- Nouriel Roubini said markets are "extremely frothy" in an interview with Bloomberg on Tuesday.
- The NYU professor added that we haven't seen cyclically adjusted PE ratios this high since the dot com era.
- "I think there are a lot of players that have taken too much leverage, too much risk, and some of them are going to blow up."
Nouriel Roubini, an economist known as "Dr. Doom" for his pessimistic market views, said markets are "extremely frothy" and participants are taking "too much risk" in a recent interview.
Roubini sat down with Bloomberg to discuss market conditions, the fallout from the Archegos blow-up, and fiscal and monetary policies on Tuesday.
The NYU professor and chairman of Roubini Macro Associates LLC said, "We're in a situation where financial markets are extremely frothy. We have either zero policy rates or negative policy rates in advanced economies. In spite of a pickup in long rates, financial conditions are very easy. And we're seeing widespread frothiness, bubbles, risk-taking, and leverage."
Roubini noted the stock market is trading at cyclically adjusted PE ratios "we haven't seen since 1999 or 2000 when there was a bust of bubbles," and said equity market frothiness has shifted to other markets creating bubbles in SPACs, cryptocurrencies, and hedge funds.
When asked about what could cause "the froth to come off" of equity markets moving forward, Roubini highlighted the "Fed and Treasury experiment" of massive fiscal stimulus and monetary stimulus, arguing there "is a risk the economy could be overheating."
The economist said that if the yield on the 10-year Treasury rises above 2% by the end of the year, causing a rise in real yields, that it could be "the shock that actually hits equity markets in the US and globally."
Roubini also said that the next two or three years could see "a series of negative supply shocks" that may lead to "inflation and then stagflation."
The NYU professor noted that tensions between the US and China, "deglobalization", and an aging populous in advanced economies could "reduce potential growth" and "increase the cost of production" leading inflation to rise "well above the targets of central banks."
Roubini criticized the Federal Reserve arguing they could be unable or unwilling to raise rates if inflation does rise because high levels of private and public debt would lead to a "financial crash" if they did.
When asked about the recent blow up of the hedge fund Archegos, Roubini said he agrees with Guggenheim's Scott Minerd that another family office is likely to blow up given the risk-taking in the current market.
"Yeah, I would agree with that assessment. I think there are lots of players that have taken too much leverage, too much risk, and some of them are going to blow up," Roubini concluded.