Roubini Says Commodity Super Cycle “Is Over,” but Optimistic on U.S.

For a man nicknamed “Dr. Doom,” economist Nouriel Roubini sounded almost giddy during a recent speech in which he said the reduced possibility of a euro zone breakup has lowered the risk in the global economy.

While the global economy is anemic and still fragile, he said over the next three years growth in the U.S. will be faster than Europe, Japan and China because “the fundamentals of the U.S. are much better in all technologies of the future.”

Roubini, a professor of economics at New York University’s Stern School of Business, received the Dr. Doom moniker after he accurately predicted the 2007 bust in the housing market and the ensuing fiscal crisis in 2008.

But as he stood before a crowd of more than 100 at last month’s Inside Commodities conference, the chairman of Roubini Global Economics said while the U.S. economy remains weak, especially the housing sector, it will get stronger, albeit slowly. Nor does he expect a crash in the bond market.

“How can we create inflation without wage inflation?” he asked the crowd.

He expects the Federal Reserve Bank to begin tapering its policy of quantitative easing and begin raising interest rates by early 2014, which will lead to a gradual strengthening of the dollar. Quantitative easing, or QE3, is the name given to the Fed’s $85 billion-a-month bond-buying program now in its third round. Roubini said by the end of 2017 U.S. interest rates will be as high as 4%.

Yet for the audience of commodity investors, Roubini’s comments were decidedly bad news. He said high interest rates and the stronger dollar will have an inverse relationship to commodity prices.

“The party as we know it is over. The commodity super cycle is over,” said Roubini. “When the dollar gets stronger, everything else being equal, commodity prices begin to fall.” In addition, a slow down in China’s growth will reduce demand for commodities.

The economist said energy prices will gradually lower over time, with oil hitting $90 a barrel, and precious metals will fall too. He predicted the price of gold could fall to $1,000 an ounce by 2015. Rising interest rates and lowered global risk are big reasons for the drop in gold. He also thinks European countries may sell some of their gold stocks to reduce their public debt.

Even though the risk of the European Union splitting has declines, he pointed out that many of fundamental problems there are not resolved. Some countries remain in economic crisis, potential growth is low and the recovery will be “extremely anemic,” between 0% and 1%, which is lethal for the unemployed.

He said the loss of competitiveness in the Euro zone hasn’t been resolved and a fiscal drag remains. The recovery in the Euro zone “will be fragile and always be behind the curve.”

Another big unknown is whether China will have a soft or hard landing. Roubini said China’s growth is unsustainable and its leaders know it. He said the bubble from too much development, housing and investment will fall, along with consumption, and that will bring down growth. He said China’s growth rate at the end of this year will be 7%, sliding to 6% next year and less than 6% in 2015. While not a true hard landing, it will be worse than people expect.

The slowdown in China will cause a drop in demand for commodities which will hurt many emerging market economies. Countries with weakening fundamentals include Indonesia, India, Hungary and Ukraine.

While the prices for all commodities won’t fall for the same reasons, he says geopolitical factors, such as the lowering of tensions with Syria and Iran as reasons for the price of oil to fall. In addition, the balance of supply and demand, will be evened out and prices will decline with new discoveries of oil, as well as the rise of other forms of energy, such as shale. In addition, “the green economy will raise new energy and reduce demand for old energy.”

He recommended that investors be underweight in bonds and overweight in U.S. equities as the economic recovery become more robust and moves into cyclical stocks. He also believes Japan’s economy will succeed under Prime Minister Abe. He said investors should be overweight in advanced economies compared to emerging markets, and that the U.S. and Japan will do better than Europe and United Kingdom.

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