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Monday, May 12, 2014

Nouriel Roubini: We’re at the very beginning of a credit bubble


May 8, 2014, 2:37 PM ET


Nouriel Roubini whipped out the “b” word on Thursday, telling Maria Bartiromo at Fox Business Network that we’re at the beginning of a credit bubble. We’re not on the brink of a major collapse, but we might be getting there, he cautioned.



BloombergNouriel Roubini


The New York University professor and chairman of Roubini Global Economics is known as something of an economic pessimist, though he’s become slightly more optimistic recently. (Still, here are six of his risks.)

The Federal Reserve will keep its key lending rate low even after it lifts off from near zero, where it has rested for the past half decade, Roubini said. That slow process of normalization will keep the spigot of borrowing flowing, helping support the economy. But it will also lead to risky lending practices. Hence, a bubble is inflating that could eventually pop.

He’s by no means the first person to make this claim: the question of financial stability is one of the key criticisms of the Fed’s accommodative policies. Roubini didn’t criticize the central bank, so much as say that the Fed is damned-if-you-do, damned-if-you don’t.

Roubini cited the return of some of the key characters associated with the period before the last financial collapse: Lots of low quality bond sales, debt without strong protections for bondholders, and a certain kind of risky security called PIK-toggle bonds. The economist says:

“All the risky things that were happening back in ’06 and ‘07 are back again to the same level, if not more. So we are in the beginning of a credit bubble, but just the beginning.”

So file this one under “not imminent.” The risks won’t build until about a year or two down the road, he said.

If it’s not happening immediately, when will it happen? Valuations are getting pretty high, prompting junk bond guru Martin Fridson to say the asset class is in a state of “extreme overvaluation.” Credit is in such high demand right now that it’s prompting big name investors like DoubleLine Capital’s Jeffrey Gundlach to declare that the asset class is too crowded.

Citi credit strategist Matt King, who is out with an extensive report this week about the current state of the credit market, has this chart to show:




King says the eventual reversal out of credit seems “problematic”, comparing it to a rubber band that will eventually snap back. Nonetheless, like Roubini, King doesn’t see the reversal happening immediately, citing money that continues to rush into the market. For now, credit investors appear to be stuck in an uneasy equilibrium.

– Ben Eisen


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