Nouriel Roubini's Vision for a New Safe Haven Asset

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1:21Hello and welcome to another episode of the Oddbots Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, do you remember, I think it was in 2022, everyone was talking about stagflation. Yes, of course, because we had markets were low. So people were talking about recession. The Fed was hiking interest rates aggressively and inflation in 2022 was peaking. So it certainly seemed like we could have had the combo right then for essentially elevated inflation and some kind of recession. Yes. And in fact, before we recorded this episode, I went back and I looked at a Google Trends chart for the word stagflation.

2:03And like the peak in 2022 is just amazing. And then it sort of fell off because we definitely had inflation. We didn't necessarily have lower economic growth. But I think now at the tail end of 2024, some of that stagflation talk is beginning to creep back into, I guess, the economic discourse. Yeah, a little bit. I mean, what I would say is, I would agree with you. There seems to be a couple things going on that are very confusing, to say the least. But one is the sort of, I don't know if it's acceptance or reality that inflation has come down quite a bit, but maybe it's going to keep bumping up against the ceiling or maybe it's going to keep bouncing off the floor, so to speak.

2:49Yeah, that last mile is going to be difficult. And then on some measures, the economy still seems good. But you look at some of the PMIs, ISMs, other industrial measures, labor market measures, some seem to be slowing down. So like I still think this idea of like I don't know if I would call it stagflation, but this sort of unpleasant combination of not great growth, not great real growth and inflation that's still like at the higher end of what people are comfortable with feels like something that could very plausibly be the case for a while. It's definitely in the air. So we need to dig into this particular argument.

3:29And who better to speak to than Nouriel Roubini? He is, of course, the chief economist and portfolio manager of the Atlas America Fund, which is a new ETF that has just launched. And he is also the chairman and CEO of Roubini Macro Associates, really the perfect guest to do this type of macro with us. So Nouriel, welcome back to the show. Good to be with you, Tracy and Joe. Do you get the same sense that the risk of stagflation is starting to pick up again? Certainly is one of the risks that we have to consider. And I think that the question on everybody's mind, of course, is what will be the economic policies of Trump and their impact on growth and inflation.

4:12If I have to look ahead, I would say that some of his policies actually could increase growth and reduce inflation, being pro-business in general. making those tax cuts permanent, having government efficiency, deregulating the economy, maybe even increasing the production of fossil fuel and reducing the price of energy. Those are going in the direction of policies that actually increase growth and reduce inflation. But on the other side, there's a long list of other policies that could be implemented. First of them, of course, tariff protectionism, an economic war with China, secondly draconian restriction to migration if not mass deportation three unfunded tax cuts and runaway fiscal deficits four potentially an attempt to weaken the dollar in a disorderly way five maybe trying to interfere with the independence of the fed now if that second set of policy were to be implemented their impact will be higher inflation over time and lower economic growth so those sets of policy will be definitely in the stagflationary direction.

5:26That was an amazing summary, by the way, of the two ways of thinking about paths. And I guess what's striking listening to you sort of list off the two columns is within Trumpism or within the Trump administration, it feels like there are several competing camps, so to speak. And we don't really know how it's going to resolve, but there are a lot of internal contradictions, whether on personnel or ideology, and to some extent what you just laid out are sort of, I don't know, maybe the fork in the road, so to speak, of how things could go. Yeah, you're absolutely right. There is a spectrum of positions on the variety of economic issues.

6:03Some are truly protectionist, others like Scott Besson says, we want to escalate as a way of de-escalating. And we're not going to know until after, of course, inauguration, in which direction and the economic policy will go. I would say, however, the following observation, I think that the potentially more stagflationary policy will be constrained by several factors. One, of course, is the choice of some of the economic advisors, someone like Scott Besson understands markets and he knows that if you do things that are radically stagflationary, it'll be bad for the economy and bad for the market.

6:41So we're going to try to push down against those. secondly i think there'll be also significant impact of market discipline if you have runaway budget deficits migration restrictions and tariff that increase inflation then the bond market vigilantes are gonna wake up expected inflation will be higher real rates will be higher and then rising in bond yield could lead to a correction of the stock market and if there's one thing that trump cares about is one the stock market we also care about the bond market because high bond yields imply high cost of borrowing, and that's going to be hurting the economy.

7:17I think the other constraint is going to be, of course, the fact that the Fed is still independent. If some of these policies were to be pursued, the Fed will likely cut next week in December, may not cut again or may cut much less than the markets are expecting next year in an extreme scenario in which inflation goes much higher. It could even increase interest rates. And that's going to be so there is both market discipline and there is also Fed discipline that might constrain to some extent those statutory policies. Setting aside the Trump administration and what they might do. And I realize that's that's a big thing to set aside right now.

