Michael Hanson
Business in Review

Crisis, Roubini Style

By, 06/08/2010
As an investor, today you more or less have a binary decision about how 2010 will end up. One, you believe the current fiscal/debt problems in Europe are bad but not enough to tip global markets into another long-lasting big bear market. That is, right now we're in the midst of a fairly classic bull market correction. Or, two, you believe Greece marked the mere birth pangs of a larger crisis looming—one where Spain and Italy and others are on their way to default or at least a bailout.

MarketMinder covers this topic daily in its news and cover story areas, so we won't go there. But this backdrop makes now a good time to discuss Nouriel Roubini's new book, Crisis Economics. (Not to kill the suspense, but Mr. Roubini is firmly in camp two.)

Known (ominously) as "Dr. Doom," Roubini is one of the famous pessimists of the era, and is widely lauded for "calling" the bear market and recession of 2008 (more on this in a moment). Personally, I disagree with most of his views (so be warned). But I will say this: He's built a persona and owns it like no other.

From his press photo (here) to his hyperbolically dour adjective choices, he's all in as the "ultimate bear." I put that in quotations, because there is a radical difference between Dr. Doom, the media personality on a book victory tour, and Nouriel Roubini, rational investor. And for those who don't believe he is playing a personality with relish, look at what he does, not what he says. His 401k is, in fact, by his own admission, 100% invested in global equities (via passive ETFs) and probably has been for yearseven through the last bear market when he was so famously, well, bearish. He rationalizes this by saying "over 10 to 20 years equities outperform any other asset class." Bravo!

Though in deed, he is exceedingly bullish—which I can understand—in word, he actually hedges his bearishness with extra bearishness. For instance, most of the book is about what a bunch of slovenly crumb bums the US is and how it'll take down the world, but he hedges it in the last chapter by saying the European Monetary Union (EMU) is ultimately worse! And worse still? Japan! It's all bad! All the time!

Yet, for all that, it's amazing how little he actually has to say in this book. In the first chapter, he describes the bear market, then digresses with a primer on different types of economic thought, then loops back around in the middle chapters to re-describe the crisis in more detail, then ends with a smattering of types of debt crises and advice on how to fix it all. Also strange about this book is that he says everything at least twice. Two times!

I haven't always made friends with these book reviews. That's mostly because I've targeted books that disagree with my own views on volatile subjects like the ‘08 crisis. So it's worth saying that I quite like Roubini and his writing. He's a really smart guy—profoundly articulate (his layman's description of current account deficits is as good as any I've read), and he's someone you'd want to share repartee with over a cocktail. He's sort of a caricature of a pessimist, striking an almost Charles Dickens-like repose in his bearish bombastics. I say caricature because it would be so much more—plausible—if he'd at least say a few things he's optimistic about in the world. Nope. It's all bearish. There's a kind of charm in that.

He claims he saw all this happening—I agree and also disagree. (Click here for a very snarky but correct summation of his forecasting history.) On the one hand, he was a relatively lone bear through the middle of last decade, and much of what he said proved about as spot-on as any forecaster could hope for. So give him credit. On the other, he didn't profit on it the way, say, John Paulson did—who as an investor has my profound respect. It's really important for investors to remember how easy it is for an economist to wax on and on about their views, but another one entirely to have some real skin in the game. Also, if you look at the breadth of Roubini's work, you realize he's been a bear basically his whole career; that essentially means he's been wrong for most of his career.

I'll make an open gentleman's wager with Mr. Roubini: According to what he says via books and public appearances, the world is at the beginning of woes to come. If even half of what he thinks actually happens, there's no way stocks or the global economy can grow in the next, say, two years. I'll take the other side of that bet—not only will the global economy have grown out of today's ills in two years, but global stocks could very well be testing prior highs and will certainly be higher than today. This might sound glib, but those are the stakes if you decide to side with Roubini's views. (His views—not what he actually does, because we know Mr. Roubini is largely fully invested already.)

The Premise Is the Problem

Ostensibly, the point of this book is to say that economic crises are common, and we should learn to anticipate them better. (Okey doke.) More, that things like sovereign debt busts are not "Black Swans" (a swipe at Nicolas Nassim Taleb's now famous concept), but that crises are in fact "White Swans." (Whoa!)

