Markets are overestimating Trump policy positives-Nouriel Roubini
Following is the transcript of a
CNBC interview with Nouriel Roubini, CEO, Roubini Macro Associates.
The interview was broadcast on CNBC on 20 March 2017.
All references must be sourced to a “CNBC Interview”.
Interviewed by Geoff Cutmore, Anchor, CNBC at China Development Forum 2017.
Geoff Cutmore: Let me ask you first off, do you think markets are being too complacent at the moment?
Nouriel Roubini: Well, they’re complacent in the sense that while the global economy is picking up, and the U.S. as well, they’re over estimating the positives of the U.S., Trump policies. Infrastructure, stimulus, deregulation, tax cuts, I think Trump will achieve much less on those dimensions, and they’re under estimating the risk that the U.S. protectionist policies are going to lead to trade wars, that the restrictions on immigration are going to slow down labor supply, and that micromanaging the corporate sector is going to be negative. Also the policy mix of the U.S., fiscal stimulus is going to force the Fed to tighten more, it’s going to push up interest rates and the dollar in a way it’s going to weaken the economy over time. All these downside risks are being under estimated right now.
GC: So when will the cracks start to show?
NR: Well over the next six to 12 months maybe the positives are going to dominate, because you have animal spirits, a buildup in consumer and business confidence, some policy action. The economy is growing and hopefully those positives are going to stay for a while. But the more this is going to be trade friction, the more there will be restriction of migration, the more this stimulus is going to be excessive, forcing the Fed in a full-employment economy to tighten more and faster, the more some of these negative start to effect markets and economic growth over time.
GC: It’s amazing that at the G20 meeting they’ve struggled to put trade and the risk of protectionism in the final communiqué. Why are countries now pussyfooting around what are clearly key issues for most of the large emerging countries?
NR: Well the veto came from the United States given the America First policy of the Trump administration, ‘Buy American, Hire American’. The traditional G20 argument being against protection for free trade was something that didn’t want to put in the communiqué. That’s the bad news. The good news is, that while there are within the U.S. administration, a number of protectionists that also… and I’m one of the key economic advisors of Trump that actually are much more pragmatic. And therefore we’re not going to have an outright trade war with Mexico or China. We’re not going to start to brand, as currency manipulator, as a whole bunch of country. You’ll have to step by step engage in a dialogue with Mexico, with China, and Europe on the issues about asymmetries of trade or unfair trade practices. But there’s going to be hopefully a constructive dialogue rather than trade war.
GC: And just to be clear I mean we’ve now seen a significant number of days of the Trump administration. Have you been more or less optimistic or pessimistic about what we’re seeing and how the narrative actually might be moderated by some more moderate forces within the government?
NR: Well I think there is still a meaningful amount of chaos within the administration (that) is not cohesive. You have a spectrum of views on all the economic issues, the Obamacare repeal and replace has been completely botched, they might negatively affect their ability to do tax reform and other types of initiatives so it’s been a very confusing start.
GC: On the interest rate picture in Europe and the U.K. and some other markets we see central banks very reluctant to acknowledge inflationary pressures particularly on the input side at the factory gate. Does that concern you?
NR: Well I would separate maybe the United States and United Kingdom that is still growing reasonably robustly. Where it may be a pick up of inflation may be occurring from places like Europe and the Euro zone, and Japan where we are now just getting out of deflation and therefore those unconventional monetary policies are warranted, both in terms of continuing QE, and continuing negative policy rates.
GC: It does appear… I mean you’ve been relatively bearish on the longer term outlook here and I think your double dip call is well understood. But do you think that somehow that the U.S. government is trying to suspend the laws of economics by perhaps refusing to acknowledge the size of federal debt as being a barrier to infrastructure projects and some of the spending that it’s planned?
NR: Well, yes the U.S. on one side faces that problem because that is high. On the other side you need to actually do infrastructure and infrastructure spending is positive for economic growth both on the demand side and on the supply side. And I think that the U.S. is going to find creative ways actually to fund that infrastructure project probably creating an infrastructure bank as a way of leveraging any money you have for infrastructure spending.
GC: And we’re here in China. We’ve got a new range for growth as laid out by the government. Are you concerned, or do you perceive that we will see further currency weakness as a way at least of trying to sustain growth levels close to what the Chinese government has forecast?
NR: Well the good news is that compared to the last two years when there were two scares coming from risk of hard landing of China, leading to currency weakness and a stock market crash, right now growth has been stabilized and investors are happy about that. The problem is that the way they’ve stabilized growth is by doing a new round of credit fueled fixed investment. That means more bad debts, more bad assets, more leverage, and more overcapacity. So you are kicking the can down the road, you are stabilizing growth in the short run. And of course this is the year of stability given the political transition in China. But then you might (be) creating more financial vulnerability over the medium term that you’re not addressing. Reforms so far are stalled, restructuring is so far stalled especially of SOEs, of the financial system and that’s a danger that is building up for the future.
GC: And just one last question, if I’m your stockbroker and I call you asking Nouriel Roubini to put money into risk assets today what would you say to me?
NR: I would say that maybe the momentum may be driving risky assets higher given the optimism about the global economy and about some of the Trump policies. But valuations in terms of PE ratios are quite stretched and you are maybe underestimating some of the downside risk not just from the United States but things that could happen in Europe, things could happen in China as well. So I would say that if you follow the momentum yes, you will be fully invested. But you have to also be careful about the triggers of things that may lead to actually to a market correction over time.