8:01But the path of inflation, it has come down from the peaks that we saw in 2022, as Joe was talking about. Why did that happen, in your opinion? Because you were one of the few voices I remember in early 2020 when the pandemic was just unfolding that predicted inflation. And, you know, it happened. But since then, it has petered out a little bit. Yes. I mean, the reason why we had this burst of inflation during and after COVID were both bad policies, the amount of monetary, fiscal and credit easing exposed that turned out to be way excessive. given the size of the economic shock that was relatively temporary.

8:44But second, there was also bad luck. There were three negative aggregate supply shocks that essentially reduced growth and increased inflation. One was the impact, of course, of COVID on the supply of labor, on production of goods, and on global supply chains. The second was the impact of the brutal Russian invasion of Ukraine on commodity prices. And three, the kind of a zero COVID policy of China that further restricted global supply chain. So why inflation fell? In part was of course, Central Bank gave up on quantitative easing, normalized policy rates. But if that was the case, we should have seen inflation falling dramatically, but probably a much stronger slowdown of economic growth, maybe a recession the way most economists thought about it.

9:31Instead, we got the reduction inflation, but growth, say the US has remained robust, above potential, 2.5 % in the last couple of years. So I think in part, we also got lucky. And luck was that these three negative aggregate supply shock got reversed. First, we had the end of COVID, so supply of labor increased. We started producing goods and services. Supply chains got, how do I say, unstuck. The impact on commodity prices of the invasion of Ukraine became reduced because there were new sources of energy coming from Middle East, US, and so on. that went to Europe, and finally China gave up on its zero COVID policy.

10:11So we got luck, and on top of it, there was another set of factors, at least for the US, that maintained growth strong. One was that we had significant amount of migration, documented or otherwise. People estimate that maybe up to 10 million people entered in the United States in the last four years. That increased the labor supply, increased growth, and reduce some pressures on wage inflation. Definitely right now, politically, of course, migration is a hot topic, but from an economic point of view, it increased growth and reduced inflation. And we had also other fiscal stimulus that helped growth from the Infrastructure Act, the IRA, and the CHIPS Act.

10:52And then we had got also, of course, the AI revolution that led to significant increase in capex. So at least for the United States, I think it was a combination of a variety of factors that implied that inflation fell and growth remained robust. Not so in other parts of the world.

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12:09In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. I want to talk a little bit more about the dollar. And there are so many different ways that you can begin a conversation or about thinking about the role of the U.S. dollar. You can think about the effects that tariffs will have on inflation or the strength of the U.S. dollar relative to other currencies.

12:48You can think about the central role that the U.S. dollar plays in global trade and finance and whether there are possible rivals that are emerging. One of the things that we saw recently from President Trump was a threat that he put on his Truth Social account of tariffs against any country that would attempt to form a rival currency block. And he specifically mentioned the BRICS. I don't know if the BRICS is a real thing or not. It sometimes seems like a meme to me, but there is an organization called the BRICS and sometimes you see headlines about dollar alternatives in the short to medium term, is there a real prospect of some other currency, the Chinese Yuan perhaps, taking sizable market share in global trade from the US dollar?

13:36Well, I would say for now, not yet, but the dollarization process that could occur over time and what could trigger it was, of course, that we have rightly or wrongly weaponized the dollar in the last few years for national security and foreign policy purposes, imposing a variety of sanctions against a variety of strategic rivals of the United States and the West. The issue about finding an alternative to the dollar is complicated because you cannot essentially replace something with nothing. And the question is, what's the alternative to US dollar. The former US Secretary of the Treasury Larry Summers once jokingly said that people don't like the dollar, but Europe is a museum, China is a prison, Japan is a nursing home, and Bitcoin, so for now it's an experiment.

14:31So there is something of an unhappiness with the US dollar, but for the time being, I would say the US dollar is still dominant. And by the way, I would probably argue that the Trump policies regarding the dollar are a little bit confused because on one side, there is this concern that a strong dollar has led to de-industrialization, loss of competitiveness, large trade current account deficits, people free riding on the US. So there is a sense I would like a weaker dollar. But if you think about policy and economic fundamentals, tariffs will strengthen the dollar and threats of tariffs have led, since election to dollar becoming stronger.

15:14Trump says, I don't want other country to, unquote, de-dollarize, and I'm gonna impose tariff on them if they do. So he wants to maintain the role of the dollar as a major global reserve currency. If that's the case, demand for dollar has to remain high, the dollar remains strong. In terms of relative growth, the US is doing stronger than Europe and other advanced economies. That should strengthen the dollar. In terms of relative monetary policies, probably given these differentials in growth and inflation, the US or the Fed is going to cut rate less than other countries, while in Europe where the economy is weak and there'll be more cuts.

