Nouriel Roubini's Vision for a New Safe Haven Asset

So like, I still think this idea of like I don't know if it's called stagflation, but this sort of unpleasant combination of not great growth, not great real real growth, and inflation that's still like at the higher end of what people are comfortable with, feels like something that could very plausibly be the case for a while.

of fossil fuel, reducing the price of energy. Those go in the direction of policies actually increase growth and reduce inflation. But on the other side, there's a long list of other policy that could be implemented. First of them, of course, tariff protectionism, an economic war with China. Secondly draconia, restriction to migration, if not mass deportation. Three unfunded tax cuts and run away fiscal deficits for potentially in attempt to

weekend the dollar in a disorderly way. Five maybe trying to interfere with the independence of the FAD. Now, if the second set of policy were to be implemented, their impact will be higher inflation over the time and lower economic growth. So those sets of policy will be definitely in the stockflationary direction.

But there are a lot of internal contradictions, whether on personnel or ideology, and to some extent you just laid out are sort of I don't know, maybe the fork in the road, so to speak, of how things could go.

will be constrained by several factors. One, of course, is the choice of some of the economic advisors like Scot Bass and understand markets and in as that if you do things that are radically stackflationary, it will be bad for the economy and bad for the market, so you're going to try to push down against those. Secondly, I

think there'll be also significant impact of market discipline. If you have run away budget deficits, migration restrictions, and tire if that increase inflation, then the bond market digilant is going to wake up expect that inflation will be higher, rates will be higher, and then rising in bond deal could lead to a correctional stock market. And if there's one thing that Trump cares about is one the stock market.

We also cares about the bond market because high bond deals imply high cost of borrowing and that's going to be hurting the economy. I think the other constraint is going to be, of course, the fact that the Fed is still independent. If some of these policies were to be pursued, the FED will likely cut next week in December, may not cut again, or may cut much less than the market are expecting next year. In an extreme scenario in which inflation goes much higher, they could even increase

interest rates. And that's going to be So there is both a market discipline and there's also FED discipline that my constraint to some extent those stock preationary.

you know it happened. But since then it has petered out a little bit.

shocks that essentially reduced growth and increased inflation. One was the impact of course of COVID on the supply of labor and production of goods and on global supply chains. The second was the impact of the brutal rush invasion of Ukraine on commodity prices entry the kind of a zero COVID policy of China that further restricted global supply chain. So why inflation fell in part was, of course central

bank gave up on quantity easy normalized policy rates. But if that was the case, we should have seen inflation falling dramatically, but probably a much stronger slow down of economic growth, maybe a recession the way most economist thought about it. And instead we got the reduction inflation. But growth, say in US as remain robust above potential twenty a half percent in the last couple of years. So I think in part we also got lucky, and lack was

the distree negative aggregate suppli show got reversed. First, we had the end of COVID, so supply of libor increased, we started producing goods and services. Supply chains got at lays say, unstuck. The impact on commodity prices of the invasion of Ukraine became ready US because there were new sources of energy coming from Middle least US and so on that went to Europe. And finally China gave up on a zero COVID policy, so we got luck. And on top of it, there was another set of actors

at least for the US that maintained growth strong. One was that we had significant amount of migration documented or otherwise people estimated maybe up to ten million people entered in the United States in the last four years. That increased the label supply, increase growth, and reduce some pressures on wage inflation. Definitely right now. Politically, of course, migration is a hot topic, but from economic point of view,

it increased growth and reduced inflation. And we had also other physical stimulus that helped the growth from the Infrastructure Act, the IRA and the Chips Act, and then we had got Also of course AI revolution has led to significant increasing capecs. So least for the United States, that think was a combination of active factors that implied that inflation file and growth remained robust, not so in other parts of the world.

possible rivals that are emerging. One of the things that we saw recently from President Trump was a threat that he put on his Truth Social Account against any of terror, against any country that would attempt to form a rival currency block, and the specifically mentioned the Bricks. I don't know if the Bricks is a real thing or not.

