Lots of people claim to have seen the 2008 crisis coming, but no one forecast the crash as accurately as Nouriel Roubini, economics professor at NYU’s Stern School of Business.
Roubini, the economist who predicted 2008 crash, warns of next imminent crisis
“Financial markets...remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets,” said Professor Roubini.
Writing for the Guardian, he referred to the danger that the world risks experiencing a so called Minsky Moment. This is named after the late economist Hyman Minsky, who provided a theoretical model to explain a crisis such as the 2008 crash many years before it happened. Minsky argued that debt underpins economic growth, but that it gets out of control — eventually leading to what he called a Ponzi phase in the economic cycle, when companies and households have to borrow more and more just to repay interest. This eventually proves unsustainable, and we get what economists, who looked back at Minsky’s theories after the 2008 crash, called a Minsky moment.
Roubini, who is often referred to as Dr Doom, highlights several risks that could prove cataclysmic.
- Geopolitical fault lines: with, on the one side, Russia. China, Iran and North Korea and the US on the other. Roubini claims that the US wants regime change in its main antagonists. The real risk here is that China, maybe with the situation exacerbated by the Coronavirus, making it feel more isolated than ever, and under local political pressure emanating from Hong Kong, may respond to the US. Its main options might be digital related attacks on the US — cyberattacks, or disinformation during what is clearly going to be a fractious US election campaign. China could, for example, use DeepFakes, where fake videos of US politicians making unpopular comments, are promoted via social media. Roubini also warned that China may also dump US bonds, moving into gold.
- Climate change: On that very note, JP Morgan has just released a report warning of a catastrophic impact of climate change.
- Cyber attacks both targeted at the US and emanating from the US.
Frankly, the political atmosphere both in the US and UK, has become horrible. Certain politicians are acting as if they have become above the law. Attacks on the media — especially the more balanced media — threaten a key pillar of democracy, a free press. Democracy relies on checks and balances — in the UK, ever since a newspaper described three judges who correctly exercised their duty to ensure the government was held accountable to parliament, were called ‘enemies of the people’ such checks and balances have been in danger of being washed away by a populist tide, which ignores the needs of minorities — even large minorities.
In combination, the backlash against globalisation and increasing anti-free trade rhetoric, not only threaten to hit the global economy, they are creating ever greater political tensions on the global stage. The anti-free trade brigade have overlooked that not only does free movement of people, goods, services, capital and data promote global prosperity, it supports global peace too. The unwinding of such globalisation, in my opinion, really does threaten to end 80 years of relative peace.
Both the toxic political atmosphere and anti-globalisation agenda has its roots in the 2008 crash itself. The response to this crisis — austerity combined with record low interest rates (exacerbating wealth inequality) — created popular unease. Immigrants were blamed, when in fact evidence suggests they stopped the situation from getting worse.
Climate change and technology, especially the emergence of social media, creating bubble filters, meant that risks built upon risks.
I don’t unduly fear the Coronavirus itself, I suspect that the fatality rate is less the than two per cent we are told and that fatalities, tragic though they will be, won’t be that different from fatalities we see every year from flu.
But I do worry about the reaction to it. We know that Apple, Jaguar Land Rover (flying parts out China) and Burberry have taken a hit. We know that the airline industry, a troubled business at the best of times, is suffering.
The IMF has already downgraded its forecast for global growth this year from 3.5 to 3.0 per cent. Now Oxford Economics has warned that the Coronavirus could knock 1.3 percent off global GDP this year.
Is this right?
There is always the possibility that sanity will return to global politics. Deteriorating relations between the US and China and Russia might suit Iran, but none of the three big powers in the situation want this. The US must learn, however, that trade wars only benefit those who thrive on conflict.
We don’t really know where Coronavirus will take us.
This week has also seen amazingly good news. Researchers from MIT claim that artificial intelligence has found a new, highly effective antibiotic.
We focus too much on the negative risks associated with burgeoning technologies. In fact, technologies such as AI, genome sequencing, personalised medicine, cultured meat (a few year off yet), and falling costs of renewables could transform lives for the better.
What can investors do?
I am normally cynical about ‘buy gold’ recommendations. Such arguments are often based on a false belief that inflation is set to surge. But if Professor Roubini is right about China selling US securities and buying gold, and if he is right that tensions between the US and China will mount, then gold should rise.
The airline industry will feel the Coronavirus pain, I suspect some airlines, especially ones that are already struggling and fly extensively in and out of China, will go bust. The airlines that survive, facing less competition, may thrive, however. Ryanair and EasyJet may be long-term beneficiaries, but things may getter worse before they get better.
If fears over Coronavirus really do deepen, then companies that provide us with benefits we can enjoy without going out might do well. So that is companies like Netflix, or companies like Boohoo or Ocado.
But bear in mind my comments above about technology providing hope. In the long term, it will be the companies that advance this technology that will win out — so that’s AI, augmented reality, clean energies, the cloud, and the healthtech revolution. That means Apple, Alphabet, Tesla, Nvidia, and probably Amazon, Microsoft and Samsung.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees