The Bridge Ep. 02: A Cambrian Explosion of Innovation

The Bridge by iCapital EP 02, Nouriel Roubini, Hudson Bay Capital – Transcript

Sonali Basak (00:00:00 -> 00:00:45)
Welcome to the latest episode of the Bridge by iCapital. I’m Sonali Basak. I am the Chief Investment Strategist at iCapital, and today I am joined by Nouriel Roubini, who I’m proud to say was a professor of mine back at NYU Stern. But more importantly, he is at Hudson Bay, where he is Senior Economic Strategist. Uh, you know, Nouriel, thank you for joining us here today because it’s a very complex macro, but this is exactly what you specialize on. And, but I also want to point out that while so many people used to know you for being Dr. Doom, you have since become Dr. Boom. And what does this mean at the end of the day? You see a brighter future for the country and for the economy at large. But why, why would we get there after all the choppiness we’ve seen in the last six months?

Nouriel Roubini (00:00:45 -> 00:01:42)
Yes. First of all, great being with you today. And, uh, let’s note that, uh, the views I express are on my own. Um, I become much more optimistic, um, for the medium long-term because I believe that the, not just AI, but the variety of other technologies of the future are really the most important innovations in human history. This is bigger than the invention of fire, agriculture or printing press, or the first industrial revolutions, steam engine, electricity, railroads…. second industrial revolution, first digital revolution. And while everybody is obsessed today about, uh, AI, Gen AI is only one of a dozen of different, different vertical industries that are all affected by AI, but they’re different. So, you have AI, you have semiconductors, you have robotic automation and human robots, you have biomedical research, you have fusion energy, you have quantum, you have, uh, space exploration, exploitation, GreenTech, FinTech, AgTech, new material science. So basically

Sonali Basak (00:01:42 -> 00:01:44)
So basically

Nouriel:
Defense Tech

Sonali:
you’re saying it’s way beyond AI.

Nouriel Roubini (00:01:44 -> 00:02:41)
I mean, these are all separate vertical industries. They’re all affected by AI, and there’s like a Cambrian explosion of innovation. That’s why while there, of course, headwinds to growth last year was a tariff for migration restriction. This year there were, with Iran, if this is short-term noise, that there’s some impact of reducing growth and causing higher inflation short-term, both when you have tariffs or whether you have migration restriction, or of course, what’s happened with oil shock. But the story is one of a secular boom of a positive aggregate supply shock because of this innovation that over time is going to increase potential growth in us and reduce inflation while the other policies are more stagflationary in the short run, reduce growth and cause higher inflation. But over the medium to long-term, I think that the secular boom story is a very, very important one. And the two countries that are leaders in the innovation of the cloud of the future are US and China. Everybody else is coming right after so

Sonali Basak (00:02:41 -> 00:03:03)
we’ll talk more about China for sure. But when it comes to AI in particular, there’s been so much talk about AI fueling the next productivity boom, leading to disinflation, but we just haven’t seen it yet realistically speaking. Do you have a sense of what kind of timeframe or what the tipping point would be such that we would actually start to see that materialize in the broader economy?

Nouriel Roubini (00:03:04 -> 00:04:28)
I think there are already signs that you’re seeing some increase in, uh, potential growth. Uh, first of all, after the Global Financial Crisis until, um, uh, 2020 average productivity growth was only 1%. Since 2020, in spite of the dip, uh, during COVID, uh, productivity has doubled to over 2%. So, you have that type of evidence that’s happening in the macroeconomic data. And also, when you look at the micro level in of real revenues of S&P 500 firms, and since the launch of ChatGPT, the XXX went up by average of 15%. And so more than 5% per year, among, of course, tech firms more like 20%. So, there’s lots of evidence actually the increase in productivity is occurring already. Now, I think the potential growth is estimated, but the Fed to be only 1.8%, uh, is actually already today higher. I do expect that actually by the end of this decade, US potential growth is going to be 4%. Now, when I tell economists are going to be four, going from two to four, they think I’m really extremely too optimistic. But when you speak to technologists and I say it’ll be 4%, they say, you’re still Dr. Doom, it’s going to be better than 4%. And I think that there’ll be an explosion of growth and acceleration decade after decade because of technology. And we’re already seeing it in some of the data.

