Roubini: Asset Bubble Is Beginning Now
Web Producer, CNBC.com
Withdrawing economic stimuli and tightening monetary policy are very difficult future policy choices, but something has to be done because asset bubbles have started to take shape, Nouriel Roubini, chairman of Roubini Global Economics, told CNBC Wednesday.
"On monetary policy, exiting too soon is going to tip the economies into recession; the trouble is… now there is the beginning of an asset bubble that's becoming global," Roubini told "Squawk Box Europe" at the World Economic Forum in Davos, Switzerland.
In Asia and China real estate prices are rising too fast, as do stock prices if you look at the PE ratio, he explained.
His comments echoed earlier warnings by European Central Bank Governing Council member Ewald Nowotny that there is a concrete risk of asset bubbles in emerging markets and in some commodities.
James Chanos, president and founder of Kynikos Associates, also warned recently that the bubble in China's real estate market is "unprecedented."
But the risk of withdrawing the stimulus too soon is falling back into recession, added Roubini, who was nicknamed Dr. Doom after his prediction of a sharp economic downturn.
"The good news is there is a beginning of an economic recovery. The question is what's going to be the shape of the recovery," he said.
In the US, gross domestic growth is likely to be stronger in the first half of the year than in the second half, when the stimulus will fizzle out, Roubini explained.
He said he predicts a "slow, anemic, U-shaped recovery" because of weak labor markets, re-leveraging of the public sector, massive excess capacity and low capital expenditure.
US gross domestic product figures for the fourth quarter will be released on January 29.
Roubini said growth may exceed 4 percent in that period but it is likely to have been influenced by restocking of inventories depleted by the recession.
"I would not read too much into the fourth quarter numbers," he told "Squawk Box."
Meanwhile, the "wall of liquidity" which is inflating the emerging markets assets bubble is chasing commodities as well, he warned.
A slowdown in growth in developed economies is likely to push stock prices lower, but he said he did not see them going below the levels reached during the crisis.
"I don't think we're going to retest the lows of last March … I see only a correction happening in the second half of last year," Roubini said. "The risk is that the policy stimulus is going to fizzle out in the second half of next year and it will become a drag on growth."
The problems in Europe, where Greece's debt threatens to destabilize the euro zone, are similar to the ones in the US, he said.
"I'd point out that in the US you have also fiscal problems at state level, a state like California is virtually bankrupt."
China should do reforms that would lead to an increase in domestic consumption, but at the same time it is not big enough to be the engine that will pull the world economy, which is another reason why recovery will be anemic, according to Roubini.
"For the last decade the US has been the consumer of last and first resort… the same way the UK, Australia, New Zealand and other countries. That model is broken now," he said.
- Watch Nouriel Roubini interviewed on CNBC above.