15:51And overall, given the productivity growth of the US, the boom of new technologies, AI, you name it, capital flows are going into the United States. So I think there is this dilemma that fundamentals and policy would suggest that the dollar is going to become stronger, But then that objective of trying to reduce the trading balance of the U.S. to a weaker dollar, unless you have a big agreement on currency, it's hard to fathom how you're going to do it. There are some ideas along those lines. It's going to be, to say, challenging. This is something I completely agree with. And I think I've said on the podcast before that it feels like Trump doesn't know what type of dollar he wants, because instinctively, I think there's a sense that he wants to say the dollar is strong.

16:39It sounds good when you can say those types of things. And generally, it means that the US economy is doing well relative to others. But if he's serious about boosting manufacturing and exports, then he needs the weaker dollar. There's also that tension between decoupling the U.S. economy from the rest of the world, maybe becoming more self-reliant, and also wanting the dollar to be at the center of a globalized financial system. Are there ways that the Trump administration could like kind of thread the needle between those two different objectives? No, it's not gonna be easy, because either you want a weaker dollar to try to improve competitiveness, reduce the trade balances, and so on, but then the dollar will have to weaken, or instead if you want to maintain the global reserve currency role of the dollar, then the dollar is gonna remain strong.

17:38And by the way, the risk of doing an agreement to try to weaken the dollar is that that could occur in a disorderly way. Because if you do another, people talk now about the Mar-a-Lago agreement, because in the past agreements to move the currencies were always in resorts like Bretton Woods, Plaza, Louvre, Camp David, you name it. So people think about maybe getting together all major economies in Mar-a-Lago and finding an agreement where Europe, Asian allies, and others let their currency appreciate the dollar weaken. but you know if people expect that from happening then capital is going to suddenly move out of the u.s because you're going to have a massive capital loss 10 15 20 percent on your dollar assets and then you could have a spike in long rates or you could have a correction in u.s equity so how do you engineer an orderly weakening of the dollar without causing significant tightening of financial condition that's also problematic it's not going to be very easy to be done the other trade-off that I think it's complicated.

18:40It's not just weak or strong dollar currency role, but also your tariff policies. Because on one side, if you impose the tariffs, the dollar is gonna strengthen. And on the other side, also, if you're gonna raise tariffs, you need revenues, but raising tariffs, if it's very significant, is gonna be highly inflationary. Now, some people within the Trump camp say, well in 2018-19 when we increased the tariffs on China there was not significant increase in inflation because the RMB depreciated and therefore import prices did not increase very much. But suppose that you impose the tariffs and the currencies of all your trading partners weaken then you might not get the inflationary burst of the tariff.

19:29That's correct. But then you're not going to have an improvement of the competitiveness of the United States and therefore inflation is not going to rise, but your trade deficit is going to remain very large. Vice versa, if tariff are imposed and the dollar does not strengthen other currency weaken, you might get actually some improvement of your trade balance, but then you'll have some inflationary impact of this. So in all these cases, there is not really a free lunch. Yeah, I want to actually dive further into this because a lot of times when tariffs come up, one thing people say is that, okay, well, it's a one-off, right?

20:07The prices may go up at some point, but that doesn't necessarily represent a new inflationary trend that, say, the Fed would have to worry about. And perhaps that's true. But it also occurs to me that if part of the impulse here is to be less reliant on global trading partners for, say, various manufactured goods and to have more domestic building, et cetera, of various things, this is happening at a time of still high resource utilization already. So the unemployment rate is at 4.1%. There are already a lot, there are shortages of industrial parts. Yesterday, we're recording this December 3rd, by the way, yesterday we got the ISM manufacturing and it showed that electrical components have now been in shortage for 50 straight months, so over four years.

20:52So it seems to me that regardless of, you know, if you have this impulse to build more here, et cetera, you're coming at it at a time in which resources remain quite constrained. I think your point is very correct and valid. In some sense, actually, the U.S. economy right now is not in a soft landing, maybe in a no-landing zone, because growth has remained above potential and inflation has fallen. But, you know, core PC this year probably is going to be 2.8, even 2.9 percent. And next year may still remain elevated, especially next year if you impose tariff, if you do significant draconian restriction to migration, if you have runaway fiscal deficits that stimulate further demand, and if you have a policy of trying to weaken the dollar.