That last one is a huge statement. What's odd is that the book doesn't actually "prove" that at all, or even try. It's just taken for granted. Roubini simply cites Kenneth Rogoff's most recent book (read my review on that here), and then moves on. When Roubini does have examples, he bizarrely lumps in stuff like Japan's decade of malaise—but that's not even close to being the same thing as today, or the Depression, or most other debt busts. (Global stocks surged in the ‘90s despite it!!!)

Of the scant examples Roubini is able to cite, one can't help but guffaw at just how much time actually passes between truly world-bending crisis events, particularly the debt-fueled ones. He often has to reach back to the colonial era.

This highlights one of the most common miscommunications between economists and actual investors—yes, there have been a lot of debt problems through time, but as for the number that actually sparked global bear markets? Very, very few.

Capitalist Zealots, and Other People I'd like to Know

I'm all for criticizing public figures—it's practically an American pastime up there with baseball. But I tend to bristle at all this retroactive deprecation of Alan Greenspan lately. Many take the view that Greenspan kept monetary policy too loose for too long, which played the biggest role in the housing bubble. That's fine enough, but it only makes sense if you believe you can identify asset bubbles with fidelity and consistency. Roubini believes he can; I don't believe anyone can. That's the real trick—the smartest minds through history simply cannot see bubbles clearly as they happen. (Bernanke, for instance, is really learning this the hard way right now.) And why should public policy officials even seek to "control" capitalism in this way at all? Again, such Achilles-like confidence in the ability to achieve such herculean feats usually stems from the academy, not those actually in the game.

More broadly, Roubini operates from the view, as many do today, that capitalism has failed and that we must "fix" it. We can almost see him sneering when he mentions laissez faire capitalism, and refers to folks (like me, I guess) as capitalist "zealots." Now, I don't know any sensible capitalist who doesn't believe in the rule of law and appropriate regulation, it's just that the bias should be toward freedom of commerce. Capitalism has a profoundly destructive side—that's a part of how it works.

Roubini regards capitalism as a kind of political philosophy, to be chosen between other alternatives like communism, socialism, etc. I don't see it that way at all. To my mind, capitalism is more like an observation about how societies (that is, humans) naturally tend to emerge, adapt, and function economically. Capitalism is (generally) what tends to happen when you leave people to pursue their own self interest. But even if you don't agree with that, it's still true that capitalism is the only system that sustainably creates wealth over time, not just divvies it up. This has been demonstrated over and over. If we mitigate the occasional destructive parts, we also mitigate the potential prosperity. We've had enough history behind us now to know this, and must keep our gumption when it's tempting to rein it in, like today.

Here's a grab-bag of many things in this book that made my eyes bulge:

  • Roubini calls democracy a "mixed blessing." (Really! Democracy!)
  • He calls Brazil an "impostor" of economic growth. (Mostly because it's getting rich off its natural resources. Seems like a perfectly fine way to get rich to me.)
  • Calls India a "tortoise" of growth. (Not sure what this means.)
  • Russia is on the ropes economically today partially because of alcoholism.
  • Says there's a glut of manufacturing capacity in the world right now, and that's evidence we'll have a new normal going forward. (Of course there's extra capacity right now. We just had a recession. That's how recoveries work—refilling capacity and then growing in later stages. Spare capacity has never been a leading indicator.)
  • Says corporations were overleveraged a few years ago and continue to be. (Totally wrong. In fact, through the decade and even now corporate balance sheets have record high cash levels.)
  • Says today's US government was as inactive as Hoover at the beginning of the Great Depression. (Uh, what about the myriad Fed programs, cutting short rates to near zero, TARP, and a trillion dollar stimulus package? Those aren't doing it for you?)

At book's end, we get the big payoff: No matter what we do, the crises won't ever end, but we can mitigate them with more government and higher taxes. Roubini's less grandiose solutions aren't so bad: create more reporting for financials and trading practices, and reform a few other features of capital markets. Actually, many of his ideas are more sensible than what's floating around the Beltway right now.

Roubini is an excellent conceptual economic thinker, and we are the better for what he's brought to society's table as a voice of pessimism. His name will live on for decades or longer as a predictor of the '08 crash. It's just too bad part of that legacy will be marred with this often sloppy and poorly argued book. Particularly since it appears, by the way he invests, he doesn't much believe in his own dire predictions.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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