(Bloomberg) – Economist Nouriel Roubini, who correctly predicted the 2008 financial crisis, sees a “long and ugly” recession in the United States and the world at the end of 2022 that could last all of 2023 and a sharp correction in the S&P 500. .
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“Even in a plain vanilla recession, the S&P 500 can fall 30%,” Roubini, chairman and chief executive officer of Roubini Macro Associates, said in an interview Monday. In a “really hard landing,” he hopes, a 40% drop could occur.
Roubini said his prescience of the housing bubble crash from 2007 to 2008 earned him the nickname Dr. Doom added, that those expecting a shallow US recession should be looking at the large debt ratios of corporations and governments. As rates and debt servicing costs rise, “many zombie institutions, zombie families, corporations, 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 decline in stocks, said it will be “mission impossible” for the Federal Reserve to reach a 2% inflation rate without a hard landing. He expects a rate hike of 75 basis points at the current meeting and 50 basis points in both November and December. As a result, the fed funds rate would be between 4% and 4.25% by the end of the year.
However, due to continued inflation, especially in wages and in the service sector, the Fed will “probably have no choice” but to raise it more, he said, with funds rates heading towards 5%. In addition, negative supply shocks coming from the pandemic, conflict between Russia and Ukraine and China’s zero tolerance Covid policy will lead to higher costs and lower economic growth. This will make the Fed’s current “growth recession” goal — a prolonged period of lackluster growth and rising unemployment to prevent inflation — difficult.
When the world is going into recession, Roubini doesn’t expect fiscal stimulus remedies because over-indebted governments are “running out of fiscal bullets”. High inflation would also mean “if you do fiscal stimulus, you’re overheating aggregate demand.”
As a result, Roubini sees stagnation as in the 1970s and massive debt distress as in the global financial crisis.
“It’s not going to be a short and shallow recession, it’s going to be tough, long and ugly,” he said.
Roubini expects the United States to survive the entire global recession in 2023, depending on the severity of the supply shocks and financial distress. During the crisis in 2008, 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, will be “withering away”.
In Roubini’s new book, “Megahreats,” he identifies 11 medium-term negative supply shocks that reduce potential growth by increasing the cost of production. These include de-globalization and protectionism, relocating manufacturing from China and Asia to Europe and the US, aging populations in advanced economies and emerging markets, migration restrictions, decoupling between the US and China, climate change global 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 be light on equities and have more cash.” While cash is eroded by inflation, its nominal value remains at zero, “while equities 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 such as TIPS.
(Roubini’s earlier debt warnings are added in the fourth paragraph)
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