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As Stocks Jump, Nouriel Roubini Ponders ‘That Stalling Feeling’

Posted by Murray Coleman

He refers to it as “that stalling feeling.” But Nouriel Roubini today looks beyond a short-term slowdown in economic fortunes to longer-term potholes forming in developed markets around the world.

 

He notes that optimists argue that the global economy has merely hit a “soft patch.”

 

That has led to a flight from more risky assets. So far this year, the two biggest ETFs have seen more redemptions than buying activity. The SPDR S&P 500 (SPY) had 2011 net outflows of more than $7 billion at the end of May, says the National Stock Exchange. Meanwhile, the SPDR Gold ETF (GLD) had lost more than $3 billion so far this year.

 

Roubini believes that major structural issues remain in developed markets. Those include:

 

• Problems of the euro zone periphery are in some cases problems of actual insolvency, not just illiquidity.

 

Issues related to large and rising public and private deficits and debt are just touching the surface of underlying damaged financial systems “that need to be cleaned up and recapitalized,” he writes.

 

“It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured,” Roubini adds.

 

• The factors slowing U.S. growth are chronic.

 

Roubini lists these as: slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level.

 

• Economic growth has been flat on average in the U.K. over the last couple of quarters.

 

“Indeed, inflation may even force the Bank (of England) to raise interest rates by the fall. And Japan is already slipping back into recession because of the earthquake,” he writes.

 

If the latest global economic data reflect something more serious than a hiccup, Roubini adds, “policymakers could well find themselves empty-handed.”

 

On a day when SPY is up 1.3% — on the heels of a 4% negative return in the past 30 days — Roubini’s views are a sobering reminder that plenty of bears still lurk in the wings.

 

It might also be worth noting that while equities have had a rough patch, GLD entered today’s session with a 3.5% gain in the past month. Even the more volatile iShares Silver ETF (SLV) has held up well with a 2.2% return in that timeframe.

 

Both the iShares Barclays 20+ Year Treasury (TLT) and the iShares Barclays 7-10 Year Treasury (IEF) are also positive by around 2% in the past month.