Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a “long and bad” recession in the US and globally by the end of 2022 that could last through 2023 and sharp correction in the S&P 500.
“Even in a simple vanilla recession, the S&P 500 could drop 30 percent,” Roubini, president and chief executive officer of Roubini Macro Associates, said in an interview Monday. In “a really hard landing,” which he expects, it could drop by 40%.
Roubini, whose premise was on the 2007 to 2008 housing bubble burst that earned him the nickname Dr. Doom, said that those expecting a shallow US recession should consider large debt ratios. corporations and governments. As interest rates rise and repayment costs rise, “many zombie organizations, zombie households, companies, banks, shadow banks, and zombie nations will 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 that achieving a 2% inflation rate without a hard landing would be “mission impossible”. for the Federal Reserve. He is expected to raise interest rates by 75 basis points at the current meeting and 50 basis points in both November and December. That will put the Fed’s deposit rate later this year at between 4%. to 4.25%.
Persistent inflation, however, particularly in wages and the service sector, will mean the Fed “will likely have no choice but to raise rates more,” he said, with deposit rates in place. On top of that, negative supply shocks from the pandemic, Russia-Ukraine conflict and China’s Covid zero tolerance policy will result in higher costs and lower economic growth This would make the Fed’s current “growth recession” target – a prolonged period of meager growth and rising unemployment to stave off inflation – challenging.
Once the world is in recession, Roubini doesn’t expect fiscal stimulus as governments with too much debt are “running out of finance”. High inflation also means “if you do fiscal stimulus, you’re overheating aggregate demand.”
As a result, Roubini saw inflation stagnating as in the 1970s and debt piled up as during the global financial crisis.
“It will not be a short and shallow recession, but a severe, long and ugly recession,” he said.
Roubini expects the US and global recession to last through 2023, depending on the severity of the supply shocks and financial distress. During the 2008 crisis, households and banks were hardest hit. This time, he said shadow corporations and banks, such as hedge funds, private equity and credit unions, “will grow”
In Roubini’s new book, “Megathreats,” he identifies 11 negative medium-term supply shocks that reduce potential growth due to increased production costs. These include denuclearization and protectionism, relocation of production from China and Asia to Europe and the US, aging populations in advanced and emerging market economies, limited migration regimes, separation between the US and China, global climate change, and recurrent pandemics.
“It’s only a matter of time until we have the next bad pandemic,” he said.
His advice to investors: “You have to take stocks lightly and have more cash.” Although cash is eroded by inflation, its nominal value remains at zero, “while stocks and other assets can fall 10%, 20%, 30%.” For fixed income, he recommends staying away from long-term bonds and adding inflation protection from short-term treasuries or inflation-indexed bonds like TIPS.
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