The human side of Nouriel Roubini

Gillian Tett of FT met Nouriel Roubini for a breakfast and wrote on FT blog:
It is not yet eight o’clock in the morning but already the ultra-trendy Soho Grand hotel in Tribeca, New York, feels like a film set. The cavernous hall is dominated by concrete pillars, metal sculptures and vast leather sofas, on which a collection of unfeasibly beautiful, elegant people are draped.

It seems an odd place to meet an academic economist for breakfast. But then Nouriel Roubini is not your average egg-head. Granted, until the financial crisis started three years ago, he had spent most of his career analysing economics and writing books with titles such as Political Cycles and the Macroeconomy (1997) or New International Financial Architecture (co-editor, 2005). He was also responsible for delivering a series of speeches on the fragility of the banking world so dour that they earned him the monicker “Doctor Doom”.

But in 2007, all this changed unexpectedly. The financial crisis exploded and, almost overnight it seemed, the world realised that Roubini was one of the few economists who had actually predicted the looming banking collapse. Today policymakers around the world hang on his words, journalists flock to his speeches to hear his latest predictions and clients pay big money to receive analysis from his consultancy company, Roubini Global Economics.

His influence has stretched beyond the business world and even into Hollywood: he appears briefly, as himself, in Wall Street: Money Never Sleeps, Oliver Stone’s forthcoming sequel to his 1980s parable of markets gone mad, as well as Inside Job, a forthcoming documentary narrated by Matt Damon. He is even something of an intellectual pin-up: his Facebook page is adorned with numerous photos of Roubini attending star-studded parties, usually with a bevy of beautiful women. (“They love my beautiful mind ... I am ugly but they are attracted to the brains,” he told a gossip columnist last year.)

A few minutes before eight, the 51-year-old nerd-turned-heartthrob materialises in the lobby, wearing black jeans and an open-necked pale yellow shirt. It blends in perfectly with the hotel decor. The only discordant note is struck by his brown leather shoes, which are shockingly, defiantly battered. Is he too cerebral to worry about trifles like shoe polish? Or simply too self-confident to care? Either way, it gives this famous economist an oddly arty air.

He drapes himself gawkily over a vast leather sofa, and explains that the trendy location could be his local. “I only live five minutes away,” he shrugs, looking at me warily with spaniel-like, dark brown eyes. A breakfast menu appears, offering minimalist, fashionable dishes. I select egg white frittata, espresso and a protein power shake; Roubini orders granola, juice, yoghurt and a latte, though he seems totally uninterested in the food.

“So what is it like being a celebrity?” I ask, wondering if he feels smug. He pulls a face. “Celebrity is just noise,” he mutters. “People are talking as if I have come from nowhere, as if I was in a little office somewhere, by myself all those years, totally obscure but then suddenly became famous. But that is not true at all – I have been an economist for 20 years!”

Indignantly, he runs through the details of his career. It is unusual. Born in Istanbul in 1959 to Iranian Jewish parents, he spent his early years in Iran, before moving to Italy, where he attended school and university. He subsequently moved to the US and Harvard, where he did a PhD in economics, then taught at Yale and in New York. Roubini, who speaks Italian, Hebrew and Farsi, says he finally felt he had arrived in the US “about 15 years ago, when I started dreaming in English”. During this period he also did stints at the International Monetary Fund, Federal Reserve, World Bank, the US White House Council of Economic Advisers and the Treasury department, before setting up his own consultancy firm.

Hardly the cv of a nobody, it’s true. But Roubini was still far from being a household name when, in the autumn of 2006, with the world economy and credit markets booming, he gave a big speech to the IMF warning that the “United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and ultimately a deep recession”, along with “homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unravelling worldwide and the global financial system shuddering to a halt”. It was a bold call; so much so that many policymakers and economists thought Roubini was slightly mad.

Indeed, when Roubini attended the World Economic Forum meeting in Davos in January 2007 to make similar prophesies, his warnings were widely dismissed. It was at this rarefied Swiss mountain resort that I first encountered him and I remember it very well. In the preceding months I had also started to write about the dangers of complex finance (albeit far less eloquently and dramatically than Roubini) and those pieces sparked criticism from some of the luminaries assembled at Davos, who accused me of being “alarmist”. Though we had never met before – and have barely talked since – at one sun-dappled lunch in a stuffy Swiss hotel Roubini forcefully defended my articles. I tell him I was grateful; vocal Cassandras were very thin on the ground back then.