Sonali Basak (00:04:28 -> 00:04:36)
So, what keeps us from getting into a more dystopian future? There are a lot of people who are very worried about AI and the job market. What do you tell them?

Nouriel Roubini (00:04:37 -> 00:05:53)
Well, there are some of the side effects of AI in long-term. The big question is, uh, there’ll be an increasing in product growth. What’s going to be happening to labor demand and employment? I think that actually in the short run, AI leads to an increase in the demand for labor because you have to build all the data centers, and you have all the workers that needed to do that. And all the collateral sectors, there are thousands of new AI startups. Each one of them hires a few people. The successful ones are going to hire thousand and thousands of people. So, the demand for labor initially is going to increase. And then slowly over time, over the long term, of course, as we have productivity growth, and most of the work is going to be done by the machines and robot, there’ll be a drop in labor demand. Now, when that occurs, we can try to retrain and skill the workers, but many jobs are going to be gone for good. the long-term solution is going to be some version of, uh, universal basic income. We’ll have to tax the winners redistribute to those who are left behind to make sure that as the economic pie grows 4% and 6, I think that by 2050 we have AGI and SAI could be even a 10% growth, but then you’ll have very high unemployment rate. But the economic pie grows so fast, they can redistribute for those were winners to those who are left behind. And that’s what’s going to happen de facto.

Sonali Basak (00:05:53 -> 00:06:10)
Yeah, because you look at even the last couple of years, right?

Nouriel:
Yes

Sonali:
You looked at GDP growth, but then you looked at a labor market that kind of stalled out, right?

Nouriel:
Yeah.

Sonali:
And so, is, is this a new normal actually, that we can see an economy that’s growing, but actually human labor’s kind of left behind in that growth?

Nouriel Roubini (00:06:11 -> 00:07:03)
I think that part of the explanation of why we’ve had, uh, weak, um, job creation in the last year has more to do with labor supply rather than labor demand. We have effectively closed the border. There are some degrees of deportation, and therefore there’s been a shrinkage in the labor supply. And luckily in spite of that, uh, growth has been robust because AI technology future, increasing productivity so we are having this gap between GDP growth that is still robust, and weak, uh, employment. But the weak employment, in my view, with exceptional maybe some of the high-tech firms that are trying to shed workers, for the time being, it doesn’t, it’s not the signal that labor demand is weak, is a signal that, uh, labor supply is weaker and that’s why the unemployment rate has barely budged. If there’d been a significant fall in labor demand you would’ve seen a significant increase in the unemployment rate, then you’re not seeing it.

Sonali Basak (00:07:03 -> 00:07:25)
Right. I’m going to have, take the other side of the argument here. It’s hard for me to imagine a world where there’s significant destruction in the labor force when the Dallas Fed is estimating that the job growth rate is going to be zero to negative, given that you have so many people rolling off of the workforce and you have so many people who are lost from the workforce because of immigration alone.

Nouriel Roubini (00:07:26 -> 00:09:04)
Yes. You know, as long as the labor supply, because there is demographic aging, because we’re restricting, uh, migration because we’re deporting people, uh, the supply of labor is going to shrink and job creation is going to be very low. But in spite of this low, um, how to say creation of jobs, we’ll have still strong economic growth because we’ll have these productivity growth coming from the technologies of the future but at some point, down the line, I think that labor demand is going to fall because at some point, more and more of the work, both manual and uh, cognitive, more blue collar and white collar is going to be done by the AI, by the robots, by the machine. And then we’re going to have a significant increase in permanent technological unemployment. And that’s where we need to have, uh, some version of universal basic income, by the way, people say is mission impossible, but we’re already today in the US in a form of mean tested, uh, universal basic income. You know, I live in New York City, my marginal tax rate between Mamdani it could be 57. I pay real estate taxes. I pay sales taxes. So, it’s quite a progressive system of taxation of income that redistributes income to those who are left behind. Social security, Medicare, Medicaid, unemployment benefit, food stamps, disability benefits and so on. So, we already are in a mean tested UBI system, it’s not as if we have to create it from scratch. So, if and when the acceleration of growth is going to lead to a sharp fall in labor demand, then we already have a system that is going to be allowing people to be supported and not to be left behind.

