Economist Nouriel Roubini, known as “Doctor Doom” after predicting the 2008 financial crisis, has released his latest prediction. He now foresees a “long and ugly” recession starting in late 2022 and lasting throughout 2023, spreading from the US to the entire world. “Even in a simple recession, the S&P 500 can drop 30%,” the chairman and CEO of Roubini Macro Associates said in an interview. In “a real hard landing,” as he expects, the largest US index could fall as much as 40%.
Roubini believes that those expecting a shallow US recession should be looking at the huge corporate and government debt ratios. As rates rise and the cost of servicing debt grows, “a lot of zombie institutions, zombie households, corporations, banks, shadow banks and zombie countries are going to go under,” he said. “And then we’ll see who’s swimming naked.”
The economist has been warning for years that high levels of global debt will drag stocks down as soon as a crisis hits. And now he thinks achieving a 2% inflation rate without a hard landing will be “mission impossible” for the Fed. In this case, he matches market expectations for a 75 basis point hike at the current meeting and 50 basis points in both November and December, which would take rates to 4% by the end of the year.
However, persistent inflation, especially in wages and in the service sector, will mean the Fed will “probably have no choice” but to raise them further, he said, to as close as 5%. In addition, negative shocks to supply chains from the pandemic, Russia’s invasion of Ukraine, and China’s ‘covid-zero’ policy will result in higher costs and lower economic growth. This, a prolonged period of poor growth and rising unemployment to curb inflation.
Once the world enters a recession, Roubini does not expect big fiscal stimulus, as governments with too much debt are “running out of bullets”. High inflation would also mean that “if someone applies a fiscal stimulus, he would be overheating aggregate demand.”
As a result, Roubini sees stagflation as in the 1970s and . “It’s not going to be a short and shallow recession, it’s going to be severe, long and ugly,” he said. During the 2008 crisis, households and banks were the most affected. This time, indebted companies and shadow banks, such as hedge funds, private equity and credit funds, “are going to implode.”
The big risks
In his new book, “Megathreats” (Megathreats), the economist identifies 11 negative supply shocks in the medium term that will reduce potential growth by increasing production costs. These include deglobalization and protectionism, relocation of industry from Asia to the West, aging populations in advanced economies and emerging markets, migration restrictions, US-China decoupling, global climate change, and pandemics. . “It’s only a matter of time until we have the next pandemic,” he said.
His advice to investors: “Be light on stocks and have more cash.” Although cash is eroded by inflation, its nominal value remains stable, “while stocks and other assets can fall 10%, 20%, 30%”. In fixed income, he recommends staying away from long-duration bonds and adding inflation protection from short-term Treasuries or index-linked bonds.
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