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Nouriel Roubini Held A Party For Clients At His Apartment Last Night, And This Is What He Told Them

Nouriel Roubini

Nouriel Roubini held a party/lecture at his apartment exclusively for clients (many of them hedge funders) of his firm Roubini.com.

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He spent about 30 minutes discussing the big issues of the day: The U.S. economy, China, and of course, the biggie, the Eurozone crisis.

Here's the gist of what he told them.

When it comes to Europe, frankly, he said, "Our view is very bearish." Europe is a slow motion train wreck and there's a "significant risk of a Eurozone breakup." This doesn't mean Greece and Portugal leaving, it means Spain and Italy ultimately leaving as well, which would mean the whole thing is toast.

And if the Eurozone breaks up "everything around the world goes sour."

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The fundamental problem — which is something he laid out in a note to clients this week — the matter of flows. While Europe might be able to address some "stock" problems (the size of the debt), there's no answer to the matter of growth and trade deficits, which the periphery countries are consistently running.

So the basic strategy of the IMF/Germany is this: Keep Greece on life support long enough for a big bazooka to save Italy and Spain, at which point, when it's obvious that austerity doesn't work (which everyone knows) then, perhaps in a year from now, you let Greece default. The hope is that Spain and Italy are okay by then. Roubini is, not surprisingly, skeptical.

There's only one strategy that might work: Periphery reforms and the core engages in fiscal stimulus and more monetary easing, in which case you might get the kind of balanced adjustment that would work. But the problem, of course, is German culture, which is against monetary easing and more fiscal stimulus.

As for the U.S., he thinks people are breaking out the kool-aid to soon on the avoidance of a recession. "Q3 GDP will be revised downward," he explained because the first estimate only looks at big firms, which are doing better than small and medium sized businesses that are "getting squeezed."

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So supposed Q3 GDP gets revised down to a rate closer to 1.5%, then next year we experience a $200 billion fiscal drag: "That will bring growth to zero."

And of course, "If the Eurozone blows up, it all gets worse."

Finally on China, he predicts it avoids a hard landing this year and next year, but sees trouble in 2013-2014.

Ultimately it will end in pain for three reasons:

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  1. A build-up of non-performing loans at the banks.
  2. A high level of government debt (when you include municipalities)
  3. And finally every single case of a country that boomed via a huge fixed-asset stimulus ends up in a hard landing, ultimately.
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