Sonali Basak (00:09:05 -> 00:09:13)
Right. Um, it’s hard not to jump right into the conversation about the fiscal situation in the US and how it could be that the only direction for taxes is higher.

Nouriel Roubini (00:09:14 -> 00:11:11)
Probably that’s the case we’re running. Uh, 6% of GDP budget deficit, uh, marginal taxation of labor is already quite high, even of capital. I’m slightly more optimistic about the fiscal situation because I believe that, uh, when the CBO does these estimates that the public debt strategy is going to go well above a hundred percent and explode, they’re assuming that, uh, potential growth is only 1.8%. If you do a scenario analysis where growth is only 50 basis points higher, 2.3% rather than 1.8, the public debt GDP rise for 15 years and then stabilizes, supposed growth is 2.5% or three. And I believe that by the end of the decade could be as high as 4. But even with 3, the debt ratio rises and then stabilize and then starts to fall. So actually, the reason why 10-year treasury yields are still quite low, closer to 4% plus as opposed to 5, is that uh, if you’re looking at potential growth of the US, the fiscal situation of US is actually more sustainable than other countries where potential growth is much lower, say European, Eurozone potential is only 1%. So, people are worried about the US uh, twin fiscal and current deficit, and we should be worried about them. The assumption is potential growth is lower. With higher potential growth given AI, of course, uh, you know, the trajectory becomes more sustainable. Now one caveat is that, uh, when growth is high, we’re going to have more revenue. We tend to spend it all and waste this fiscal dividend coming from growth. That’s one risk. Two is that if and when we have to create, uh, universal basic income, there are two ways of, uh, financing it. One is by taxing enough the winners. So that is self-funded, but there could be a tendency of not raising taxes for those who are the winners. And then you do fiscal deficits and therefore the fiscal condition, even with higher growth, can become worse over the long term.

Sonali Basak (00:11:12 -> 00:11:55)
I’m glad we are getting into the fiscal. There’s more I want to cover on the markets, but on the fiscal, you and your former colleague Steven Myron, wrote a paper that addressed what you both called, uh, activist Treasury Issuance.

Nouriel:
Yeah.

Sonali:
You know, um, it really got to the heart of a dynamic that we’re living with still today. This idea that the treasury really has to rely on short-term financing, that we are rolling bills essentially, and that it’s been very hard for the US to issue at the longer end of the curve. What stops this dynamic? Realistically speaking, at what point do we get to the point where, um, we could be more proactive as a country and bring our borrowing costs down? Because as it stands today, borrowing costs are higher than the defense budget.

Nouriel Roubini (00:11:56 -> 00:13:06)
You are right. For now, there is not, uh, as much, uh, market discipline on debt and deficit dynamics and what has happened is that the long hand of the yield curve has been contained in terms of bond yields for a while because we’re doing quantitative easing, and we’re buying the long-term bonds, keeping a lid on long-term bond yields. And when we started quantitative tightening, what happened was, um, what, uh, Steve and I called the activist treasury policy, that the Treasury decided less of the long-term coupons and more of the short-term debt is we’re preventing long rates from going much higher. And actually while, um, um, Bessent and his administration initially criticized what generally had was doing, they’ve doubled down on it because they have continued first the same policy. They’ve said that they could actually issue only short short-term debt rather than any coupons, and they’ve even said they could even do debt buybacks. It’s like tripling down on this activist Treasury policy. So, uh, and by the way, even if there was a Fed treasury accord, the way Kevin Warsh suggesting to try to say the Fed focused would,

Sonali Basak (00:13:06 -> 00:13:07)
Which we’ve seen in history before

Nouriel Roubini (00:13:08 -> 00:14:03)
Yeah, we’ve seen it before. And he is saying, let’s do the same thing. The Fed should be only issuing short, doing open market operation using short-term bills, not to do any quantitative easing and tightening and let the fiscal policy and public debt management to deal with the long-term bonds of the country. But if you do run very large budget deficits, and if you have this new accord to separate monetary from fiscal policy, then the Fed may not be doing quantitative easing. But if you’re issuing a lot of debt, then long yields are going higher. And then Treasurer is going to do backdoor quantitative easing the way they’ve done with these activist Treasury policies. So, you can say, I’m going to divide monetary and fiscal policy by having an accord, but that might force the Treasury to actually become even more manipulating the long end of the yield curve by doing backdoor quantitative easing.

