Nouriel Roubini on Economy, French and US Elections

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Bloomberg Jul 3 06:31 · 16.5k Views

Nouriel Roubini, CEO of Roubini Macro Associates and professor emeritus at NYU Stern School of Business, discusses the outlook for the US economy, geopolitical risks and the potential impact of the French and US elections on global markets. He speaks on "Bloomberg The Close."

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00:00 Tony Christensi was talking about sort of Fed is in risk management mode.
00:04 Are they doing this right?
00:07 Yeah, I would say they
00:08 overall are doing it right.
00:11 On one side, they're still worried that the
00:13 surge in inflation occur in the.
00:15 First quarter
00:16 may be slightly more than temporary, even if the latest number suggests the softening of
00:22 core PC.
00:24 But now
00:25 there's also something of a slowdown of the economy, something of a softening of the labor market, the rich job creation by the
00:32 unemployment rate
00:34 sticked up towards 4%.
00:36 So there is better balance and there is a slowdown in the economy.
00:39 So
00:40 based on their dual mandate, they have to worry about the inflation.
00:43 They have to
00:44 worry about growth as well.
00:46 So I think they're right in waiting until they start cutting rates.
00:49 Nouriel, do you think that the risk should be more on the inflation side or the growth side in that the risk is higher inflation or lower growth?
00:56 Which camp would you be on?
00:59 Well, I think recently I would have argued that the biggest risk was
01:02 upside
01:04 on inflation side.
01:05 But now
01:06 economic growth has slightly moderated, consumption is slowing down, there is some slackening in the labor market.
01:15 So I think that the Fed that wants to achieve a soft landing
01:19 but not a softish landing, they don't want to go to 2% with a
01:23 even a short and shallow recession.
01:25 And therefore, they have to start thinking also about
01:28 to dance at risk to economic growth.
01:30 Are we out of the woods yet in terms of we can avoid a recession?
01:34 At most we'll get a soft landing.
01:38 Yes, we want caveats.
01:39 You know, a year ago, everybody worried about a real hard landing.
01:43 Then there was a risk of a softish landing.
01:46 Then people said, no, we're going to achieve a soft landing.
01:50 But recently
01:51 there was both growth above
01:54 potential in inflation above target.
01:57 So the risk was that actually the economy was growing too fast
01:59 and we'll be in a long no landing situation and no landing will lead the Fed to stay
02:05 high for longer or even higher for longer.
02:08 That was the risk.
02:10 While I would say that right now the softening of the
02:13 growth and labor markets.
02:15 I'd suggest that maybe
02:16 the risk of a no landing is reduced, then we're going towards maybe something closer to
02:21 the goal of the fact that is a soft landing.
02:25 In terms of global economic risks and what might keep you up at night, I know that you worry about a lot of things and a lot probably keeps you up at night.
02:31 But
02:32 globally, when you look at what's going on in the Middle East or when you look at what's going on with Russia and Ukraine,
02:37 what's happening in Europe with those elections taking place in France and the UK
02:42 or China, what is the single biggest concern for you as it relates to how the Fed proceeds?
02:48 Well, the biggest risk would be.
02:50 Is some kind of geopolitical shock
02:52 they will lead to some spike?
02:55 Either in energy
02:56 or broader
02:57 commodity prices.
02:59 The initial
03:00 brutal Russian invasion of Ukraine let the spike not just in
03:04 energy prices but also food, fertilizer, industrial metals.
03:09 If there was a worsening
03:11 of the conflict between Israel and a mass and escalation that includes Hezbollah
03:16 and Iran, of course there could be
03:19 a spike in all prices
03:21 like the one we saw in the speculation of the episode of 73
03:25 and 79.
03:27 And
03:27 the conflict with
03:29 China is more of a slow motion,
03:31 a build up of a Cold War, is getting colder,
03:34 risk of protectionism.
03:35 And of course,
03:36 what's going to happen on the trade side depends very much on
03:39 whether Trump is going to be elected or by them or some other
03:43 Democrat as well.
03:45 I would say all central banks worry
03:47 about some geopolitical shock that spikes in their energy.
03:50 For other commodity prices, that will lead to an increase in headline inflation that could eventually lead to a second round effective increase in core inflation and the stock inflationary shock.
04:01 That increase in inflation reduces growth
04:03 in a way they'll make really hard that
04:05 the goal of central banks to achieve a soft landing.
04:08 I'm putting aside the US election for a second because we will get to that.
04:11 What is the risk that we should
04:14 put on the French parliamentary second round election and the result of that?
04:20 There is certainly a risk that
04:22 the
04:23 party of Le Pen reaches a absolute majority
04:27 their fiscal program,
04:29 the program.
04:30 Talking about Europe,
04:31 it's really, if implemented fully,
04:34 something would be dangerous, not so
04:36 just for France, but also for Europe.
04:39 However, I feel that even if they were to come to power,
