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He Predicted 2008 Financial Crash. Now, Warns Of Long, Ugly Recession

India September 23(IM): Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a long and ugly recession in the US and globally occurring at the end of 2022 that could last all of 2023 and a sharp correction in the S and P 500.

Even in a plain vanilla recession, the S and P 500 can fall by 30 per cent, said Roubini, chairman and chief executive officer of Roubini Macro Associates, in an interview Monday. In a real hard landing, which he expects, it could fall 40 per cent.

Roubini whose prescience on the housing bubble crash of 2007 to 2008 earned him the nickname Dr Doom, said that those expecting a shallow US recession should be looking at the large debt ratios of corporations and governments. As rates rise and debt servicing costs increase, many zombie institutions, zombie households, corporates, banks, shadow banks and zombie countries are going to die, he said. So well see whos swimming naked.

Roubini, who has warned through bull and bear markets that global debt levels will drag down stocks, said that achieving a 2 per cent inflation rate without a hard landing is going to be mission impossible for the Federal Reserve. He expects a 75 basis points rate hike at the current meeting and 50 basis points in both November and December. That would lead the Fed funds rate by years end to be between 4 per cent and 4.25 per cent.

However persistent inflation, especially in wages and the service sector, will mean the Fed will probably have no choice but to hike more, he said, with funds rates going toward 5 per cent. On top of that, negative supply shocks coming from the pandemic, Russia Ukraine conflict and Chinas zero Covid tolerance policy will bring higher costs and lower economic growth. This will make the Feds current growth recession goal a protracted period of meager growth and rising unemployment to stem inflation difficult.

Once the world is in recession, Roubini doesnt expect fiscal stimulus remedies as governments with too much debt are running out of fiscal bullets. High inflation would also mean that if you do fiscal stimulus, youre overheating the aggregate demand.

As a result, Roubini sees a stagflation like in the 1970s and massive debt distress as in the global financial crisis.

Its not going to be a short and shallow recession, its going to be severe, long and ugly, he said.

Roubini expects the US and global recession to last all of 2023, depending on how severe the supply shocks and financial distress will be. During the 2008 crisis, households and banks took the hardest hits. This time around, he said corporations, and shadow banks, such as hedge funds, private equity and credit funds, are going to implode

In Roubinis new book, Megathreats, he identifies 11 medium term negative supply shocks that reduce potential growth by increasing the cost of production. Those include deglobalization and protectionism, relocating of manufacturing from China and Asia to Europe and the US, aging of population in advanced economies and emerging markets, migration restrictions, decoupling between the US and China, global climate change and recurring pandemics.

Its only a matter of time until were going to get the next nasty pandemic, he said.

His advice for investors You have to be light on equities and have more cash. Though cash is eroded by inflation, its nominal value stays at zero, while equities and other assets can fall by 10 per cent, 20 per cent, 30 per cent. In fixed income, he recommends staying away from long duration bonds and adding inflation protection from short term treasuries or inflation index bonds like TIPS.

source : NDTV

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