Sonali:
I want to,

Nouriel:
if you don’t deal with the fiscal issue, eventually

Sonali Basak (00:14:03 -> 00:14:05)
yeah, you’re going to be stuck this issue almost no matter what.

Nouriel Roubini (00:14:05 -> 00:14:25)
Yeah so, the Fed wants to have monetary dominance say, if they’re fiscal deficit, I’m not going to monetize them. But the reality is that you might have a fiscal dominance, a situation which if the deficits are too high, you have de facto monetizing them – either because the central bank is monetizing them or because the Treasury manipulates the issues of the debt.

Sonali Basak (00:14:25 -> 00:14:50)
So, I’m going to slow us down here because I think this is a very important dynamic.

Nouriel:
Mm-hmm .

Sonali:
It’s one that a question that we get a lot on the road with financial advisors. What does it mean? What does it mean for the Treasury Department to be in conflict with the Federal Reserve? Why in plain English is it the case that when you see the Fed, um, easing the way that it has been, it’s fighting with the initiatives of the Treasury?

Nouriel Roubini (00:15:06-> 00:16:17)
Well, when there are large fiscal deficits, uh, there is a debate on whether there is, um, monetary dominance or fiscal dominance. What does that mean? [15:15] You have a large budget deficit and if you don’t monetize them, then bond yields go much higher, then can crowd out economic growth, the risk premium goes higher. Uh, and therefore if the central bank is weak, it might monetize them; print money and wipe out with higher inflation. The real value of long duration fixed income. That’s the story of fiscal dominance that effectively, if you have large deficit the Central Bank has no option but monetizing them, that eventually causes uh, inflation. The other view is no; the Central Bank is truly independent. There’s monetary dominance, it’s going to tell fiscal authority – if you have very large budget deficits, uh, I’m not going to monetize them. But if that happens, the deficit remain large, then you have really significantly higher bond yields that can lead, actually eventually went to an unsustainable situation. So, there is this game of chicken between the monetary and the fiscal authority. The monetary want to impose credibility and say, I’m not going to monetize; monetary dominance. The fiscal say, sorry, I’m running these deficits. And by the way, what’s happening right now is that the monetary authority say, I’m not going to monetize them. And now the Treasury’s saying, if you don’t monetize them, I’m going to do backdoor QE, through activist treasury issues and manipulating the composition of public debt. So, it’s a game of chicken. [16:32]

Sonali Basak: [16:32]
It’s, it’s amazing and it’s something that I think a lot of people have their ha uh, hard time wrapping their heads around. And I think this is going to become very into focus very soon.

Nouriel Roubini (00:16:27 -> 00:16:36)
Not just in US, it’s going to to be coming in focus in Europe and all over the world.

Sonali:
Japan?

Nouriel:
Japan, in UK, in France, in Italy.

Sonali:
Yeah.

Nouriel:
And all over, yeah.

Sonali Basak (00:16:36 -> 00:17:16)
But in the US what’s interesting was I thought Kevin Warsh put this well during his Senate confirmation hearing something along the lines of how um, you know, if you keep printing money you’ll get inflation basically, right? And so now we’re in this place where we have kept printing money, but when we look at the Fed’s own balance sheet, we have to remember right, that the reason we got here was because of crisis. The reason we got to such a big balance sheet is because the Fed had had to step into support the economy multiple times. And so how can we be so sure that the administration will be successful, that the new Fed could be successful in shrinking the balance sheet when it’s really only ever gotten this big in the first place because it’s, had, needed to step in and then has had a hard time stepping out.