04:43 they'll be moderated.
04:44 They'll be moderated because that constraints coming from the
04:47 European Union, from the ECB,
04:50 They'll be in the competition, Macron.
04:52 And most importantly, there is market discipline.
04:55 If they were to follow a reckless fiscal policy,
04:58 there'll be a massive widening of their sovereign spread that fall in the stock market, a weakening the Europe that that wood forest them
05:05 to adjust.
05:06 So
05:07 we know what happened in the UK where the government of this trust
05:10 is not survival more than 44 days
05:13 when the bondage of Antes came into action.
05:16 So it's a the biggest constraint to a radical economic and fiscal policy in France comes from
05:22 market discipline and that's going to lead them probably to moderate if they come to power, if they want to stay in power.
05:29 The alternative behind Parliament is not much better
05:32 because that time parliament implies a minority government, one's going to be subject to
05:37 a vote of no confidence, eventually caretaker government and to
05:41 policy and political chaos as well.
05:44 So either way, the risk
05:45 in France for the thing that market discipline is going to constrain, whether it's going to be in power from doing things like that to extreme.
05:54 The rise of Lepen
05:55 indicates the rise of populist parties.
05:58 Are there instances where populist parties are good for markets and for the economy?
06:05 Some of these populist parties start from a
06:08 how to say very populist.
06:10 Economic agenda
06:11 and then they moderate.
06:13 In the case of Italy,
06:15 Maloney when she came to power, the world is that we
06:18 lose fiscal policy.
06:19 There'll be a reversal of structural reform
06:22 that did not occur.
06:24 And some do hope that Le Pen can be
06:27 the way I put it, to be melanized
06:29 that one
06:30 power is going to moderate.
06:32 There are differences between Italy and France.
06:35 The program of Le Pen is much more to the right of the one of Meloni.
06:39 Italy had the carrot of €200 billion of
06:43 low cost loans or grants from the EU
06:46 and the Draghi
06:48 played the role of how
06:49 to say paternal guidance.
06:51 In the case of melody.
06:52 There is not say same figure in the case of France.
06:55 So they're not, I don't think that France will get under
06:58 Le Pen fully melonized, but they're going to moderate compared to what they are right now
07:03 if they
07:04 come to power.
07:05 Nouriel, when it comes to a lot of the policies,
07:09 particularly towards China, Biden and Trump actually see eye to eye more than they are facing off against one another.
07:15 But what you are pointing to is really the threat of increased sanctions and more protectionist policy, isn't it?
07:23 Yes, it is, of course.
07:25 Democrats Republic and
07:27 want to be tough on China,
07:29 but by.
07:30 The administration had the view of creating what they call a
07:34 narrow yard with high fences and concentrating on some
07:38 critical technological
07:41 factors and sanctions.
07:42 While
07:43 the plan of Trump, at least at face value, is one of imposing
07:47 a 10% tariff
07:49 on all the imports coming to the United States,
07:53 even from friends and allies like Europe,
07:56 Japan, South Korea and you name it,
07:58 and up to 60% on
08:01 Chinese goods.
08:02 So I would say that the big question mark is going to be whether it's going to head and do that
08:07 or whether it's going to offer some carrots and sticks,
08:11 telling, for example, Europeans that if they spend more on the fence or if they change some of their trade policies, that may be subject to exemption
08:19 from
08:20 the 10% parish.
08:22 Same thing for China.
08:23 It may gradually increase the tariffs every month
08:27 to reach eventually 60%.
08:28 But if China does certain things, maybe it stops short of that.
08:33 But the point is that any tariff is a
08:36 regressive form of taxation.
08:38 It increases import prices
08:40 and it causes a higher inflation.
08:43 What it could alternatively do, and people have discussed it, is the idea
08:47 of instead of a generalized tariff to
08:49 force that
08:51 other countries to accept the
08:53 depreciation of the dollar and the appreciation of other currency,
08:57 something equivalent to the
08:59 what happened with the Plaza
09:01 or the Louvre agreement.
09:02 People talk about the
09:04 Mar a Lago agreement on currencies,
09:07 but that would be similar in terms of impact on inflation to a generalized tariff as well.
09:12 So Nouriel, we leave the dollar out for a second.
09:14 What, what is the asset class that you think is going to have the most exposure to the volatility of the election?
09:20 Based on the policies that we do know, bond market, equity market,
09:25 I would say that
09:28 protection is going to lead to a gradual increase in inflation.
09:33 And that will be something will be of concern certainly to the bond market.
09:38 But an escalation of trade friction
09:41 or a generalized trade war with the rest of the world
09:44 because
09:45 our
09:46 trading partner might also impose targets against the United States is also a threat to the stock market.
09:53 A global trade war not going to be good for the stock market.

Nouriel Roubini on Economy, French and US Elections

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