“I remember that,” Roubini laughs. He then recalls, with irritation, a column written by Michael Lewis, author of the acclaimed Wall Street study Liar’s Poker (1989) as well as the recently published study The Big Short (2009), during that Davos meeting, which labelled Cassandras such as Roubini as “wimps” and “ninnies”. “It is amazing how some people have changed their views,” he says, adding acerbically that “there is a lot of Monday morning quarterbacking” now.

Why did the banking world spin out of control in 2007? Roubini has co-authored with Stephen Mihm, a professor of economic history, a book about the banking collapse, Crisis Economics, which seeks to answer this question and suggest what can be done to put it right. At first glance it covers similar ground to all the other “crunch lit” books now being churned out by economists. What sets this one apart, however, is that unlike almost every other economist – exceptions include William White and Claudio Borio of the Bank for International Settlements – Roubini can claim to have got things right before disaster struck. So what made him so sure he was right, I ask, as our understated breakfast arrives on the low table next to the leather sofa. The only splash of colour is a vast strawberry adorning my power shake.

“Having spent 10 years studying emerging markets, I know that you have patterns repeated over and over again,” he explains. “A bubble is like a fire which needs oxygen to continue ... when you see there is no oxygen, things change.” More specifically, by the summer of 2006 Roubini could see that the housing market had peaked. That left him convinced that the system was about to unravel, because there was so much mortgage debt.

He has continued to issue warnings since the crash. In early 2009, he argued that the banking crisis might not be finished. He also suggested that there was a 20 per cent chance of a double-dip recession, because American growth would be so weak. In fact, the US economy has rebounded faster than he expected and bank share prices have risen too. All of which leaves some rivals gloating that Roubini was simply lucky with his 2006 call. He retorts, though, that it is still too early to conclude that the global economy is really on a recovery track. And at least one recent call has been correct: for the past year he has repeatedly warned about dangers stalking sovereign debt. In particular, he thinks that the dramas in Greece reflect a bigger problem facing the western world, since governments appear to lack the stomach to tackle spiralling government debt.

“What really worries me about the US right now is that there is this [political] gridlock,” he says, arguing that this prevents the government from taking the necessary tough decisions. “The UK has the same problem. There is no real willingness to have spending cuts or tax increases.” As a result, “there will be temptation to keep monetising the fiscal deficit”, which will ultimately produce inflation.

To combat those risks, Roubini wants policymakers to co-operate across party lines and to break out of their old ideological boxes of “left” and “right”. “I grew up in Italy in the 1960s and 1970s and it was a period of a lot of social turmoil, when even young teenagers were engaged in politics. I was slightly more left of centre then,” he says, stirring sugar into his latte, making elegant swirls of brown and white. These days he is “centrist” on economic issues, since he believes that governments need to spend money in a crisis to support the system, in line with Keynesian economic ideals – but he believes that when a crisis is over, they should revert to free-market approaches, reflecting the so-called “Austrian school” of economics. “There is this big debate between the Keynesian school and the Austrian school. But I am pragmatic and eclectic. It is all about timing.”

So where would he suggest people put their money now? What does he do? He looks coy. “I have never in my life bought an individual stock, bond or currency. I have my own 401k [pension and savings pot] in a passive fund – 100 per cent equity investment, half US, half non-US. All the extra income I have received in the past few years has gone into cash. At some point I will move that into riskier assets, but not now.” This caution seems typical of Doctor Doom, I suggest. He disagrees. “Dr Doom as a nickname was cute and I did like it for a while but what I keep saying now is that I am Dr Realist.”

In other words, Roubini now wants to be known as a sage who can proffer constructive advice, instead of predicting disaster. Indeed, on the day we meet he has written a column for the FT urging Europe to let Greece restructure its debt. And he has just returned from Washington, where he met a group of senior western finance ministers and central bankers. “What is important to me is that when I write something, people listen to me. I provide my wisdom to people, whether they agree or not.”

As he dollops yoghurt on to his granola, I cut to the chase. How does such lofty economic “wisdom” coexist with his new-found celebrity, gossip-column status? “Celebrity has become a burden,” he sighs, “there are more demands on your time. People think it is glamorous to fly places. But it is not – even if you travel business class and stay in wonderful hotels, you end 10,000 miles away from home.” He reckons that he spends two-thirds of each year on the road; unsurprisingly, the new book was mostly written on planes.

