Gus Ruelas/Reuters
Nouriel Roubini is well-known for his perennially bearish views on markets and the economy. They sometimes come to fruition in a big way, like in the 2008 Global Financial Crisis, but they also don't always play out.
Now, the famed New York University economist is putting his acumen for forecasting economic trends to the test in the public markets.
Roubini is launching an ETF called the Atlas America Fund, which he says aims to offer protection from a coming bout of inflation through exposure to gold, real estate, and the agriculture sector.
At Bloomberg's ETFs in Depth conference in Manhattan on Thursday, Roubini laid out a multi-part argument for why he sees inflation soaring to 5-6% over the remainder of the 2020s.
On the supply side of the inflation equation, there are trends that should constrict the supply of goods, according to Roubini:
On the demand side of things:
In such a scenario where inflation sees a resurgence, Roubini warned of fairly dire consequences for investors and the classic portfolio structure of 60% and 40% bonds.
For instance, 10-year Tresasury yields would soar, he said, as investors demand higher returns. That would mean the assets lose a large chunk of their value.
"Suppose that over the next few years by the end of this decade, inflation were to be not 2%, but say 5-6%. What would be the bond yield on a 10-year Treasury? It would have to be something like 8%," he said. "Six percent for expected inflation, and 2% real. Why 2% real, rather than lower? Because fundamental factors including high debts and deficits imply the risk premium lies closer to 2% rather than 0%."
When yields on the 10-year spike that high, it tends to mean trouble for stocks, particularly growth names, which dominate the market today.
"That short rise in bond yields should lead to a significant correction in equities," Roubini said. "As you remember, 2022, when yields were going higher, S&P fell 15%, Nasdaq fell 20%, and growth stocks fell by 40% or even more."
Roubini makes some compelling points about the direction inflation could take in the years ahead, but the outlook is murky. While economists broadly warn that reshoring trends and tariffs will lead to higher prices, technology advances could help to keep labor costs, and therefore prices, down like they have over the past couple of decades.
For now, inflation continues to move sideways, hovering between 2-3%. Equity investors have so far stomached an 80-basis-point rise in 10-year yields since mid-September, with the S&P 500 up 7% to all-time highs since then. Time will tell where inflation and yields go in 2025. Moves higher could spoil the stock market's party, as Roubini warns.
