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.
Roubini, chairman and chief executive officer of Roubini Macro Associates said, “It would be a real hard landing.”
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 we’ll see who’s swimming naked.”
Roubini 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 50 basis points in both November and December. That would lead the Fed funds rate by year’s 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 China’s zero Covid tolerance policy will bring higher costs and lower economic growth. This will make the Fed’s current “growth recession” goal — a protracted period of meager growth and rising unemployment to stem inflation — difficult.
Once the world is in recession, Roubini doesn’t 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, you’re 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. “It’s not going to be a short and shallow recession, it’s 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 Roubini’s 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. “It’s only a matter of time until we’re going to get the next nasty pandemic,” he said.
His advice for investors: “You have to be light on equities and have more cash.”