Sunday, May 24, 2009

Dissecting Nouriel Roubini

Just who is Nouriel Roubini? A lucky guy? Like I always say, if you are bullish or bearish long enough, you will eventually be right. My two New York fund manager friends who were down a few months back told me that Roubini is a party animal when he is not speaking like a diplomat on TV. Not that there is anything wrong with that!

The following is a revealing piece on him from The New Republic:

Some economists--strict academics mostly--have long considered Roubini a quack. They sneer at his approach, which is wide, deep, and deeply unconventional. When he travels, for instance, he says his research includes talking to "everyone from the airport cab driver all the way to the finance minister." One prominent economist who studies recession indicators recently slammed Roubini for his "subjective," "wild man" predictions because they don't always rely on econometric modeling. And Roubini certainly didn't help his case at an IMF conference in September 2006, when he guesstimated the chances of a world recession at 70 percent before offering, by way of explanation, that he had pulled the number "just out of my nose."

Anirvan Banerji, an economist with the Economic Cycle Research Institute, has been particularly dismissive of Roubini's forecasting abilities: "The average time between recessions is about five years in the postwar period," he says. "So, if you forecast a recession one year and it doesn't happen, and you repeat your forecast year after year ... at some point the recession will arrive."

And Roubini has undeniably overshot. In 2004, he predicted that the oncoming recession would precipitate the crash of the dollar. The crisis has mainly buoyed it. On September 1, 2005, three days after Hurricane Katrina made landfall, Roubini told Reuters that economic disaster was imminent. What followed instead was a bump in financial activity that forestalled the recession for more than two years.

Nouriel Roubini. Credit: Jonathan Twingley

Nouriel Roubini. Credit: Jonathan Twingley

All the while, though, Roubini understood better than anyone just how weak the fundamentals of our economy were. The day after the now-famous 2006 IMF talk, he went on "Kudlow & Company," on CNBC. Roubini was, as always, the foil to Kudlow's chipperness. "All my friends are in a great mood, Nouriel. They're in a terrific mood. They love America," Kudlow sang. Roubini countered starkly: "Well, they're all rich," he said. "The average American actually is in debt"--a sign to Roubini that housing would only be the catalyst of something larger.

What sets Roubini apart from his fellow economists (and what occasionally gets him in trouble) is his willingness to intuit broad patterns and connect the dots, something that became apparent early in his career. While others spent years refining one econometric model or drilling down on one microsubject, Roubini gorged on a range of diverse topics that, to him, were all related: Japanese public debt, tax evasion, liquidity and exchange rates, monetary policy in the newly formed European Union, the effect of political cycles on industrial economies. As a graduate student, he attracted the attention of older, more established academics both for his ambitiously sweeping econometric analyses and his ability to synthesize vast swaths of seemingly unrelated information.

But the first real test of Roubini's eclectic methodology didn't come until 1997. That summer, the government of Thailand--highly in debt and over-leveraged after a long and poorly regulated real-estate boom--cut its currency from its peg to the dollar. Investors panicked, and Thailand's surging economy froze, triggering massive layoffs in real estate, finance, and construction. The crisis, which quickly spread to the rest of the region, took most economists by surprise.

Roubini, by then a young professor at NYU, was trying to stay on top of the rapidly shifting situation in Asia for a class he was teaching. He found it nearly impossible until he hit on a relatively new technology: a website. He hired some students versed in HTML and set up the Asia Crisis Homepage. The bright yellow portal pooled news reports, academic work, and policy debates on the subject, filtering, organizing, and contextualizing the information in real time under no fewer than 32 headings.

Wading through the data on Thailand, Roubini found that corruption and bad policy created a vacuum that sucked in a flood of foreign capital. This skewed the country's financial reality and accelerated an unsustainable boom. (Roubini later spotted this distinctive pattern in the United States when the Chinese, Russians, and Gulf states were hungrily snapping up U.S. debt and inundating the market with foreign cash.) But, at the height of the Asian financial crisis, Roubini was, again, in the minority. Many economists saw it as a simple comedy of errors: Misinformed investors panicked, they said, and pulled the rug out from under the Thais. Roubini, on the other hand, saw the crisis as a systemic failure rooted in Thailand's policies. And he was right.

More than a decade later, Roubini-ism--sprawling, non-linear, and hypercaffeinated--looks pretty much the same. His prescient February 2008 blog post that predicted the Rube Goldbergian collapse of the world financial system, for example, was called "The Twelve Steps to Financial Disaster," but, if you include all the sub-steps and sub-sub-steps, the real number is likely twice that. On television, his talking points are similarly pluralized, rushing out quickly, like a magician's scarves, to a grand and logical finale. (At the diner, I clocked him: 295 words on the intricacies of the European monetary crisis in under 90 seconds.) This, of course, means that brevity goes out the window. Roubini's weekly Web column for Forbes comes in at close to 3,000 words and runs at half that length. A recent Roubini academic paper tracks no less than 47 emerging countries over the course of 32 years using more than 50 variables. Giancarlo Corsetti, who was Roubini's advisee at Yale and is now a frequent collaborator, presents with Roubini at conferences, and sometimes finds this expansive approach frustrating. "I go up, I present one or two points," Corsetti says. "Nouriel goes up and gives you twenty-six points, three or four of which are contradictory."

Robert Shiller, who also worked with him at Yale and was one of the first people to warn of a housing bust, isn't surprised that Roubini, of all the great minds staring down our financial future, emerged as the one to piece it together. "A financial crisis needs general thinking, and a team of specialists will have difficulty understanding the whole thing," he says. "Nouriel's approach has always been worldwide, which is not rewarded in academia. There's an element of luck in everything, but it's not random who he is."

This is what the life of a prophet looks like: Two days after we met at the diner, Roubini is back at the airport. He's off on another long jag--four continents, seven countries, eight cities, ten days.

He's been thinking a lot not just about the way down but the way out. With the help of the Obama administration's policies (not great, he says, but better than nothing), he sees "a light at the end of the tunnel." To actually get to the end of it, though, the United States will have to get used to consuming less, which means China, Germany, and Japan will have to get used to producing less, which means that all the intermediaries--Chile, Australia, Brazil--will have to scale back and turn inward like everyone else. The world may curve and warp a bit, and it will be difficult, but Roubini sees good in this. Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. "When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive," he had told me earlier. "Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that's actually a good change. The transition is painful, but the result may be good."

On the other end of the line, I can hear him fumbling with his luggage as he talks, and there's a sense of noble resignation in his tone. He hasn't had any rest since we met, but, he insists, "I cannot get sick. I can't stop." His is hard, life-shortening work, but someone has to tell the world that only its wholesale rewiring will get us out of this.

p/s photo: Rachel Maryam



"When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive"

I've been thinking this for awhile now. It's all quite grotesque.

The imbalance is perhaps equivalent to a promotion & sales driven organization (reward obscenely those who make money for the org) without similar emphasis on operations and innovation. That organization should be heading on a downhill trajectory in the longer term.

solomon said...

The careers of economist is just like a businesman. One needs to persist and strike a good call (good deal) in life to earn himself the fame and fortune.

I don't dissect Roubini. Maybe he is just one of the lucky one, with thousands of similar economists trying like him.

If he deserves it, he will last. If not, the most he will be remember as one of the Dr. Doom like Marc Faber.