21:45So yeah, we live in an economy that's already a no-landing where resource constraints are significant. Labor market is significantly tight. Goods markets are also tight. Imports can help you. But then if you're going to restrict the labor supply to migration restriction, if you're going to weaken the dollar, if you're going to impose tariff, you're going to make those inflationary pressure going higher. And that may trigger the Fed then having to act and stop cutting rates or maybe even increase them over time. I mean, the counter argument to the no landing idea is that we have seen some signs as joe mentioned in the intro of the labor market softening um and even yesterday you know we already mentioned the ism but we had pmis as well that also looked kind of sluggish is there a possibility that the economy weakens significantly into 2025 well i would say that the risk of economy weakening significant 2025 will be one in which those sets of uh stipulationary policy are followed if you really impose massive tariffs, if you deport millions of people, if you try to weaken the dollar, if you have a massive fiscal deficit that then lead to bond yields rising, crowding out economic growth, you could be in a situation in which growth significantly slows down and inflation goes higher.

23:10I think that's definitely a risk. As I pointed out at the beginning, however, there are sets of policies of Trump that are actually positive for economic growth. and some of those policies will be implemented. Wait, if you had to choose from like column A or column B, what would be like the higher probability as of now? I would say that the impact on growth for next year is gonna be a wash because on one side definitely is pro-business, is gonna deregulate. There'll be some increase in capital spending. Stock market is strong. Financial conditions are easy. So those are positive for increasing growth.

23:51But then some of the other policies, especially on labor market and tariff and protection is when some increase in long rate are gonna weaken economic growth. So I think that the impact for growth next year is that if this year we're growing, say 2.8%, next year we're gonna still grow above potential, but less, maybe 2.4. But I don't think there's gonna be a massive slowdown unless it goes really radical with the stagflationary policies. However, on net in an economy is already in a tight resource constraint, labor, goods market and otherwise, that is more in a low landing zone, where even before Trump was elected, the Fed was starting to say, wait a moment, should we really cut rate as much as we promised, given that growth seems to remain robust, that inflation remains more sticky, that in that world, in my view, inflation is gonna be on net staying high, rather than going towards the 2 % target.

24:49So I would say the net impact on growth for the time being is a wash, but the impact on inflation probably the inflation is somehow higher. And that's gonna impose something of a dilemma for the Fed. Of course, there is a tail risk that it goes fully stagflationary. But as I pointed out, there are two major constraints. One is really market discipline. The market would punish those policies and will have to reverse. I mean, take an example. in the UK because there was a fiscal stimulus was excessive, then suddenly the pound collapsed, bond yields went higher, the pension crisis, and this trust, Prime Minister lost power in 44 days.

25:27Now, that's not going to happen in the United States, but I think that people should not underestimate how market discipline can really punish even a country like the United States. So between the constraint of the Fed being still independent and the market discipline, probably excessively stack pressure policy will be constrained next year.

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27:26Rokeraj services for U.S. listed registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc. Member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. So amid all of this extraordinary uncertainty, you recently at the end of November announced you have a new ETF, the Atlas America Fund. And it looks very interesting. You know, I think like I want to get into what it is, but I think, you know, when people think about, say, like a well diversified or all weather portfolio, and it sounds like we all want an all weather portfolio because there's just so much uncertainty right now, as you've been talking about for the last several minutes, something that would thrive and be stable amid all this uncertainty.

28:10You know, for years, people talked about the 60-40 portfolio, and it had a certain, I guess I would say, intellectual elegance to it, because the two legs of it generally produced positive real returns, but also they had a sort of natural hedging component against each other. And so usually if stocks were going up and bonds were doing a little worse, And then when your stocks would go down and the bonds were going up, worked very beautifully for several years, basically until 2021. And now I'm not sure if people feel confident at all to go back into that. And people come up with reasons why it's very, there's a lot of distrust about using bonds or a heavy allocation of bonds as a good ballast for a portfolio.

28:49What is the sort of, before we get into the specifics per se, why don't you talk about sort of like the intellectual or conceptual framework behind your approach, which is to come up with a new sort of diversification strategy that can work across cycles? Yeah, the logic is as follows. I wrote a whole book titled Megathreats, where I argued that the era of the grid moderation, where we had low growth and low inflation, is over. Even the era of the secular stagnation that followed the post-GFC period, where again, growth was low and there were these inflationary forces is over. And there are a variety of forces that are gonna lead to stagflationary pressures in the global economy, both on the supply side and on the demand.

29:37On the supply side, I consider 10 factors from geopolitical fragmentation to deglobalization, protectionism, friendshoring, reshoring, to aging of population, restriction to migration, global climate change, pandemics, cyber warfare, backlash against liberal democracy and pro-labor fiscal policies, and potential gradual de-dollarization. Now all these factors gradually over time reduce growth and increase inflation. And on the demand side, we live in a world of very large private and public debt that's gonna become larger. We're gonna spend more on defense all over the world. We're gonna spend more on dealing with climate change.