Clashing Views with Dr. Roubini

October 29, 2009 at 2:00 am 6 comments

Sword-Fight

The say keep your friends close, and your enemies even closer. Nouriel Roubini, professor of economics and international business at the NYU Stern School of Business, is not an enemy, but I think his fluctuating views (see previous story) and Armageddon expectations are off base. Perma-bears like Roubini and Peter Schiff (view article) have gloated and danced in the media limelight due to their early but eventually right calls. Over the last seven months or so, their forecasts on the U.S. economy and markets have been off the mark. With that said, even those with competing views at times can find common ground. For Nouriel and I, we currently share similar beliefs on gold (see my article on gold).

Here’s what Professor Roubini has to say:

I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.
The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.”

 

My thoughts on oil are less bearish, but nonetheless more cautious given the massive price bounce to around $80 per barrel. Could I see prices coming down to $50 like Roubini feels is appropriate? Certainly. With the $100+ per barrel swing we saw last year, I cannot discount completely the possibility of that scenario. However, unlike gold, oil has a much stronger utility value, and based on the slow adoption of more expensive alternative energies, this commodity will be in strong demand for many years to come. The pace of global economic recovery, especially in countries like China, India, and Brazil provide an underlying demand for the petroleum product. In order to understand the underlying bid for this economic lubricant, all one has to do is look at the appetite of emerging economies like China when it comes to this black gold (see my article on China).

And where does Roubini think markets go from here?

“If the recovery of the economy is going to be anemic, sub-par, below-trend and U-shaped, there is going to be a correction. And therefore my view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.”

 

Perhaps Roubini’s “double dip” fears will eventually come true – and he leaves himself plenty of room with vague loose language – however, I follow the philosophy of Peter Lynch: ‘‘If you spend more than 14 minutes a year worrying about the market, you’ve wasted 12 minutes.” Great companies don’t disappear in challenging markets – they become cheaper – and new innovative companies emerge to replace the old guard.

As much as I would like to be right all the time, that’s not the case. In order to learn from past mistakes and continually improve my process, it’s important to get the views of others…even from those with clashing perspectives.

Read IndexUniverse.com Interview  with Nouriel Roubini Here

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct long or short positions in gold positions, however accounts do have long exposure to certain energy stocks and ETFs. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

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6 Comments Add your own

  • 1. Anuj  |  October 29, 2009 at 11:56 am

    I am a bit disappointed after reading your article “Clashing Views with Dr. Roubini”. Somehow, I was expecting contrasting views between yours and Roubini’s. However, based on this article, it seems like you agree with Roubini’s views on Gold and to some degree on Oil (2 out of 3 major points mentioned in this article).

    This leads to the third point – should we invest into risky assets or not. While I found you differing from Roubini’s views on investments in risky assets, your advocacy for investing in “Great” companies (the ones that won’t take more than 2 min. of your time) suggests to me that you’re also a seeker of “relatively less risky” investments in the “risky asset” category. Unfortunately, I found the article with a great title remained just that.

    I’d appreciate a dialogue if you think that I might have missed something in this article.

    Thanks,

    A

    Reply
    • 2. sidoxia  |  October 29, 2009 at 12:31 pm

      Anuj:

      The problem with Roubini and other strategists is that it is very difficult to disagree or agree with their viewpoints because their opinions are constantly changing and nuanced (see: http://investingcaffeine.com/2009/07/20/pinning-down-roubini-requires-a-lasso/)

      For example, Roubinis price targets continually change. He says the market will go up, and then down, but doesn’t know when and keeps talking cryptically about U-shaped, L-Shaped, and W-shaped recoveries. Oil, according to Roubini, will go up on speculation, then come crashing down because it will choke the economy.

      His views on gold seem much clearer and I can agree with that. But we will see, maybe that viewpoint will change tomorrow?

      ~WS

      Reply
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