Nouriel Roubini, called ‘Dr. Doom’ for his often dour predictions, says that the stock market doesn’t reflect the real economy. He also says “Main Street is struggling, it’s struggling severely.”
In an interview with Bloomberg Television, Roubini says that with interest rates at zero, investors who need yield can’t find any in bonds or fixed income. Because of this, they have no choice but to turn to the stock market.
“We have zero policy rates, if not negative, we have long term interest rates in the US at best, at 60 basis points. In parts of the world zero, if not negative (interest rates), central banks are even buying high yield and high grade bonds, so those spreads are squeezed and you don’t get much in credit or fixed income.”
This has caused the stock market to recover, but only because it’s the only game in town. It’s not due to the underlying companies are doing well.
“Therefore people are going into stocks, but not because there has been a very strong recovery of earnings. Five companies, the “big tech” within the 500 of the S&P, those are doing well, the rest of them are not doing well. So it’s all driven by further multiple expansion rather than a real recovery.”
Wall Street VS. Main Street
He paints the recovery as Wall Street versus Main Street, or the stock market versus the real economy.
“And what’s good by the way for Wall Street is bad for Main Street. Because Wall Street represents what – big firms, big tech, & big banks. What’s Main Street – workers, households, and small and medium sized enterprises. We know that hundreds of thousands soon enough of small shops, retailers and others are going to go out of business while the market share of big business will rise. And that’s driving main street down, it creates tons of jobs in small and medium enterprises, and makes the big firms even bigger in terms of market shares.”
He says companies that are hitting their earnings targets only by cutting jobs will eventually get trapped when those laid-off workers don’t have the income to continue buying goods and services.
“If the firms are going to survive and thrive and achieve their earnings target by slashing labor costs, your labor costs are my labor income, my consumption, and eventually that slump in consumption is going to weaken earnings and profits down the line. So I think that the stock market doesn’t reflect the real economy. Main Street is struggling, it’s struggling severely.”
Roubini also said that the “v-shaped” recovery could very easily get derailed.
The “v-shaped” recovery “is becoming a U and the U could become a W,” Roubini says. It will if we don’t find a vaccine and don’t have enough stimulus.”