LAS VEGAS (TheStreet) -- At the Skybridge Alternative Investment (SALT) Conference, Nouriel Roubini -- whose bearish economic views have earned him the nickname 'Dr. Doom' was asked, "just how pessimistic are you?" - generating a light chuckle from the crowd. But while Roubini acknowledged the rally in risk assets over the past few years, he stuck to his pessimistic view, saying that while the market has rallied, there is a notable gap between the markets and the real economy--between Wall Street and Main Street. Ultimately, he said, much of the rally is the product of work from central banks, something that signifies a potential bubble.
Austan Goolsbee, former chairman of the President's Council of Economic advisers and professor of economics at the University of Chicago, presented a different view on the panel and when I spoke with him one-on-one. To Goolsbee, the market rally reflects improving fundamentals. "After all, companies have been able to do more with less, ensuring their survival and then high productivity," he said. In other words, as fundamentals have improved at individual companies, profits are up. And thus, with valuations that are not stretched, he disagrees with Roubini that the markets reflect a bubble.
That said, Goolsbee clarified that Wall Street and Main Street do tell different stories in one significant way: employment. Much of the improvement in fundamentals at companies has come despite, or in some cases, because of lack of employment growth. Importantly, for a sustained rally, we need to see the employment picture get rosier. Importantly, Goolsbee noted that the majority of net job creation through the 1990s was from small, new firms, while the existing 'big guys' were net job losers. We have cited this analysis as well behind the scenes on Mad Money, looking at the Dow stocks, where a good majority are working with many fewer employees than pre-recession.
Of course, though, real job creation could be the impetus for the next leg of the rally. Goolsbee cited two areas where we should see jobs growth: (1) Construction--where over the course of the recovery thus far we were just filling in vacancies (surplus supply) in housing, and (2) Small business, where financing has remained troubled thus far. Remember, in construction, we are starting to get very bullish data on both pricing and starts. And while small business growth remains anemic, efforts are in place to aid in financing initiatives.