Dr. Doom sounds more like Dr. Boom these days, but Nouriel Roubini still sees plenty of risks looming over the US economy.
The economist, who’s often referred to as “Dr. Doom” for his bombastic and frequently bearish predictions in markets, laid out his top fears about the macro environment speaking to Bloomberg this week.
Roubini, who rose to fame calling the 2008 financial crisis, said he remains optimistic on the investment landscape overall. That’s largely due to his positive outlook on the AI boom, he said, pointing to the billions tech giants are spending on AI infrastructure and the expected productivity payoff down the line.
Still, he identified four concrete risks that are on his radar. Here’s what Roubini says he’s worried about:
1. The Strait of Hormuz is still closed
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Oil flows are still largely choked off in the Persian Gulf, an issue that has hung over the market since the start of the Iran war and sent oil prices spiraling into the triple-digits earlier this year.
Crude has cooled from its wartime peak, but prices remain elevated and risk moving higher again as the war drags on and oil reserves run low. Risk assets, like stocks, have also generally fallen as oil prices have climbed, a sign that investors are worried about the knock-on effects on inflation and economic growth.
Brent crude, the international benchmark, surged 6% this week as the US and Iran launched fresh strikes. Stocks in the US’s Strategic Petroleum Reserve, meanwhile, hit a 43-year-low last month, according to the latest data from the Energy Information Agency.
2. Iran war could escalate after the midterm elections
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There’s a chance the Iran war could escalate significantly after the midterm elections this year, Roubini said, pointing to fears that President Donald Trump may become concerned with his presidential legacy and ramp up military pressure on Iran.
“If they lose the House and he’s going to start bombing Iran and try to win the war — that’s always a risk,” Roubini said.
3. Bond yields could move higher
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There’s a need for “fiscal consolidation” around the world, Roubini said, referring to how global concerns about growing budget deficits have caused bond yields to surge.
“If that doesn’t happen, then bond yields can go higher and that could put pressure and crowd out some of the domestic demand,” he added, referring to the economic impact of higher yields.
The US bond market has been rattled by a myriad of concerns lately, among them fears that the budget deficit is growing to unsustainable levels and that inflation will move higher over the long term.
Part of the move is explained by investors being less willing to hold government debt, meaning yields need to rise in order to entice investors back to the bond market. Bond yields are also tied to interest rate expectations, implying that markets perceive elevated inflation as a future problem.
4. Potential for coming market corrections
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Roubini flagged the potential for a market correction to strike, though he reiterated his optimism about the overall investment landscape.
“Some corrections could occur,” he said, adding that he didn’t believe the current run-up in AI represented a market bubble. “The downside risks are the usual suspects, but we are in the middle of a real global investment boom.”
More forecasters have been flagging the risk of a correction lately, particularly as yields remain elevated and the market enters a seasonally weak period. Stretching back to 1928, the S&P 500 has seen its worst average three-month performance from the August to October period, with the average correction in down years being 7.35%, according to an analysis from Bank of America.
