Advanced economies, compared with emerging markets, have better fundamentals, but getting back to ‘normal' will be a multi-year process, says economist Nouriel Roubini.
The real deal
Leaving aside the self-promotion, Roubini is the real deal. His analysis is exactly what hedge funds need in these uncertain and challenging times. Roubini’s take on tail risk, for example, is fundamentally different from that of most economists.
The first chapter of Roubini’s Crisis Economics starts off with a new take on tail risk. Where most see black swans, Roubini sees white. “A black swan event is something like a random tornado or earthquake. It’s unpredictable,” he says.
White swans are what everyone should be worried about. “Tail events are always the result of a build-up over time of macro, fiscal, financial policies. The mistakes reach a tipping point. Therefore, they are, to some measure, predictable, even if the timing of them is sometimes hard.
“Our entire approach is based on trying to identify those build-ups, those vulnerabilities that will lead to these white swan events or tail risk or whatever you want to call them. The world is not one of normal distribution of events but is one in which there are big fat tails. Therefore, those fat tails have a massive effect on asset performance.” Being able to recognise the forces that lead to them and predict them is Roubini’s forte. “It’s absolutely critical for proper asset management and also risk management,” he declares.
He believes the “more sophisticated” hedge funds think this way. “Everybody thinks about tail risk but the question is do you have the internal expertise to do so?” he questions.
There are multiple kinds of tail risk. “It’s critical to identify which kind of tail risk you are worrying about. Is it tail risks of high or low inflation, of deflation? Are you worrying about tail risk of a double-dip recession? Of another global financial crisis?” Roubini believes managers first need to identify what those tail risks actually are and where they are most likely to occur and over what time horizon. Only then can a manager select the best tools and strategy to hedge the risks.
But what perhaps Roubini is most known for is his pronouncements on the general global economic picture. As a self-confessed ‘global nomad’ he can travel, literally, around the world several times a year. His peripatetic lifestyle is his way of “connecting the dots”.
The interrelatedness of events, situations, actions and reactions is what makes it possible to forecast the future with a degree of accurateness.