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%,” Roubini, chairman and CEO of Roubini Macro Associates, said in an interview Monday. In “a real hard landing”, which he expects, it could drop 40%.
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 high debt ratios of corporations and governments. As interest rates rise and the cost of debt service rises, “many zombie institutions, zombie households, corporations, banks, shadow banks and zombie countries 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 push inventories down, said hitting 2% inflation without a hard landing will 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 mean that the Fed fund rate will be between 4% and 4.25% by the end of the year.
However, ongoing inflation, especially in the wage and services sectors, will mean the Fed “probably has no choice” but to raise more, he said, with interest rates approaching 5%. In addition, negative supply shocks from the pandemic, the Russia-Ukraine conflict 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 “get through their budget bullets”. High inflation would also mean that “if you take fiscal stimulus, you overheat aggregate demand.”
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%, 20%, 30%.” 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.
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