Nouriel Roubini (00:17:17 -> 00:21:05)
Yes, he’s against, uh, quantitative easing and he wants to do quantitative tightening and continue it much more than the Fed has done so far, but I think that he’s going to face, uh, a reality check. The reality check one could be that if there is some reason why there is a recession severe enough, like during the global financial crisis went to zero policy rates. And even with zero policy rates still there was not enough demand that’s why we started to buy long-term bonds, QE, to push down the bond yields on the long end, not just on the short end. And we ended up with quantitative easing. Uh, so you could be in a situation with a recession severe enough that you have to do it and if you go to zero and you don’t do it, then you have to go to negative policy rates. That’s what they’ve done in Europe and Japan. But having negative policy rate could be as bad or worse than QE. Secondly, uh, the current system of the Fed is one of ample reserves that are much more excess reserves that are needed by the banks. But the impact on the monetary growth and on credit growth is sterilized because now the Fed pays interest rate on these excess reserves. If these excess reserves were not paid interest rate, then the banks are going to go and lend it out, there’ll be credit boom and there’ll be an inflationary rise of the economy. And we need the buffer of, uh, ample reserves because if you reduce them, like it happened last fall, the Fed stopped QE, QT because there was a shock in, uh, in the repo market and the money market. And when that happens, then the Fed was forced to resume QE to the back door. So, he wants to continue quantitative tightening, but there is a problem of necessary liquidity in the system that leads to shocks to the financial system. And if you reduce the balance sheet too much and then there’s a liquidity shock, then you’ll be forced to do more quantitative easing. That’s why I think the majority of the FMC is in favor of these ample reserve system rather than shrinking it. And I think it’s going to have a hard time to convince the committee to move away. The other argument he makes that I think is a bit flawed that says, if we reduce the balance sheet, that’s a tightening of financial condition that allows it to reduce the policy rate. But the Fed has been reducing the balance sheet by 25% and in spite of that, there was no tightening of financial condition. Why? Because they’re paying interest rate on those reserves. So, the impact of those excess reserves is sterilized. So, if you reduce the balance sheet, you don’t have a tightening of financial condition and therefore that’s not a justification for reducing the policy rate. So, I think the framework that he has is one that is going to be very challenged. And by the way, in the Fed system, the Chair is not a, how to say, an absolute king or monarch. He is a primus inter pares. Latin means first among equals. He has to convince the committee to go along for example, with rate cuts. And today with the shock coming from the war, the rise in oil prices, in inflation, the delayed effect of tariff, there is still plenty of potential upside to inflation. And therefore, the majority of the FMC says, given uncertainties, let’s wait and see. They don’t want to raise rates for now because they don’t know whether the shock is going to be permanent to inflation, inflation expectation. But there is not a good argument for cutting rates. You know, even at the last FMC, uh, the only one who voted in favor of rate cuts was uh, uh, uh, Steve Miran, uh, Chris Waller, and Bowman voted in favor of them. They said, given the war

Sonali Basak
Change of tune.

Nouriel:
The change of tune and now actually Chris Waller says there may be even a state of the world where he may have to raise rates.

Sonali Basak (00:21:05 -> 00:21:06)
Right, right. For this is all the January meeting

Nouriel Roubini (00:21:06 -> 00:21:30)
So, so I think that Warsh, if he wants really to change completely the framework of the Fed, you’ll have to convince the committee. He’s just one vote. Of course, he’s the Chair, or will be the Chair. But I think that most likely the Fed will have to stay on hold, wait and see. And then depending on the economy and growth inflation decide whether we should be stay on hold or cut rates and when to do so.

Sonali Basak (00:21:30 -> 00:21:58)
You know, when you think about 2025 that, you know, this was another year where you had doubled digit percentage growth in the S&P 500, it was almost like nothing was really going wrong. Growth was still really strong, but you still had, to your point, a degree of Fed intervention. To me that doesn’t sound like that we’re still living with a Treasury market that’s not on a little bit of life support. It seems like there’s a Treasury market that is more fragile than meets the eye. What do you think?

Nouriel Roubini (00:21:58 -> 00:22:24)
It does. Uh, there’ve been bouts of shocks that have led to bond yields actually going higher. Oftentimes there is a risk of, uh, bond yields go lower as people get out of Treasury but when you have a negative aggregate supply shock, like the oil shock that came from the war, you have both equity going down, but bond yields go higher because there is a worry there’ll be an increase in actual and inflation expectation.