It sometimes seems like a meme to me, but there is an organization called the Bricks, and sometimes you see headlines about dollar alternatives in the short to medium term. Is there a real prospect of some other currency, the Chinese un perhaps taking sizeable market share and global trade from the US dollar.

The dollar is complicated because you cannot essentially replace something with nothing, and the question is what's the alternative to US dollar for US actor treasure there Summers once jokingly said, people don't like the dollar, but you know, Europe is a museum, China as a prison, Japan is a nursing home, and bitcoin so for now is an experiment. So there is something of an happiness with the US dollar. But for the time being, I would say the US dollar

is still dominant. And by the way, I would probably argue that the Trump police is regarding the dollar a little bit confused, because on one side, there is this concern that a strong dollar has led to the industrialization, loss of competitiveness, large trade, current account deficits people free riding on the US So there is a sense I

would like a weaker dollar. But if you think about policy and economic fundamentalals, tariffs will strengthen the dollar, and threads of tariffs have led since selection to the dollar becoming stronger. Trump says, I don't want other country to unquote the dollar rise, and I'm going to impose tarif on them if they do so. He wants to maintain the role of the dollars a major global reserve currency. If that's the case, demand for dollar ass remain high,

the dollar remains strong in terms of relative growth. The US is doing stronger than Europe and other advanced economies that just strengthen the dollar in terms of relative monetary Police is probably given these differentials in growth and inflation, the US or the FED is going to cut rate less than other countries. Well, in Europe, the colomies we

can there'll be more cuts. And overall, given the productive growth of the US, the boom of new technologies, AI, you name it, capital flows are going into the United States. So I think there is this dilemma that fundamentals and police would suggest that the dollar is going to become stronger, but than that objective of trying to reduce the trade imbalance of the US to a weaker dollar unless you have a big agreement on currency, is hard to fathom how you're going to do it. There are some ideas

along those lines. Is going to be, to say, challenging.

needs the weaker dollar. There's also that tension between decoupling the US economy from the rest of the world, maybe becoming more self reliant, and also wanting the dollar to be at the center of a globalized financial se Are there ways that the Trump administration could like kind of thread the needle between those two different objectives.

the dollar is going to remain strong. And by the way, the risk of doing an agreement to try to weaken the dollar is that that could occur in a disorderly way because if you do another people talking now about a Mara lagoa agreement, because in the past agreements to moved currencies were always in resorts like Breton Woods, Plaza,

over Come, David, you name it. So people think about maybe getting together all major economies in mar Lago and finding an agreement where europe Asian allies and others let

their currency appreciate the dollar weekend. But you know, if people expect that from happening, then capital is going to suddenly move out of the US because you're going to have a massive capital loss time fifteen to twenty percent on your dollar assets, and then you could have a spike in long rates or you could have a correction in US ecuity. So how do you engineer an orderly weakening of the dollar without causing significant tightening of financial

condition that's also problematic. It's not going to be very easy to be done. The other trade off that I think it's complicated it's not just a weak or strong dollars a currency role, but also your tariff policies, because on one side, if you impose the tariffs, the dollar is going to strengthen. And on the other side, also if you're going to raise tariffs, you need revenues. But raising tariffs, if it's very significant, it's going to be

highly inflationary. Now, some people within the Trump come say, well, in twenty eighteen nineteen, when we increase the tariffs on China, there was not significant increase in inflation because the RMB depreciated and therefore import prices did not increase very much. But suppose that you impose the tariffs and the currencies of all your trading partners weekend, then you might not

get the inflationary burst of the tariff. That's correct, but then you're not going to have an improvement of the competitiveness of the United States, and therefore inflation is not going to rise, but your trade deficit is going to

remain very large. Vice versa. If tarif are imposed and the dollar does not strength another currency weekend, you might get actually some improvement of your trade balance, but then you'll have some inflational impact of this, so in all these cases, there is not really a free lunch.

