Fed Exit Strategy Will Be ''Treacherous''...

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As the Federal Reserve's Open Market Committee begins a two-day meeting, economist Nouriel Roubini and political scientist Ian Bremmer warned that the Fed's monetary easing exit strategy would be "treacherous" and would lead to financial instability.

"We know how the movie ended, and we may be poised for a sequel. The weak real economy and job market, together with high debt ratios, suggest the need to exit monetary stimulus slowly. But a slow exit risks creating a credit and asset bubble as large as the previous one, if not larger," they wrote in a report published in Institutional Investor magazine.

Roubini, better known as "Dr. Doom" for his pessimistic economic forecasts, and Bremmer, president of global political risk research and consulting Eurasia Group warned that the real underlying risks to the global economy were being ignored.

In the report, they warned that market complacency among politicians, investors and central banks was leading us into a "New Abnormal" era - a "period in which every market assumption must be questioned and the wise investor is prepared to be surprised."

"Unfortunately, the sense of crisis has lifted on all fronts, encouraging some to see in the changed landscape a sustainable 'new normal', a period of painfully slow but predictable economic progress," they said.

"Some believe that U.S. lawmakers can now afford to postpone tough choices, the Europeans will muddle through, China can smoothly rebalance its economy, and fires in the Middle East can simply burn themselves out. These are dangerous illusions," the authors said.

"The convulsions of the past five years arose from structural faults – financial, economic and political – that have not been fully resolved," despite the exuberance in financial markets.
There were more reasons why political and market turbulence had "plenty of room to run," the authors said, telling investors to expect more political and policy gridlock, market volatility and even another crisis as governments' monetary policies reached a crossroad.

Global markets had focused on the wrong risk triggers for the last five years, Bremmer told CNBC late on Monday."For the last five years our focus has been on the financial crisis - on the fiscal cliff, will the euro zone break down, will Japan crumble under its debt? And the reality is that those were not serious structural risks, those were much more stable places," Bremmer told CNBC's "Closing Bell."

"We have to start paying more attention to the real risks because they're growing every day, both the macro pieces that are truly in play and we've not seen anything like this in generations with global powers having very different perspectives on the market place and politics," he added.
The authors added that there were more, new worries posed by emerging markets as growth slowed there and governments were slow to implement reforms.

Bremmer warned that the relationship between China and the U.S. would be key.
"Whether we're talking about cyber, whether we're talking about market access, trade secrets of trade craft, the relationship between China and the U.S. is very difficult to manage and it's not been given priority by either the Chinese or U.S.," he said.

"A pragmatic, mutually profitable geopolitical partnership forged by the U.S. and China is our best hope if the New Abnormal is to end with a smooth landing," Bremmer and Roubini concluded.

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