Sonali Basak (00:22:24 -> 00:22:25)
Yeah, you get a nightmare for the 60/40

Nouriel Roubini (00:22:25 -> 00:22:36)
Exactly. You have a balance bear, you lose money on equity, you lose money on bonds that is exactly what has happened. That’s one of the challenges there we’re, we’re facing right now.

Sonali Basak (00:22:36 -> 00:23:05)
So, let’s talk about the geopolitical conflict.

Nouriel:
Yeah.

Sonali:
Because now we have geopolitical conflict that’s broken out in multiple parts of the world. But what happened in Iran in early 2026, a lot of people are thinking about, um, the near-term effects. But I really want your opinion on the longer-term effects here. Because the world changed, didn’t it? The Middle East changed. China’s relationships have changed; India’s relationships have changed. How do you guide investors on how to look around the corner on what the world looks like as we come out of this?

Nouriel Roubini (00:23:05 -> 00:26:36)
Well, on one side, every investor has to think about, um, the geopolitical risk and what are the implication for growth inflation and the markets. Uh, you know, when there was the war between Russia, Ukraine start initially was a spike in, uh, commodity prices, but it faded away so, the economic impact was mostly on Russia and Ukraine. When there was a war between Israel and Hamas, again the impact was, um, modest because they had the regional impact but was not global. When there was the 12-day war between Israel and Iran, um, in June of, uh, 2025, last year, the market didn’t overreact because they expected that, uh, the war will be short and then there’ll be a resumption of, uh, essentially the flow of oil. Uh, this year has been different because, uh, compared to June of last year, the war led, uh, the Iranians to actually exercise the option of trying to block the Strait of Hormuz. Therefore, the spike in oil prices has been more significant. So, I think that in the past, with few exceptions, most geopolitical risk had not had a, a permanent, uh, economic and market impact. But there’s an exception. The exception I’m old enough is to remember the seventies when there was the Yom Kippur war within Israel, Arab states, oil embargo tripling of oil prices, uh, very ugly recession, stagflation recession, inflation in ‘74, ‘75. And then you had the Islamic Iranian revolution in ‘79 and other major oil shock and a double deep recession in ‘80, ‘82. Now the world today is different from the seventies for many reasons. And this shock might be more temporary than the seventies and we might be closer to what happened last year with the 12-day war. And that’s why central banks have to wait and see. Central banks made a mistake after COVID believing that uh, the shock to supply was uh, transitory and then was massive monitoring, fiscal easing, we ended up with almost double-digit inflation. This time around is the same if the shock is temporary and then eventually have a ceasefire, inflation is going to pick up for a few months, but there’s not going to be a permanent increase in inflation or inflation expectation. So, you wait and see and maybe eventually you can even cut rates. But suppose, and we don’t know because there is a state of the world where there is further escalation, and oil prices could feed more and then fertilizer prices and then food and helium and industrial metals. Then if you ease, now you risk repeating the mistake you did after COVID. That’s why with exception of one person FMC, everybody say, let’s wait and see.

Sonali Basak (00:26:36 -> 00:26:56)
You know, the, this particular shock, to your point, you know, I heard from an earnings call, the name of the company escapes me, but the point stands that it could take 90 to 120 days to even see the impact of the higher oil prices into corporate margins, um, into supply chains in a meaningful way. Is this all an easy way of saying it’s going to be a messy year,

