Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a “long and ugly” recession at the end of 2022 in the US and globally that could last until 2023 and a sharp correction in the S&P 500 .
“Even in a plain vanilla recession, the S&P 500 could fall as much as 30 percent,” Roubini, president and CEO of Roubini Macro Associates, said in an interview Monday. In “a real hard landing,” which he expects, it could drop 40 percent.
Roubini, whose prudence over the housing bubble crash from 2007 to 2008 earned him the nickname Dr. Doom, said those expecting a shallow US recession should look at the large debt ratios of corporations and governments. As rates rise and the cost of paying off debt rises, “many zombie institutions, zombie houses, corporates, banks, shadow banks and zombie countries are going to die,” he said. “So we’ll see who’s swimming naked.”
Roubini, who has warned through bull and bear markets that global debt levels will drag stocks down, said achieving a 2 percent inflation rate without a hard landing is going to be “mission impossible” for the Federal Reserve. He expects an increase of 75 basis points in the current meeting and 50 basis points in both November and December. This will push the fed funds rate to between 4 per cent and 4.25 per cent by the end of the year.
However, persistent inflation, especially in the wage and services sector, would mean the Fed “probably will have no choice”, he said, to raise more, he said, with funds rates going toward 5 percent. have been On top of that, negative supply shocks from the pandemic, the Russia-Ukraine conflict and China’s zero COVID tolerance policy will bring higher costs and lower economic growth. This would make the Fed’s current “growth slowdown” target — a long period of under-growth and rising unemployment — difficult to contain inflation.
Once the world is in recession, Roubini doesn’t expect fiscal stimulus measures because governments with too much debt are “running out of fiscal bullets.” Higher inflation would also mean that “if you do a fiscal stimulus, you are increasing aggregate demand.”
As a result, Roubini sees the massive debt crisis as a deadlock and the global financial crisis as in the 1970s.
“It’s not going to be a short and shallow recession, it’s going to be severe, long and ugly,” he said.
Roubini expects the US and global recession to last through 2023, depending on how severe the supply shocks and financial crisis are. During the 2008 crisis, households and banks took the hardest hit. This time around, he said that corporations, and shadow banks, such as hedge funds, private equity and credit funds, “are about to explode”.
In Roubini’s new book, “Megathreats,” he identifies 11 medium-term negative supply shocks that reduce potential growth by increasing the cost of production. These include globalization and protectionism, the shifting of manufacturing from China and Asia to Europe and the Americas, population aging in advanced economies and emerging markets, migration restrictions, disengagement between the US and China, global climate change and recurring pandemics.
“It’s only a matter of time until we’re going to get the next terrible pandemic,” he said.
His advice to investors: “You should be light on equities and have more cash.” Although cash is eroded by inflation, its face value remains at zero, “whereas equities and other assets may fall by 10 percent, 20 percent, 30 percent.” In fixed income, he recommends staying away from long-term bonds and adding inflation protection from inflation index bonds like short-term Treasuries or TIPS.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)