By Lewis Braham

Economist Nouriel Roubini is best known for predicting the 2008-09 financial crisis. For this -- and his frequently bearish outlook -- he earned the nickname "Dr. Doom." Both he and his partner in his new ETF venture would prefer he not be called that.

"I think we're more realists than doomsayers," says Reza Bundy, CEO of Atlas Capital Team. Indeed, Roubini now calls himself "Dr. Realist."

The exchange-traded fund, Atlas America (ticker: USAF), launched in November, with Roubini as one of three co-managers. A "moderate allocation" fund by Morningstar's definition, it has an 0.86% expense ratio and clearly bears Roubini's imprint. While many allocation funds have a traditional 60% stock/40% bond portfolio, Atlas holds mainly Treasuries, gold, real estate investment trusts, agricultural commodities, and other alternative assets.

Roubini doesn't think the classic 60/40 portfolio will work anymore. "60/40 is based on the assumption that there is a correlation that is negative between the price of equities and the price of bonds," he says. Historically, if stocks went down, bonds went up, and vice versa, smoothing out returns. "That negative correlation assumes that inflation is low and stable," he says.

But since the pandemic, the stock/bond relationship has changed. "The era of great moderation, when growth was stable and inflation was 2%, is over," Roubini says. He expects inflation to be 5% going forward. Among the causes are what he calls "supply-side shocks" that include deglobalization, protectionism, climate change, aging demographics in the U.S., high debt, reshoring of manufacturing, and a greater likelihood of pandemics. President Trump's threatened tariffs and restrictive immigration policies could make things worse.

The Federal Reserve normally raises interest rates to combat inflation. Since bond prices move inversely with rates, Roubini thinks the 10-year Treasury note could fall as much as 30% and 30-year Treasuries even more if inflation hits his 5% target. (The longer a bond's duration, the more sensitive it is to rates.) Stocks also fall in this scenario: The 2022 inflationary market, when both stocks and bonds lost double digits, was a preview. "In our scenario, that defensive asset [bonds] is going to lose a lot of money, at a time when higher bond yields lead to a correction in equities," he says.

Two assets to combat inflation are gold and commodities. The fund recently had 16.8% of its portfolio in gold bullion ETFs and 7.5% in the Invesco Agriculture Commodity Strategy ETF $(PDBA)$. "We chose agriculture primarily because of the impact of climate change and supply-chain disruptions around agriculture," Bundy says. Why not oil? Roubini thinks food security is a bigger problem as the U.S. already produces more oil and gas than it consumes. "Energy also tends to be more volatile," he adds.

The team employs a nuanced approach with REITs. "We have [REIT property] data literally at the ZIP Code level, and we know exactly for each REIT in North America if there is a risk of rising sea levels, hurricanes, flooding, wildfires, and crop failures," Roubini says. There are already parts of Florida, Louisiana, and California where homeowners can't get insurance because of flood and fire risk, and he believes that climate change will ultimately force mass migrations to other states. The ZIP Code data should help analyze the risks of REITs with widespread property portfolios. One of the fund's largest REIT holdings, Realty Income, owns some 15,400 properties in 49 states. REITs are currently 12.9% of the fund's portfolio.

Yet the lion's share of the portfolio, some 50%, is in Treasuries. Roubini points out they're mainly short-term ones that won't be hurt much by rising rates. The ETF also hedges long-term Treasuries by holding the Direxion Daily 20+ Year Treasury Bear 3X ETF $(TMV)$, which rises when 20-year Treasuries fall.

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January 22, 2025 01:30 ET (06:30 GMT)

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