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Faber v Roubini: the Doctor Dooms' biggest calls are put head to head
on Aug 20, 2012 at 14:04
Marc Faber and Nouriel Roubini are two of the world's best known economists, earning themselves the 'Doctor Doom' nickname for predicting the financial crisis and the fallout that ensued. Here, we put the pair's biggest calls to the test.
Faber v Roubini
Marc Faber and Nouriel Roubini are two of the world's best known economists, both earning themselves the 'Doctor Doom' nickname for predicting the financial crisis and warning of the fallout that ensued.
Faber, a regular commentator in the media and author of the Gloom, Boom and Doom Report, first rose to prominence after telling his clients to sell out of equities just days before the October 1987 crash.
The Swiss national has often said this call was accidental, despite its uncanny accuracy, but in the years that followed he has gone on to cement his reputation by predicting the rise of Asia and the commodities boom.
Roubini, meanwhile, currently professor of economics at New York University and founder of consultancy Roubini Global Economics, cut his teeth at Yale before going on to work at the International Monetary Fund (IMF), Federal Reserve and as a senior adviser to Tim Geithner, the US Treasury secretary.
Here we take a look at some of the pair's biggest predictions in recent years to assess just how accurate they been.
August 2006 - Roubini fears a global property crash
Six years ago Roubini said the housing market was in 'freefall' and believed that a hard crash in US housing would push the country into recession. As if this prediction wasn't bleak enough, Roubini warned that the role of the US property crash in ending America's boom years would be far more significant than the tech bust in 2000, and that other economies around the globe faced the same fate.
Verdict: Roubini was right - unlike technology stocks, property is an asset held by the masses, so when the residential market crashed its impact was far more destructive and the US fell into recession in December that year.
February 2007 - Roubini calls the sub-prime credit crunch
This call was linked to Roubini's fears about the housing market, which he later expanded on to describe as probably the worst housing recession in five decades.Roubini said there was a 'mountain of garbage' pilling up and reckoned that a host of new mortgages would turn sour, causing a severe credit crunch.
Verdict: Right - while some argued sub-prime was only a tiny part of the market, Roubini correctly labelled the bulk of highly rated paper junk.
August 2007 - Faber tells clients to ditch risk assets
While Roubini was focussing on the housing bust, Faber was poring over asset prices and warned of a 'severe correction' across all markets. Two months earlier he had already advised investors to short retailers, foreseeing a drop-off in retail spending, and in August 2007 he told clients to cut risk and beware inflation, fearful of the negative impact this could have on asset prices.
Verdict: Faber was early to the party. The S&P rose almost 10% over the next two months, but then turned to fit Faber’s prediction when the index slid by half to hit 683.2 the following March.
December 2008 – Faber tells clients to stock up on gold
‘You want to be in gold, silver, platinum and also oil. If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals,’ Faber advised at the time, adding that investors wanting to own shares should look to resource companies and Asian stocks.
Verdict: Right, though again a little early. Oil rebounded sharply in 2009 after dropping 70% from peak to trough, while bullion and silver surged and past a string of all-time highs. Asia and resource stocks proved to be the place to be the following year.
March 2009 – Roubini calls another recession
Roubini said the recession would continue throughout this year, adding that even if the economy expanded 1%, there was still a technical recession.
‘Unemployment will peak at 10% next year and the recession will last 36 months rather than 24 months. There is no sign the rate of contraction is slowing,’ he warned.
Verdict: Correct. Roubini’s call on unemployment was spot on, as was his dire prediction about the extent of the recession. He was perhaps a bit too bearish about the extent of the recession, which turned out to last for 18 months.
March 2009 – Faber tells clients to get into equities
This call was based on Faber’s belief that if there was more money printing, the rally would continue to have legs.
Verdict: An excellent call. Faber was again correct, and is one of the few market commentators who called both the downturn and the recovery.
February 2010 – rally fading
Faber decided it was time to close out of his earlier trade capitalising on additional money printing, and in February 2010 said he saw the market going lower.
Verdict: the jury’s out. While expecting the market to close lower Faber said there was not huge downside risk, arguing that the Federal Reserve would act if the S&P or Dow Jones dropped between 15% and 20%.
Faber was correct about quantitative easing – more did come – but the rally had further to go with the S&P adding an additional 12% by the year-end.
May 2010 – Roubini says stocks to fall 20%
Just three months after Faber warned on the rally, Roubini warned that equities may shed 20%. ‘There are some parts of the global economy now at risk of a double-dip recession. From here on I see things getting much worse. I would certainly insure my portfolio against that downside risk. Apart from cash, I would invest in short-term debt from countries that don’t have a serious debt problem, like Germany,’ Roubini said.
Verdict: Roubini’s bearish outcome certainly has not come to pass yet and although the S&P 500 did fall by 5% over the following two months, it recovered quickly and has now moved up by a third since Roubini made his call. He admitted at the time that buying insurance for a portfolio was not cheap and it would have been an expensive tip for investors to follow.
March 2011 - Faber is Bullish on Japan
‘If I had to make a bet for the next 10 years in terms of equity markets, I would seriously consider a very strong weighting in Japan…the interest payments on the government debt in Japan and the fiscal deficits will become very burdensome but that will necessitate monetisation. That will bring about a huge shift of money out of cash and bonds into equities.’
Verdict: In fairness, Faber’s call on Japan is a long-term one, but it has got off to a somewhat unfortunate start with the Nikkei 225 plunging by more than 12% in the next fortnight following the earthquake. Clearly, such exogenous shocks are by their very nature impossible to predict and the stock market has recovered to be just 6% down from when Faber made his prediction, which he would no doubt argue marks a more attractive entry point.
June 2011-present – Roubini fears eurozone break up
Since last June, Roubini has warned of the single currency zone’s demise, arguing that the peripheries’ lack of discipline would bring about its downfall.
Over the months that followed Roubini’s predictions about Europe grew darker – he warned that Italy had passed the point of no return and would be forced into a managed debt restructure as early as 2012.
His attention then turned to Spain, and in May this year warned that a Spanish exit loomed just as exit as Madrid moved to take over Bankia, the country's fourth biggest lender, in an attempt to allay market fears over the government's ability to clean up its financial sector.
Verdict – Many would argue Roubini could still be proved right, with reports only days ago that Finland is preparing for a break-up scenario.The economist was also sketchy about when a break up would come, and in the case of Spain pointed out this could take months to unfold. He said at the time: 'I'm worried about Spain, but it's going to be slow motion. By the end of the year, Spain is going to lose market access, going to require a troika bailout and it's going to keep them out of the markets for a year or two…eventually even Spain could exit the eurozone.’
May 2012 – Faber warns of another US recession
Some three months ago Faber was quoted as saying he is ‘100% certain’ there will be another recession in America, and more recently he decided to sell out of Asia and for the first time by European stocks.
Verdict: Faber’s call on European stocks is hard to quantify, as he has given away few clues about the sectors or companies he chose to back.In the US, however, the situation has turned darker, though it would be incorrect to say the country in in recession. Growth has fallen from 3% to 1% over the last three quarters and since Faber made his call in May, the unemployment rate has risen from 8.1% to 8.3%.