Friday, July 14, 2023

Nouriel Roubini Is Worried

I'd be worried if he wasn't worried.

From Institutional Investor, July 13:

A Credit Crisis, AI, and More Are Worrying Nouriel Roubini and Sander Gerber
During a recent fireside chat, the economist and hedge fund manager also discussed bubbly markets and “known unknowns.”

Admired economist Nouriel Roubini and hedge fund manager Sander Gerber are both worried about a new phase of the credit cycle and other phenomena that might not bode well for investors.

In a recent webinar, Roubini, a researcher long sought after for his insights, professor at New York University and CEO of Roubini Macro Associates, talked with Gerber, the chief executive and investment officer of Hudson Bay Capital who challenged and then collaborated with the late Harry Markowitz.

During their sprawling conversation just before the July 4 holiday for Hudson Bay’s investors — but shared with Institutional Investor — Gerber said that continued interest rate hikes by the Federal Reserve, and higher long-term rates, will make it harder to service loans and result in losses.

“I think that the credit cycle is looming. In particular, if we’re going to get down to the theoretical 2 percent target, I don’t see how we’re not going to have a credit crisis,” Gerber said.

Roubini agreed. As rates rose rapidly, investors suffered from their duration risk. Now, as the economy slows, credit risk will emerge, he said.

“In a world in which there will be a recession, however short and shallow or more severe, and where nominal and real rates are higher, I would say we’ll have a migration from duration risk to credit risk. And those institutions, private and public, that are highly leveraged, are going to experience severe debt servicing difficulties,” Roubini said.

And beyond what part of the credit cycle investors are facing, Roubini and Gerber also shared other things they find troubling right now: bubbles and markets they are watching, the negative consequences of generative AI, and some “known unknowns.”....