Roubini: The Long, Ugly Recession

Nouriel Roubini became a household name in the finance and economics arena over 14 years ago for his warnings about the global financial crisis of 2008. Many of his concerns manifested in a perfect storm of excessive lending, exorbitant leverage and with inter-connectedness of the financial system— which all came together in the historic financial crisis of 2008 and 2009. The NYU Professor of Economics who was dubbed ‘Dr. Doom’ by the media (although he prefers to be called Dr Realist) sees the makings of the next crisis that will emerge soon. The factors for a major crisis: Slowing economic growth, ill-timed fiscal stimulus, trade frictions which could turn into trade wars, domestic politics and frothy asset prices. In his latest book, Mega Threats he warns of a series of crisis coming together – debt to climate change.

Source: https://www.livemint.com

Persistent inflation will mean the Fed will “probably have no choice" but to hike more than 4-4.25% from the present 3-3.25%. The Fed funds rate is going toward 5% in the coming year. 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 meagre growth and rising unemployment to stem inflation as difficult. With a hard landing, equities (S&P 500) may fall by 40%.

As a result, Roubini sees stagflation of the 1970s with massive debt distress. It’s not going to be a short and shallow recession but severe, long and ugly.

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 corporations, and shadow banks, such as hedge funds, private equity and credit funds, “are going to implode".

His advice for investors includes: 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%, 20%, 30%." 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. Assets such as properties or commodities (including gold) will be part of the portfolio to weather this catastrophe.

References:

Roubini: This will trigger the next crisis, Caleb Silver, Investopedia, 11 Sept 2018

Economist Nouriel Roubini, who predicted 2008 crisis, warns of “long, ugly” recession, Bloomberg, 23 Sept 2022