FED would have to worry about. And perhaps that's true, But it also occurs to me that if part of the impulse here is to be less reliant on global trading partners for say, various manufactured goods, and to have more domestic building, et cetera of various things, this is happening at a time of still high resource utilization already, So the unemployment rate is at four point one percent, There are already a lot there are shortages of industrial parts.

Yesterday we're recording this December third, by the way, yesterday we got the ISM Manufacturing and it showed that electrical components have now been in shortage for fifty straight months, so over four years. So it seems to me that regardless of you know, if you have this impulse to build more here, et cetera, you're coming at it at a time in which resources remain quite constrained.

But you know, core PC this year probably going to be two point eightyve and two point nine percent, and next year may still remain elevated, especially next year if you impost tariff, if you do significant draconia restriction to migration, if you have run away physical deficits, that's stimulate further demand. And if you have, you know, a policy of trying to weekend the dollar. So yeah, we live in an economy is already no landing where resource constraints are significant.

Libor market is significantly tight, Goods market are also tight. Imports can help you, But then if you're gonna restrict the libor supply to migration restriction, you're gonna weaken the dollars. You're going to impose tariff, You're gonna make those inflationtionary pressure going higher, and then make trigger the fad than having to act and stop cutting rates or maybe even increase them over time.

definitely a risk. As I pointed out at the beginning, However, there are sets of policies of trumpet are actually positive for economic growth, and some of those policies will be implemented.

So I think that the impact for growth next year is that if this year we're growing, say two point eight percent, next year we're going to still grow about potential but less maybe two point four. But I don't think there's going to be a massive slowdown unless it

goes really radical with the stackpreationary policies. However, on net in an economy is already in a sight resource constraint labor goods market otherwise that is more in a low landing zone, where even before Trump was elected, the FED was started to say, wait a moment, should we really cut right as much as we promise? Given that growth it seems to remain robust, that inflation remains more sticky

that in that world. In my view, inflation is going to be on net staying high rather than going towards the two percent targets. So I would say the net impact on growth for the time being is a wash, but the impact on inflation will probably be the inflation is somehow higher, and that's going to impose something of a dilemma for the FAT. Of course, there is a tail risk that it goes fully stackflationary. But as I point,

are two major constraint. One is really market discipline. The market would punish those policies and will have to reverse. I mean, take an example in the UK, because there was a physical STEAMUS was excessive. Then suddenly the pound collapse, bond deals when higher, the pension crisis, and least trusts Prime minister lost power in forty four days. Now that's not going to happen in the United States. But I think that people should not underestimate how market discipline can

really punish even a country like the United States. So between the constrain of the FED being still independent and the market discipline probably excessively stack, treasury policy would be constrained next year.

But I think, you know, when people think about, say like a well diversified or all weather portfolio, and it sounds like we all want all weather portfolio because there's just so much uncertainty right now, as you've been talking about for the last several minutes, something that would thrive

and be stable amid all this uncertainty. You know, for years people talked about the sixty forty portfolio, and it had a certain I guess I would say intellectual elegance to it, because the two legs of it generally produced positive real returns, but also they had a sort of natural hedging component against each other, and so usually if stocks were going up at bonds were doing a little worse, and then when your stocks would go down and the

boons were going up, work very beautifully for several years, basically until twenty twenty one. And now I'm not sure if people feel confident at all to go back into that, and people come up with reasons why it's very there's a lot of distrust about using bonds or a heavy allocation of bonds as a good ballast for a portfolio.

What is the sort of before we get into the specifics per se, what do you talk about sort of like the intellectual or conceptual framework, but behind your approach, which is to come up with a new sort of diversification strategy that can work across cycles.

