HardAssetsInvestor

Written by Lara Crigger  |

November 06, 2009

Nouriel Roubini: The Coming Commodities Correction

Details

The chairman of RGE Monitor shares his bearish outlook on commodities for 2010.

• Too much supply, not enough demand
• China can't be ‘main engine of growth’
• $100 oil would mean ‘double-dip recession’

 

From crude to copper, from gold to silver, most commodities have been on a tear lately—but is the rise too much, too fast?

So says Dr. Nouriel Roubini, professor of economics at New York University's Stern School of Business and chairman of the RGE Monitor. Best known for his accurate predictions of the current financial crisis back in 2005, Dr. Roubini now argues that the world has set itself up for another bubble in risky assets, like commodities—and when the bubble pops, it won't be pretty.

HAI Associate Editor Lara Crigger caught up with Dr. Roubini at the "Inside Commodities" conference on Nov. 4, where he shared his thoughts on global commodities markets, including why we can't look to China to drive global growth, how $100 oil would tip us back into recession, and what will happen when the commodities bubble finally pops.

 

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Here we are at the "Inside Commodities" conference—so which commodities do you think will perform well in 2010?

Nouriel Roubini, chairman, RGE Monitor (Roubini): Well, in my view, commodity prices have increased since the beginning of the year too much, too fast, when compared to the improvement in economic fundamentals. Some of that increase is justified. But if the global economy were to have a more anemic, subpar recovery—if instead of a V-shaped recovery, there's going to be a U-shaped recovery—then I actually think demand for commodities would be weak compared to supply, and there could be a correction in commodity prices in 2010.

Take oil prices: They have gone up from $30/barrel to over $80, at a time when demand is back to 2005 levels, and oil inventory is at all-time highs. Part of the increase is justified by fundamentals. But part of it is essentially this wall of liquidity chasing assets, and the effect of carry trade on the U.S. dollar, driving further higher these commodity prices.

So these nonfundamental factors can push oil and commodity prices higher, especially if there's going to be an increase in expected inflation. But the fundamentals of supply and demand actually suggest that, from now on, oil and other commodity prices should be lower, rather than higher.

Crigger: Last year, Jim Rogers spoke at this conference and told us that the U.S. was doomed to be a third-world economy forever. What do you think? Can America regain its competitive edge?

Roubini: In many dimensions, the U.S. does look like an emerging market economy, because it's running significant current account deficits, fiscal deficits and that accumulation of private debt that led to a very severe financial crisis. So now we have to get our act together and tighten our belts, both in private savings and public savings—something we're not doing fully. I'm not bearish on the U.S. economy in the medium/long term, as long as we fix the policy mistakes that led to this financial crisis.

Of course, if you were not to do those things, you could have a decline of the U.S. economy. Certainly, the U.S. economic growth now is only 2.75-3 percent, compared to 6-7 percent in emerging markets. If we don't fix our problems, then the potential growth could be closer to 2 percent eventually, rather than 2.75 percent.

If that were to occur, the U.S. would look like Japan and Europe, where there is economic malaise, slow growth, fiscal problems, high unemployment and large imbalances. That would be something that would lead to the relative decline of the U.S. economy in global economic affairs. But that would be a long-term process, not something that would occur overnight. So no, I don't predict that to happen, but it's conditional on us fixing the mess that we created in our economy. It will take a lot of work by the public and private sector.