial crisis not this year, not next year but two or three years down the line if we keep on doing these policies,” he says. “You’re building the financial leverage that’s going to lead you to [another] bubble and eventual crash.”
Off camera, Roubini sums up his analysis of all this as “short-term bullish, long-term catastrophic.”
Again, I’d like to stress that while some other gurus are saying the ‘bubble’ in financial assets is about to burst, Roubini is suggesting that it’s just getting started and also that he frequently referred to a similarly themed speech by Fed governor Jeremy Stein. I’d like to further stress that while some are freaking out over hints the Fed might “vary the pace of asset purchases,” talk is cheap and the Fed is miles away from taking any action. Heck, if the global economy continues to weaken and U.S. unemployment rises again, the Fed’s next move might be additional accommodation, i.e. QE5 (or is it 6? I’ve lost count.)