That I consider ten factors from geopolitical fragmentation to the globalization, protectionism, French shoring, reshoring to agingle population restriction to migration, global climate change, pandemics, cyber warfare, backlash against liberal democracy and proliber fiscal policies, and potential gradual dedollarization. Now, all these

factors gradually over time reduce growth and increase inflation. And on the demand side, we live in a world of very larger private and public debts are going to become larger. We're going to spend more on defence all over the world. We're going to spend more on dealing with climate change. We're going to spend more to deal with pandemics. We're going to spend more because there's going to be a disruption coming from AI robotic automation. We're going to spend

more because there are many people left behind. We need the bigger social safety nets, so we spend more. We have limits so much we can raise avenues, so structural budget death is going to rise, and therefore they're being incentive to wipe out the real value of nominal long duration that through unexpected inflation. Now I'm not talking about hyper inflation or even high inflation, not even double digits.

Let's assume for a moment that this supply and these the main forces imply that over this decade inflation is not a tool. Let's say five six percent, it is very reasonable. We were at nine just two years ago. And I think these forces over time are going to essentially materialize, and the policies of Trump, some of them exactly go along the same tackflationary direction of lower growth and higher inflation that we described. So in that world,

think of it this way. Bond yial is ten years right now aband four percent, but if inflation was six, bond yills have to be at least eight six percent for expected inflation and two for the real because in the world of high debt and that it's the equlibrium relong rate is not zero anymore, it's closer to two. Suppose the bond yills go gradually from four to eight percent, then a tenured treasury is going to lose thirty forty percent of its value over time. And we saw what

happened in twenty twenty two. In twenty twenty two, sixty forty did not work. It did not work because sixty forty assumes that there is a negative correlation between the price of stocks and the price of bonds. Risk one and growth equity to well. Bond bills are higher, the price is lower, so you make money on equities, you lose money on bonds. Risk of recession. Equities go down, bond bills fall, the price goes up, you make money on the bond part of your portfolio. You lose on equity.

But that negative correlation assumes that inflation is low and stable. When inflation is not low and stable is rising, then what happens. Bond bills are higher and you lose money on the bond component. And like to happening in twenty two, and happened again even last year. When bond yials are significantly higher, stock prices correct, and therefore you get a

positive correlation between bond prices and equity prices. Paradoxically, actually, in twenty twenty two, a sm PIFA boundred fell by fifteen percent, but the price of tenure treasury fell more fell by twenty percent as tenure treasure yield went from one to three and a half. So in a world in which bond yields gradually could go from four to eight, the traditional defensive asset in a sixty to forty portfolio, this long duration treasury doesn't work anymore, and therefore this

is not an old weather portfolio. ATTF is something of an alternative to the traditional defensive assets, and alternity to the forty percent of the sixty forty is not the sixty part.

your defensive asset actually loses as much, if not more than equities. So then you have to think in a world of gradually higher inflation, which are the other alternative asset that provide a hedge against inflation, against the basement of your currency, against disuization, against the geopolitical risk, against

financial crisis, and against climate change. And the range of assets that we have chosen for this ETF is one that provides you a better hedge against those still risks than traditional defensive masses like tenure treasury, and that's the idea behind this new ETF.

So you mentioned, you know, the stuff that could do well in an inflationary environment and withstand some of those big risks, stuff like gold, US property that is somewhat climate resilient. So I guess in the northeast and short term US treasuries where the rates will more or less

follow inflation. And one of the other interesting things about this whole project is Atlas itself is based out of Dubai, where there are you know, it's very close to some very large pools of capital that have been investing in treasuries. Talk to us more about that angle, this idea that you could pitch it as a sort of treasury alternative for some big investors.