Nouriel Roubini (00:26:57 -> 00:29:23)
It’ll be a bumpy year, But as long as there is not a severe escalation, then uh, I think the baseline is one in which this year compared to what was the expectation at the beginning of the year, growth is going to be lower and inflation’s going to be higher. Growth will be more low and inflation higher in parts of the world where you have both the price and quantity impact. This Asia, that 20% of oil that comes from uh, the Gulf is going mostly to Asia. In Europe, is more of a price effect rather than quantity because apart from some LNG, they have a negative terms of trade because they have net importers of oil. But even in country like the US that are net energy exporter, US, Brazil, others, you have some slow down on growth and some increasing inflation. Inflation because of energy prices and slowdown in growth because those were consumer of energy, households and firms that are using a lot of energy are going to cut back somehow in spending, while those who are winners that are the oil big oil producers are not going to increase production investment a lot if the shock is only temporary. So even in the US you’ll have a slowdown of growth, and you’ll have some pickup in inflation. Now, in a baseline, we don’t have a global recession this year. We have just a slow down our growth, some pickup in inflation and then maybe if the conflict stabilizes by the second late part of the year, there’s some strengthening of growth. You know, the year actually for the US started very strongly before the war. You had the monetizing of the Fed, you had the financial condition very easy with uh, equity markets and all-time, high bond yields, low credit spreads low and the weakening of the dollar happening. Competitiveness, you had good business confidence, you had, uh, still fiscal stimulus in the pipeline because most of the spending cut are going to occur, they decided, after the midterm election. So, the momentum actually coming also from AI, the tailwinds from AI were supporting growth. So, this year was supposed to be an acceleration of growth and a reduction of inflation because of the base effects, uh, of the tariff fading out. And now we have this bump.

Sonali Basak (00:29:23 -> 00:30:16)
Yeah, so, you know, before I let you go, I, I don’t know if this is what was supposed to be taken away from the class I once took with you at NYU around that time you had recently or fairly recently written Crisis Economics. Since then, you’ve written Mega Threats. But one thing I loved about Crisis Economics and learning from you is understanding the role of the dollar around the world. How much other countries, companies borrowed in dollars, how much, uh, the dollar was really the currency of choice. At the end of the day for the global investor, we’ve seen a really meaningful decline in the dollar. We have seen a lift up in the course of the early parts of the war. I’ve been trying to watch the correlation between oil and the dollar actually also given how much it’s been benefiting as us as an oil exporter in the us what’s the role of the dollar in the future? Right? Has some of that been eroded in a meaningful way? Should people be worried about that at in any fashion?

Nouriel Roubini (00:30:17 -> 00:34:32)
Well, to answer this question, you have to think about the bigger picture. And of course, um, last year with the tariff, the migration restriction, large twin deficits attack independence of the Fed, attacks of law at home and abroad, people became very negative about the US. They said, uh, tariff will lead to US and global recession, American exceptionalism is over, the debt is unsustainable, the stock market is going to crash. The exorbitant privilege of the US dollars, the global reserve currency is going to…

Sonali:
None of that played out.

Nouriel:
…collapse. And and the dollar’s going to go in freefall, and it hasn’t happened. And why isn’t it happened? I think, uh, two reasons in my view, one: market discipline constrained the bad policies yet to chicken out because otherwise we would’ve had a recession. So instead of 30% tariff, now they fall into 14. So, there was a slowdown of growth, but not a recession. But we had these massive tailwinds coming from uh, AI. Now why do I believe that American exceptionally is not over? If you had American exceptionalism with average growth for the last 20 years was 2%. S&P gave your returns of 12 including dividends and Nasdaq 16%. Suppose the US growth is now higher. I believe it’s going to go to 4 but suppose I’m too optimistic and it’s not going to be 4 by 2030, suppose going to be only 3%, still an increase from 2 to 3; 50%. So, if you’ve had American exceptionalism with 2% growth, even with 3% growth, let alone three and a half, four, there’ll be even more. So of course, there’ll be winners and losers. But on average the US should be doing well because with 3% growth, average return to US equity should be higher. And therefore, the idea that the stock market and the bubble is false, the idea that the US debt is unsustainable is false. And the idea that the US dollar is going to lose its role as a global reserve currency is also false because money and capital moves when there is economic opportunity. If US is going to have an acceleration of growth, even if we have a very large trade and current account deficit, the reason why we have it is because there is an investment boom. More CapEx and we don’t have an an optimistic savings. So, from a macro point of view, the current account is savings minus investment. So, if you have an investment, boom, equity capital influence in US; FDI, private equity, venture, whatever is going to feed the financing of that investment boom and therefore, the dollar is a reserve currency is going to remain actually key. People may not like the dollar because we’re weaponizing it, but what’s the alternative? And two, uh, if they have this capital inflows, the dollar is not going to go into a freefall. So, all this doom and gloom about the debt, about the stock market, about American exceptionalism, about the US dollar and exorbitant figures I think is wrong because while there are policies that are potentially stagflationary, in my view, there’re second order. Last year I said tech trump tariff. Why I said that, because the effect of tech is to increase potential growth from 2% to 4 at 200 basis points upside. And all these stagflationary policies starting with tech, uh, tariff have only a secondary effect- maybe 50 basis points negative. So, it’s a ratio of 200 to 50: 4 to1. So, tech trumps tariff and therefore tariff, immigration restriction, rule of law, geopolitical noise, war with Iran, oil shock, all these things matter in the short run. But if you believe that technology is the driver of higher potential growth and US is still going to be the key of innovation. Some says it doesn’t matter who is in White House, the dynamism of the US private sector is such that we’re going to win in many of the industries of the future. Therefore, everything that is more stagflationary is secondary and is noise. And the big picture view of the medium term is going to be one of secular growth. Now, in the short run, noise can correct market, can affect growth, can affect inflation. If you take the medium-term view actually should be optimistic by the US economy. But US growth exceptionally the dollar, exorbitant privilege, the sustainability of the debt and of the stock market.

