Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a “long and ugly” recession in the US and globally that could last all through 2023 at the end of 2022 and a sharp correction in the S&P 500.
“Even in a vanilla recession, the S&P 500 could fall by 30 percent,” Roubini, chairman and CEO of Roubini Macro Associates, said in an interview on Monday. With ‘a real hard landing’, which he expects, it could fall by 40 percent.
Roubini, whose foresight to the housing bubble crash from 2007 to 2008 nicknamed him Dr. Doom said those anticipating a superficial recession in the US should look to the large corporate and government debt-to-GDP ratios. As interest rates rise and debt servicing costs rise, “many zombie institutions, zombie households, corporations, banks, shadow banks and zombie countries will die,” he said. “So we’ll see who’s swimming naked.”
Achieving two percent inflation without a hard landing will be a mission impossible for the Federal Reserve. Roubini expects a rate hike of 75 basis points at the current meeting and 50 basis points in both November and December. That would put the Fed’s interest rate between four percent and 4.25 percent by the end of the year.
However, ongoing inflation, especially in wages and services, will mean the Fed “probably has no choice” but to raise more, he said, with interest rates approaching five percent. In addition, negative supply shocks from the pandemic, the conflict between Russia and Ukraine and China’s zero-covid tolerance policy will mean higher costs and lower economic growth. This will make difficult the Fed’s current target for a “growth recession” – a prolonged period of meager growth and rising unemployment to contain inflation.
Once the world is in recession, Roubini doesn’t expect any fiscal stimulus remedies as over-indebted governments “run out of fiscal bullets”. High inflation would also mean that “if you take fiscal stimulus, you overheat aggregate demand”.
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As a result, Roubini sees stagflation like in the 1970s and a massive debt crisis like in the global financial crisis.
“It’s not going to be a short and shallow recession, it’s going to be a deep, long and ugly recession,” he said.
Roubini expects the recession in the US and the world to last through 2023, depending on how severe the supply shocks and financial problems will be. Households and banks were hit hardest during the 2008 crisis. This time, he said that companies and shadow banks, such as hedge funds, private equity and credit funds, will “implode”.
In Roubini’s new book, “Megathreats,” he identifies 11 negative medium-term supply shocks that reduce potential growth by increasing production costs. These include deglobalization and protectionism, relocation of production from China and Asia to Europe and the US, population aging in advanced economies and emerging markets, migration restrictions, US-China decoupling, global climate change and recurring pandemics. “It’s only a matter of time before we have the next nasty pandemic,” he said.
His advice to investors: “You need to be light on stocks and have more cash.” Although cash is being eroded by inflation, its face value remains at zero, “while stocks and other assets can fall by 10 percent, 20 percent, 30 percent.” With fixed income, he recommends staying away from long-term bonds and adding inflation protection through short-term government bonds or inflation-index bonds such as TIPS.