has been traditionally the safe defensive asset. Speaking about literally twenty threellion dollar plus of debt and in the world that I describe right now, the losses that occurred in twenty twenty two or summer of last year when again there was a spike in bond hills to five percent, there was a correction equity will occur, So you're going to lose money on the equity and on the bond

side of portfolio. That's why, by the way, even fancy models like risparity, there are glorified versions of sixty forty seventy thirty have not done very well. And therefore I think there is a nervousness around the world. The large

pools of money that I have. The allocation to long duration treasury is their concern about a variety of the risks that I described, and they're thinking about alternative and as you pointed out, the combination of the assets is one exactly that does reasonably well actually in normal times and is a convexity. So if some of these tailies were to materialize, of course the return is going to

be much higher. So for example, you want to stay completely away from long duration treasuries and instead you want to be in short duration treasury whisually goes higher and under the same price correction. If bond deals are going to be higher, you want to be into tips that of course are going to do well if there are increases in an expected inflation. The allocation to gold is a hedge bought against inflation and the basement of yet currency,

but there's also a hedge against potential di dollarization. If you think about the only liquid foreign reserve acid that cannot be seized. The last few years in Russia, in Iran, North Korea, we've had massive sanctional financial and seize their foreign assets. The only liquid acid that cannot be seized not euros, not dollars. It's not the end. All of those have been seased. There's going to be gold bullion. If you old gold bullion, you're going to go and

be safe. And that's why for example, significant central banks, not only of the strategic ralvas of the US, but even of the fer enemies of the US. I've gone into gold this year. The surge over forty percent in gold prices is significantly driven by that geopolitical risk of didollarization and diversification. You want to be in some allocation for commodities, especially a commodity is because in the world of climate change, the demand is going to be there,

but there'll be supply disruption. We have seen spikes in commodity prices driven by climate change. And real estate traditionally is a good hedge against moderate increases in inflation because rents and other things can go higher, and in the short run, real estate is a fixed supply. But because of climate change, of course, lots of parts of North America are going to have significant problems and asset dials

are going to be reduced. I mean many parts of Florida, Louisiana, California not even a more insurable in terms of home insurance. People have to move, and as they move, prices are going to fall in the region where you have climate change, and they're going to increase where you are having better climate. And therefore some location is in real estate. But we have data at the zip level for every zip level county of the United States, and we look at each

one of the riads in North America. We see what's our allocation two different region with a whole global climate change map based on big data that allows us to go into the reads that are going to be benefiting from climate change as opposed to those who are going to be hurt by climate change. So the combination of assets that provides you know, solid returns with very low volatility, and it's an alternative to the traditional defensive act.

the end and I don't want to have that. But I do want to ask an adjacent question today, which is that when you talk to overseas investors and talk to people with high amounts of ultra high networth people today in twenty twenty four, when you talk to them, how seriously do they view setting aside your own views? How seriously do they view bitcoin or crypto? Is some component of the portfolio that they want to have.

exactly exactly. So if you want if you want something a substitute for the forty component, I would say the combination of assets that we have considered and willok them carefully gives you stable returns and reasonably high turns. If you add any crypto asset, you add a huge amount of volatility, and there's a wide range of investors that don't want that type of volatility.

The basement of FIAD currency, you could have something that would actually have a stable store of value, still dollar rinked, but gives you positive return, and it's going to be a good hedg against some of those theories that are facing So it'll be a way of eventually making it available to many investors all over the world. But that'd be stage two organization, not for the time makes the ATF.

defensive one. There's not going to be this safe acet anymore in a world in which will be a variety of new tail risks. We have to find a hedge against it. So I think that is is going to take time. It's not something's going to happen overnight. Is

a medium, long term story. But I do believe that investors are getting nervous about the whole speries of things, and I have to think about an alternative to traditional But you know, making the idea design and get implementing convincing people that that's the right thing to do takes a lot of time and effort. Is hard work, all right.

trump Ism. There's this sort of traditional Wall Street quote pro business unquote view, and then there is the sort of much more nationalistic, anti immigration, anti free trade, stagflationary view, and it's very unclear who what mix will win out.

I've written about it to some extent, but the idea of the market as a limiting factor on what's possible, and part of me is a little bit nervous about that one because it seems like maybe a big ask for the market to police the new administration. But the other thing I was thinking about was the importance.

them just sort of disappear. This will be one I at least pay attention to.