Nouriel Roubini

No painless way out of current bubble, Roubini warns

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One of the few economists who predicted the 2008 financial crisis, Nouriel Roubini, argues that Covid-19 policies of “helicopter money”, share-dealing apps and the cryptocurrency craze have inflated asset prices hugely and Main Street will suffer most when the music stops.

The self-described expert on international financial markets, asset and credit bubbles and their bust,
who has worked for the IMF, the US Federal Reserve and the World Bank, says it’s obvious that current market mania will end badly.

“With equity markets reaching new heights at a time of rising income and wealth inequality, it should be obvious that today’s market mania will end in tears, reproducing the economic injustices of the 2008 crash” Roubini, whose nickname is “Dr. Doom,” wrote  in a op-ed published on Project Syndicate last month.

The NYU Stern professor of economics also blasts get-rich-quick schemes. A whole cohort of people are being exploited in the name of “financial democratization,” he warned. Roubini refers to the millions of people who ended up losing their jobs, homes, and savings during the 2008 financial crisis. He argues they are being lured into a new investment trap.

“Workers who rely on gig, part-time, or freelance ’employment’ are being offered a new rope with which to hang themselves in the name of ‘financial democratization,'” the famed economist said. “Millions have opened accounts on Robinhood, and other investment apps, where they can leverage their scant savings and incomes several times over to speculate on worthless stocks.”

Gamestop drama aka a “David and Goliath” battle

The recent GameStop saga, that saw a legion of retail investors banded together in the WallStreetBets forum on Reddit and decided to invest in video game retailer GameStop stocks in order to make money and troll massive hedge funds,  shadows how a class of “hopeless, jobless, skill-less, debt-burdened individuals” are being exploited once again, Roubini said.

“Many have been convinced that financial success lies not in good jobs, hard work, and patient saving and investment, but in get-rich-quick-schemes and wagers on inherently worthless assets like cryptocurrencies (or “shitcoins,” as I prefer to call them),” he wrote.

“The populist meme in which an army of millennial Davids takes down a Wall Street Goliath is merely serving another scheme to fleece clueless amateur investors” and will culminate in a repeat asset bubble reminiscent of 2008, he said.

“Making matters worse, markets are starting to worry about the massive experiment in budget-deficit monetisation being carried out by the US Federal Reserve and Department of the Treasury through quantitative easing (a form of Modern Monetary Theory or “helicopter money”) he added.

Chart Stock Market Bubble

The trend of using helicopter money as a monetary policy response to Covid-19, intensified dramatically during the first half of 2020, leading to the further expansion in central banks’ already bloated balance sheets.  A byproduct of this extraordinary Quantitative Easing (QE) operation is the creation of a disconnect between stock markets and the real economy. QE  when used in huge quantities (as is currently the case), artificially ‘blows up’ the value of stock markets.

Meanwhile, stimulus packages and other anti-crisis programs to combat the economic fallout from Covid-19 have multiple side effects. US Congress passed the 1.9 trillion dollar stimulus plan, but in these conditions-economy on its knees, millions of people unemployed, and businesses bankrupt-is not stimulus but relief.

“The Fed is probably worried that markets will instantly crash if it takes away the punch bowl. And with the increase in public and private debt preventing the eventual monetary normalization, the likelihood of stagflation in the medium term – and a hard landing for asset markets and economies – continues to increase” Dr. Doom concludes.

Speaking of  Reddit, a user who read Roubini’s op-ed wrote: “One day he’ll be right … and I think it’s later this year.” Hedge fund manager Ray Dalio, has also warned for pain ahead. And another famed investor Jeremy Grantham, sounded the alarm. The stock market feels like a ticking time bomb.