15 November 2011

Nouriel Roubini thinks the Euro is doomed

I have perhaps a disproportionate respect for this man's opinions, because listening to him speak on a NPR program prompted me to exit the equities market before the downturn of 2008.  Past performance is no predictor of future success, but for what it's worth, these are some of his thoughts expressed in a column this week at Slate:
The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access. But the eurozone's problems are much deeper. They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain...

In short, the eurozone's periphery is now subject to the paradox of thrift: Increasing savings too much, too fast leads to renewed recession and makes debts even more unsustainable. And that paradox is now affecting even the core.

If the peripheral countries remain mired in a deflationary trap of high debt, falling output, weak competitiveness, and structural external deficits, eventually they will be tempted by a third option: default and exit from the eurozone. This would enable them to revive economic growth and competitiveness through a depreciation of new national currencies.

Of course, such a disorderly eurozone breakup would be as severe a shock as the collapse of Lehman Brothers in 2008, if not worse...

With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.
What I'm not sure about is, if this prediction holds true, how to position my personal finances.  I'm not a sophisticated investor capable of shorting currencies.  Will a Euro crisis spread contagion to other world markets or will Americans, Canadians, Aussies and others see their equities benefit as (relatively) safe havens?  Will recession keep interest rates invisibly small, or will countries try to inflate their way out of their problems?  I don't know.


  1. The US is already in a debt crisis. If Greece, shortly followed by Italy, pulled out of the Eurozone, it would create global havoc, giving the US politicians a "softer" ground in which to announce the failure of the US economy.

    "Softer", as in "punch-drunk", because many people are still reeling from prior crises. "

    Softer" also, as those same US politicians can use the Eurozone failure as a scapegoat, rather than their own actions.

    Australia and Canada, as two other countries you mentioned, would be able to ride it out much more easily.

  2. It would necessarily spread to other markets. Lets say I invested in Starbucks. Starbucks has stores in europe. As the Euro disintegrates and their economies falter, consumer spending is going to go down, and the value of their currency going to zero, companies are going to have hard choices to make in terms of how they pay their employees, what they charge, etc. This will inevitably hurt their bottom line, which means starbucks stock goes down.

    Worse yet, government bonds that were bought in euros, will be worthless once those governments default. Anyone whose invested in traditionally safe governmental bonds would lose everything. So if you own a mutual fund that has international bond exposure, that would decrease in value.

  3. I've been following this for a while. The Euro crisis summarized: Some countries borrowed a lot of money. Now they can't pay it back, and no one wants to loan them more. The people that loaned the money want their money back, so they are trying to figure out how to help the countries cover the debt. The current best idea is a stronger European fiscal union, where basically the economically strongest countries pay some of the debt of the weaker countries. But the people in those strong countries (Germany mostly) don't like that idea, even though the governments & bankers are pushing it hard because they fear another crisis. So right now there is a compromise -- some of the debt is written off (bankers lose money), some is guaranteed (by various intergovernmental deals), and the rest -- oh, that is the problem. It seems like every time a deal gets made, people realize that the loss and guarantees combined still won't cover the debt, and so there is a new round of worrying. Eventually, there will either be a strong union and Germany and France will pay everyone's bills and the whole Euro zone will suck for a while, or certain countries will default, the Eurozone will break up, and everyone who loaned them money will lose it. or maybe a little of both -- certain countries (Greece) leave the zone and everyone loses that money, but Italy and/or Spain get bailed out.

    if you're invested in anything that has invested in Europe (and especially Greece) -- and I bet you did, whether you know it or not -- you will lose money.

  4. It's best to not put your trust in money. It has the nasty little tendency of disappearing. :)

  5. I am reminded of the game Monopoly: When one player gets most of the property and money, it's time to start a new game. I'd say it's time for a global Jubilee; reset the board and start over...

    Of course, this won't happen, so I guess the 99%ers will have to endure many decades of hard times (as in Dickens' novel, Hard Times).

  6. Seems the American economy is showing signs of life. America has pulled the world out of economic doldrums many times, and MIGHT AGAIN. The northern Europeans are playing brinksmanship, trying to not get stuck carrying the corruptoid southerners on their backs forever. Mighty tough to call a bottom, because it could be marked by a single speech by Merkel, for instance. A surprise agreement would be followed by a SHARP global rise in equities, with perhaps a collapse of gold prices. Bummer to be left out of that.
    Norm's bet: A slow but relentless growth in the American economy, combined with German strength, pulls the cord of the great lawn mower one more time. The ones that buy the European bank stocks just before the great speech make the money. The Chinese? A black box. Who da heck knows. Sure got burned on them solars. Holy smokes.

    Experience shows the doomers don't call the bottom, or the snapbacks. Their personality type dictates always looking over the cliff.

    By the way, I run a hedge fund capitalized in the multiple thousands of dollars.

  7. Can I call you Norm?

    I hope you're right, but with the supercommittee deadline next week and the deliberations not going well and rumors that the automatic cuts might not be enforced (and that bypassing the automatic cuts might be viewed as an ultimate sell-out), I decided to hedge my own long positions.

    I took a simple route by buying deeply-out-of-the-money index puts on a broad index (the Russell 2000).

    But I'd prefer that you be right and I lose that hedge.

  8. For longer term, I'd say look to BRIC. And the 5th member, in some people's eyes - Mexico.

    For those who don't know, BRIC is Brazil, Russia, India and China. The 21st century is supposed to belong to them.

    Mexico has had recent slight downturns vs the dollar, but it was not involved with the speculative and derivative elements that brought about the Lehman Bros. collapse, so it retained more solidity and should fare well enough for the foreseeable future. Mexico won't be ever on a steep up-slope, but at the same time, it won't be in dire straits, either.

    Brazil has found an oil field in the Atlantic with reserves reportedly as big as Iraq's, so expect there to be wealth going around there as time goes by and the fields get developed. They may even decide to turn their ethanol-producing cane fields to something more edible. They will at least have that option, given their surplus.

    India? I don't know, but they are doing well, with a lot of up side.

    China - approach with caution, not because their economy isn't doing well or that they own too much American paper. I've heard too many disaster stories of people getting hosed on an individual level. The Chinese love to cheat others in business, thinking it is part of the game.

    Russia may eventually be the best bet, but now may not be the time. I say this because when I saw the title of your "History is all explained by geology" just after this one, I thought it was pertaining to natural resources. Well, IMHO, it DOES apply to resources. American economic history revolves around natural resources, and now that we have extracted such a large proportion of the easily extracted minerals, our day is over. It - the future - has passed now to other countries who still have resources. And that, above all, would be Russia.

    So, I'd be looking to Mexico, Brazil and Russia, followed by India. Long term in the U.S. is not looking good. It is at best a long, slow downward slope. You might find winning strategies here, but if so you will be either really smart or really lucky.

    Of all those, I think the most benign and user-friendly is Mexico. But Brazil would be a close second.


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