Despite the chaos that is transpiring all over the world – the Hong Kong protests, the U.S. war against ISIS, the Russia-Ukraine conflict, the Ebola outbreak – financial markets are still roaring ahead and seem ignorant of what’s going on in every region of the globe.
Nouriel Roubini, an economist at New York University, explained in an article published on Project Syndicate that this is a perfectly normal reaction in the markets, but the good times could eventually come to an abrupt end.
Roubini wrote that international markets are pushing ahead and are “rationally complacent,” but “financial contagion cannot be ruled out.”
In the early 20th century, financial markets projected that a certain major conflict would not come to fruition, though it ignored all the risks, the world embarked on the First World War. Roubini argued that markets were not good at “correctly pricing low-probability, high-impact tail risks. They still are.”
The crises occurring in China, the Middle East and Ukraine have been largely ignored because of declining oil prices and quantitative easing embarked upon global central banks. However, if a terrorist attack takes place in the West then that would inevitably change.
“Or the U.S. Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect. Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up,” Roubini wrote. “The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible.”
The Dow Jones started off the month of October on Wednesday in a bad way. It lost 238.19 points, or 1.4 percent, to 16,804.71. The Standard & Poor’s 500 index shed 26.13 points, or 1.3 percent, to 1,946.16. The Nasdaq composite fell 71.30 points, or 1.6 percent, to 4,422.09.
Roubini is full of it.