Nouriel Roubini, who earned the soubriquet Dr. Doom when he accurately predicted the financial crisis, thinks investors should "overweight U.S. equities" and underweight bonds and gold.
Speaking on Monday at the Inside Commodities conference in New York, Roubini told advisors and other professional investors that the commodities super cycle is over partly because China's economic growth will continue to slow in the next few years. This has serious implications for other emerging markets and commodity-driven economies.
In this type of slow-growth world, both the U.S. dollar and U.S. equities could continue to remain favorites of global investors, Roubini said. It's not that the U.S. economy is performing at anywhere near a peak level. Roubini said he wouldn't be surprised if third-quarter GDP turned out to be disappointing.
But when one examines the technologies that drive almost every major industry from energy to manufacturing to medicine to information and entertainment, the U.S. is either the world leader or close behind. Multinational American companies are well-positioned to export these technologies to other nations.
"The dollar will strengthen" because the U.S. has more favorable demographics and can expand faster than other developed nations. In contrast, gold could fall to the $1,000 area as interest rates rise and bonds offer more attractive yields.
After a Janet Yellen-led Federal Reserve Board finally lets short-term interest rates appreciate on a short leash in 2015 or thereabouts, Roubini thinks the 10-year Treasury bond yield could reach 4.5 percent by mid-2016. While Yellen will try to make the withdrawal from QE and the subsequent rise in rates as painless as possible for bond investors, fixed-income securities won't be the place to be.
The U.S. federal budget deficit has fallen from the 10 percent area in 2009 and 2010 to about 4 percent and Roubini said it could continue to decline to the 2 percent area in the next few years. Despite the gridlock unfolding in Washington this fall, he predicted that both Democrats and Republicans could come together on modest entitlement reform in the next two years.
The probability of Eurozone disintegration, a distinct threat several years ago, is receding. Roubini said that some of the big core Eurozone nations like Germany and the U.K. are improving but the smaller nations on the periphery remain distressed.
Emerging markets aren't plagued with the huge debt loads afflicting developed nations but they face another dilemma. Many want to avoid a freefall in their currencies to halt capital flight. But the only way to achieve this is to raise interest rates at the same time as their economies are slowing. They are "damned if they do and damned if they don't," Roubini said.