Sonali Basak (00:34:33 -> 00:35:33)
And to, and to, you know, honestly to make your point, we’ve seen some of the biggest fundraisers ever for the AI companies in the US in the first three months of 2026. So, it’s certainly playing out all of that investment. But okay, so one of the most bullish things I think I’ve heard you and your colleagues say before is this idea you and your colleague Jason Cutler at Hudson Bay had this prediction, if you will, that multiples can start to expand at the end of 2025. This was a pretty amazing prediction in my view because, um, you had these multiples, 23 times forward earnings on the S&P 500 that many people would’ve thought were pretty exorbitant. We have corrected a bit this year and uh, to a place where people are more comfortable. But it seems like you and your colleagues see a, a rerating, a rerating of American capital markets such that companies can be, or the index at large can be trading at that higher valuation. Do you still believe that to be the case and why?

Nouriel Roubini (00:35:34 -> 00:37:26)
The main point is, um, if US potential growth goes from two to two and a half to three, three and a half and four, even if it doesn’t go to four. But less than that, you have really much higher earnings growth, and you’re going to be in a state of the world of what we call optimism as opposed to pessimism, where the risk premium are much lower and therefore, you’ll have more earnings growth, and you have also potential for multiple expansion. And therefore, over time, uh, the stock market is not overvalued, and returns are going to be even higher, uh, than the past.
Again, the short run, tariff, immigration restriction, noise on geopolitics, war with Iran, there’s bumps on the road. But think of it this way, uh, after the cease fire started, the stock market in two weeks retraced the losses that it had during the war. And in spite of all being close to a hundred, the stock market in US reached new all-time highs. Point number one, same thing happened in Taiwan, in Korea and other parts of the world that are very much tech driven. That means to me two things: means one, that the market believes rightly or not so, that the war shock is going to be temporary, but most importantly believes that regardless of the war, these massive tailwinds, coming from the technology of the future are first order effects. And therefore, that’s what’s driving because the market was going higher, then you got the war and then the the correction. But now that the war may be phased out, the fundamentals that is higher growth, higher innovation, higher productivity, secular boom, capital influence in the US are going to remain and those can sustain higher valuation both through multiples and higher earnings growth.

Sonali Basak (00:37:26 -> 00:37:28)
So, in short, you are bullish

Nouriel Roubini (00:37:28 -> 00:38:02)
Overall, I am, but of course in the short run, correction have occurred and can occur. So, if you take the medium-term view, I think you can be really bullish on the US and even on the global economy. Short term, there’s lots of noise, there’s economic noise, political noise, geopolitical noise, trade noise, deglobalization noise, climate change, lots of stuff that are reducing growth and causing higher inflation. In my view, over time they become second order compared to a secular force of technology that increases growth and reduces inflation and is bullish for the economy.

Sonali Basak (00:38:02 -> 00:38:13)
Thank you so much for joining us here today. That has been Nouriel Rubini. He is the senior economic strategist at Hudson Bay Capital. And I’m Sonali Basak. You have been listening to the Bridge by iCapital.

END