Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a “long and ugly” recession in the US and globally at the end of 2022 that could continue throughout 2023 and a sharp correction in the S&P 500 index.
“Even in a mild economic recession, the S&P 500 could drop by 30 percent,” Roubini, Chairman and CEO of Roubini Macro Associates, said in an interview Monday. In a “real hard landing” he expects, it could drop as much as 40 percent.
Roubini, whose knowledge of the housing bubble collapse from 2007 to 2008 earned him the nickname Dr. Doom, said those anticipating a shallow recession in the United States should look at the large debt ratios of businesses and governments. With rising interest rates and increasing debt servicing costs, he said, “many zombie enterprises, zombie families, corporations, banks, shadow banks, and zombie countries will die.” “So we’ll see who’s swimming naked.”
Roubini, who has warned through both rising and falling markets that global debt levels will drive equities lower, said achieving 2 per cent inflation without a hard landing would be “mission impossible” for the Fed. It expects a rate hike of 75 basis points at the current meeting and 50 basis points in both November and December. That would lead the federal funds rate by the end of the year to between 4 per cent and 4.25 per cent.
Still, persistent inflation, especially in wages and the service sector, will mean the Fed “may have no choice” but to raise more, he said, with money rates rising nearly 5 percent. Moreover, negative supply shocks from the pandemic, the Russian-Ukrainian conflict and China’s zero-tolerance policy on Covid will lead to higher costs and lower economic growth. This will make the Fed’s current “stagnation growth” target – an extended period of sluggish growth and rising unemployment to stem inflation – difficult.
Once the world enters a recession, Roubini does not anticipate fiscal stimulus treatments because governments with large debts are “running out of fiscal lead”. High inflation could also mean that “if you do fiscal stimulus, you are heating up aggregate demand.”
As a result, Roubini sees stagflation as in the 1970s and massive debt distress as in the global financial crisis.
“The recession will not be short-lived and shallow, it will be harsh and long and ugly,” he said.
Roubini expects the recession in the United States and the world to continue into 2023, depending on how severe the supply shocks and financial distress are. During the 2008 crisis, households and banks took the hardest hits. He said companies and shadow banks, such as hedge funds, private equity and trust funds this time, would “collapse internally.”
In Roubini’s new book, “Great Threats,” he identifies 11 negative medium-term supply shocks that reduce potential growth by increasing the cost of production. These factors include deglobalization and protectionism, the relocation of manufacturing from China and Asia to Europe and the United States, population aging in advanced economies and emerging markets, immigration restrictions, the decoupling of the United States and China, global climate change and recurrent pandemics.
“It is only a matter of time until we investigate the next evil epidemic,” he said.
His advice to investors: “You need to be light on stocks and have more cash.” Although the liquidity is eroded by inflation, its face value remains at zero, “while stocks and other assets can decline by 10 percent, 20 percent, 30 percent.” In fixed income, he recommends moving away from long-term bonds and adding anti-inflation protection from short-term Treasuries or inflation index bonds like TIPS.
(Except for the headline, this story has not been edited by the NDTV crew and is published from a syndicated feed.)