I suggest that some of his rivals would struggle to feel much sympathy with the “dilemma” of having to stay in luxurious hotels. In fact, many might feel a twinge of jealousy, when they look at the money, fame and parties (he recently posted some pictures of a party that he attended in the Caribbean, thrown by Roman Abramovich). And what about all those glamorous women constantly surrounding the permanent bachelor Roubini?

“I am just a normal human being – I am alive! Why is anyone surprised that I am human?” retorts Roubini. “Like many New Yorkers, I have a multifaceted life. I collect art – I love modern art, film ... in fact, soon I am going to Cannes because I am appearing in two films!”

I express surprise; the film stars who live in this part of New York might consider this entirely “normal”. Most egghead academics do not. However, Roubini explains that both films – Stone’s Wall Street drama and the documentary Inside Job – are essentially highlighting the role he played in predicting the credit disaster.

I suddenly recall that I also gave an interview for the latter, talking about complex credit instruments, and am apparently appearing in it too. Our conversation and the location begin to take on a surreal quality; suddenly the starry grandeur of the Soho Grand does not seem such a strange place to be chatting about mortgage-backed securities after all. Three years ago, it was hard to imagine that such complex financial tools would ever attract the interest of Hollywood. Or that a man such as Roubini would be hailed as a prophet, or go partying in Cannes. Yet now that this bizarre plot twist has occurred, he is clearly determined to enjoy it – whatever fellow academics think.

I ask for the bill. Roubini has been so busy talking that he has barely eaten. He gathers himself up, and we stroll through the lobby, surrounded by concrete, bottleglass and steel. “You must come to Cannes too! We can be a wonk and wonkette together!” he says, laughing at such an odd thought. I laugh off his infectious enthusiasm. Then, as he leaves, find myself checking my diary; could I fit in a trip to the film premiere in Cannes? Should I? Sovereign debt crises and collateralised debt obligations never used to be this much fun.

‘Crisis Economics’ by Nouriel Roubini and Stephen Mihm (Penguin, £25) is published on May 20

Gillian Tett is the FT’s US managing editor and the author of ‘Fool’s Gold’

(from FT, May 7, 2010)

PIMCO’s Gross Says Rating Agencies No Longer Serving Valid Purpose for Investment Companies

PIMCO, which runs the world’s biggest bond fund, the PIMCO Total Return Fund, said on Wednesday that big credit rating agencies are no longer useful, since companies as big as PIMCO are quicker to anticipate shifts on credit quality of debt. Reuters has reported that PIMCO's managing director, Bill Gross, wrote in a May Investment outlook through company’s website, [ The credit rating agencies] ”no longer serve a valid purpose for investment companies free of regulatory mandates.”

Gross says that recent downgrade of Spain by Standards and Poor’s shows how timid and slow the three big credit rating agencies can be in downgrading sovereigns. On April 28, S&P cut Spain's rating one notch on the economic view. “S&P just this past week downgraded Spain one notch to AA from AA+, cautioning that they could face another downgrade if they weren't careful...And believe it or not, Moody's and Fitch still have them as AAAs,” Gross wrote.

Gross said that currently Spain’s unemployment rate is twenty percent and its current account deficit has touched the ten percent mark. As a result, government bonds in the market are trading in a way as if they were rated at Baa levels, which is in the lower echelons of investment grade. “Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors,” Gross wrote.

EU will Help Greece in Risk Rollover

Rollover Risk, by David Kotok, Cumberland Advisors Market Commentary February 10, 2010

Tonight on Larry Kudlow’s show I listened to a gang of four first bash Greece, then the ECB and then the EU. They forecast the demise of the euro and the collapse of the EU. I couldn’t disagree more. Today I had to explain to a good friend and client why all $2.8 trillion of US state and local government debt wasn’t going to default. Today the FT said “Connecticut’s Lisbon, New York’s Rome, Georgia’s Athens and Iowa’s Madrid may lack the sense of budgetary crisis being felt lately in their European namesakes, but America’s states and municipalities could yet spark equally vexing problems for the United States. Like the eurozone’s members, America’s states have no currencies of their own to devalue and must tread cautiously between entrenched public sector unions and irate taxpaying voters.” We are witnessing much hyperbole about a crisis of confidence in sovereign debt. We’ve written about it for months. In our view, crises present opportunity. We will continue the dialogue about Greece below. In addition, we can report that our separately managed Muni accounts are full invested in tax-free bonds and in taxable municipal Build America Bonds. We expect that our clients will be fully paid and are amply rewarded for taking the risk of selected sovereign debt. More on Greece below.

