Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a “long and ugly” recession in the US and global in late 2022 that could last through 2023 and a sharp correction in the S&P 500.
“Even in a plain vanilla recession, the S&P 500 could drop 30 percent,” Roubini, chairman and chief executive officer of Macro Associates, said in an interview Monday. In “a real hard landing,” which he expects, it could drop by 40 percent.
Roubini, whose preoccupation with the housing bubble crash of 2007 to 2008 earned him the nickname Dr. Doom, said those expecting a shallow U.S. recession should look at the large debt ratios of corporations and governments. As rates rise and debt servicing costs rise, “many zombie institutions, zombie families, corporates, banks, shadow banks and zombie countries are dying,” he said. “So we’ll see who swims naked.”
Roubini, who has warned through bull and bear markets that global debt levels will drag down stocks, said achieving an inflation rate of 2 percent without a hard landing was going to be “mission impossible” for the Federal Reserve. He expects a rate hike of 75 basis points at the current meeting and 50 basis points in both November and December. That would push the fed funds rate to between 4 percent and 4.25 percent by the end of the year.
But continued inflation, particularly in wages and the services sector, will mean the Fed “probably has no choice” but to raise the funds rate further, he said, heading toward 5 percent. On top of that, negative supply shocks from the pandemic, the Russia-Ukraine conflict and China’s zero-tolerance Covid policy will bring higher costs and lower economic growth. That would make the Fed’s current “growth recession” goal — a prolonged period of low growth and rising unemployment to curb inflation — difficult.
Once the world falls into recession, Roubini doesn’t expect a fiscal stimulus remedy because governments with excessive debt are “running out of fiscal bullets.” High inflation means that “if you stimulate revenue, you’re overheating aggregate demand.”
As a result, Roubini sees a stagnation similar to the 1970s and a massive debt crisis similar to the global financial crisis.
“It’s not going to be a short and shallow recession, it’s going to be serious, long and ugly,” he said.
Roubini expects the U.S. and global recession to last through 2023, depending on how severe the supply shocks and financial slowdown become. During the 2008 crisis, households and banks were hit the hardest. During this time, he said that corporations and shadow banks, such as hedge funds, private equity and credit funds, are “going to explode.”
In Roubini’s new book, “Megathreats,” he identifies 11 medium-term negative supply shocks that reduce potential growth by raising production costs. These include deglobalization and protectionism, the shift of manufacturing from China and Asia to Europe and the United States, aging populations in advanced economies and emerging markets, immigration restrictions, the rift between the United States and China, global climate change, and recurring pandemics.
“It’s just a matter of time until we’re going to have the next nasty epidemic,” he said.
His advice to investors: “You have to be light on equities and have more cash.” Although cash is eroded by inflation, its nominal value remains at zero, “while equities and other assets may decline 10 percent, 20 percent, 30 percent.” 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.
(Except for the headline, this story was not edited by NDTV staff and appeared on a syndicated feed.)