Things are getting clearer regarding Greece. The unions are out in the street, as we expected. The Greek government has committed itself to advance the austerity measures in spite of the strikes. The European political organizations are holding much discussion but not committing hard money. So far, so good.

The next test will soon come for the European Central Bank (ECB) and here is where the rubber meets the road. Greece will have to roll over some large proportion of its debt within the next few months. Credit-rating agencies have said they need to see Greece adopt an austerity budget and implement it or they will cut the Greek sovereign rating. They mean it and Greek officials know it.

This brings us to the issue of “rollover risk.”

Rollover risk is the term that applies to governments when they have to refinance. Governments are going concerns. They do not liquidate in a bankruptcy. They perpetually refinance their debt. When governments issue debt over the longer term, like 10 or 30 years, they reduce their rollover risk. That is because only a small portion of the debt is coming due at any one time.

But longer-term debt is usually more expensive than shorter-term debt, because the interest rate that the government must pay is usually higher when the debt is longer term. So governments tend to choose shorter-term debt in an effort to lower cost, and then they “roll” the short term debt over and over. The United States is doing that as this is written, and the amounts involved are measured in the trillions. Greece did it and got away with it, for a while.

Some governments are forced to issue only short-term debt, because markets do not trust them. This is usually true of inflation-prone governments. Italy is a good example. Before the euro zone was created, the Italian government had a history of devaluation of its currency. It cheapened the lira whenever it got into economic trouble. It also had a history of high inflation. The bond markets did not trust the Italian governments – and there were many of them in succession. Italy reached the point where it had to roll over nearly its entire issuance of government debt within a single year. And the debt burden was about 100% of the Italian GDP. That is an example of an extreme in rollover risk.

This was in the 1990s and during the formative period of the euro and before the euro actually became a currency, but after the Maastricht Treaty was signed in 1991. In that period the interest rate on Italian longer-term bonds was five full percentage points higher than that on the benchmark German bonds. 500 basis points was the spread between Italy and Germany on ten-year government bonds.

After the euro was fully launched, those rates converged and Italy at one point traded within a few basis points of Germany. Even today, with all the market turbulence, the Italian spread is still much, much lower than it was prior to the euro. Even Greece today is lower by several hundred basis points than its spread was prior to the euro.

What I have just written is well-known and understood in Europe; the memories of the inflation-prone period are fresh. Therefore those countries and governments are not about to go back to the former structure, which was very costly. Let’s assume that is the case.

The risk now ahead is the rollover. Will Greece be able to do it? Will they go to an auction and find that the bids received are not sufficient to cover the issue?

Here is where the ECB can step in and assist if, and only if, the Greek government has put the austerity budget in place. The ECB can finance the assistance needed to accomplish the rollover. Its method is to accept the Greek debt as collateral and to loan to the banks that are buying the debt. The banks will be at risk to a Greek default. The ECB will be at risk if the banks fail. The ECB will likely proceed as long as the credit rating on Greek debt is acceptable under the ECB rules. Thus the ECB can provide the financing so that the debt issue doesn’t experience a failed auction.

We expect this scenario to play out. That means Greece will reach a point where it can refinance, and the market will price in a premium for all the aggravation, but it will not experience a failed financing. The ECB will have held the high ground so that it will be able to maintain the strong and hard money characteristic of the euro as a reliable world reserve currency. We discussed this issue with Steve Liesman this morning on CNBC. See cnbc.com for the tape.

The weakness of the euro combined with the shock experience in European markets is setting things up for a good buying opportunity. It is too soon to do it now, but one must get prepared. Investors will be able to buy fine German companies and do so when the euro has been weakened by the events originating in Greece. European exporters are for sale cheap while their currency is weak. They will be strong competitors for US companies as they sell to Chinese and other emerging market buyers. That can be a real bargain for an investor.

Adversity is the source of opportunity in investing. Rollover risk is the issue for Greece. It will be resolved before the summer equinox ushers in the bright sunshine that warms the Adriatic. Cruise in the Greek Isles anyone?

Hedging for Disaster

... I think it’s time to revisit the concept of hedging for disaster, something I advocated during another "recovery," in October of last year, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings - "just in case." The idea is of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn. That way, 10% allocated of your portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a buying opportunity.
... As far as hedging goes, if you are 50% invested and 50% in cash and you are worried about losing 20% on the stock side in a major sell-off, then the logic of these hedges is to take 40% of your cash (20% of your total) and put it on something that may double while the other positions lose. If things go down, your gains on the hedge offset some of the losses on your longer positions. If things go up, you can stop out with a 25% loss, which will "only" be a 5% hit on your total portfolio but it means we are breaking through resistance and your upside bets are safe and doing well. That is not a bad trade-off for insurance in this crazy market. Also, be aware that these are thinly traded contracts with wide bid/ask spreads and you need to use caution establishing and exiting positions.

... “Investor sentiment is worsening because of the reignited uncertainty about credit,” said Naoteru Teraoka, who helps oversee $16 billion in Tokyo at Chuo Mitsui Asset Management Co. “There’s uncertainty about the future and companies are cautious.” The Nikkei pulled back another 135 points (1.34%) and finished right at the 10,000 line while the Hang Seng dropped 318 points (1.44%), after failing to hold the critical 22,000 mark, and wound up at 21,741 and the Shanghai Composite also dropped 1.4%, failing to hold support at 390 and looking more like a double top here than an index that’s consolidating below 400.

Europe is holding on to small gains ahead of our open (8:30) as German Exports continue to do well and the UK declares they will keep their stimulus plans (and presumably, easy money policies) in place through 2010. No news coming out of Europe is going to impress us at the moment as the FTSE failed our 5,250 watch line and the DAX failed at 5,750 as well, so those are bearish signals for the global economy. Certainly this is a reflection of default concerns from both Greece and Dubai, who have both had their ratings cut to near junk status this week. Russia’s finance minister added to the chorus of concerns Tuesday. He said Russia is "still a weak link" in the global economy and would be vulnerable in case of a reversal of the tide of money now flowing in, partly because of higher oil prices.

Greece’s case could present the European Central Bank and the European Union with a dilemma: whether to bail out the country or possibly see a euro-zone member face a debt crisis. The first course could reduce the pressure for fiscal discipline, while the second could damage the credibility of Europe’s great single-currency experiment. The real danger here is triggering a rapid rise in interest rates before international banks have a chance to stabilize their balance sheets.

Mario Draghi, the governor of the Bank of Italy, highlighted the danger posed by a "huge wall" of corporate and public debt. He cited estimates of around $4 trillion in non investment-grade and commercial-real-estate-based debt coming due over the next five years, "trillions" of dollars of bank debt and public debt on top of all that. "We are actually seeing sovereign risks that materialize," Mr. Draghi noted, referring to Fitch’s downgrade of Greece’s sovereign debt Tuesday. "All of this will certainly increase the risk premium in an otherwise safe asset, and may bring in sometime higher interest rates," he added.

We’re already well short on Commercial Real Estate but that sector never ceases to amaze us by staying up despite all news to the contrary. At the moment, we are resigned to being patient until Jan earnings announcements give us a better look under the hood of these players and, until then - we have our disaster protection - just in case things go south faster than we thought they would.

Keep in mind that this morning we are playing for our bounces but by no means bullish overall. Goldman’s market goose of the day is to announce that there will be no Fed hike until 2012 so all aboard the free money express. Of course, someone should tell GS that the money train left the station a long time ago and, unless the Fed is going to start paying us to borrow money, rates aren’t going any lower. Today is not a big data day, with Wholesale Inventories at 10 and Oil Inventories at 10:30, where we may finally get a draw after 2 weeks of builds. Since a 2Mb build is being forecast by crooks in the pockets of Big Oil analysts, it will be very easy to beat and move oil higher.

High oil was a big factor in killing consumer confidence in last night’s poll, with half of those polled saying they feel LESS financially secure than they did last year and just 1 in 3 people saying they think the economy will improve in the next 6 months. Mortgage Applications came in mixed but the numbers can easily be spun positively and that’s all that will count this morning on that report.

We’ll try to be agnostic and watch our levels, but let’s all be careful out there, I’ll feel much better with a little more disaster protection despite the fact that we are mostly cash and bearish since taking it off at the top over the past couple of weeks. As I said above, we were so bearish we had to sell DIA puts to lock in gains, but we’ll be happy to buy them back if our lower levels start failing and we’re on the way to that 1.25% sell-off for the day.

(by Philip R. Davis at SeekingAlpha, December 9, 2009)