Nouriel Roubini: The S&P 500 is expected to see a significant correction towards the end of 2022, according to economist Nouriel Roubini, who correctly forecast the 2008 financial crisis. This recession is expected to be “long and ugly” and might extend the entire year of 2023.
The S&P 500 can fall by 30% even in a standard recession, according to Roubini, chairman and CEO of Roubini Macro Associates, in an interview on Monday. It may drop 40% in “a truly harsh landing,” as he anticipates.
According to Roubini, who acquired the moniker Dr. Doom for foreseeing the housing bubble fall in 2007 and 2008, people anticipating a brief US recession should pay attention to the high debt ratios of businesses and governments. He predicted that “many zombie institutions, zombie households, corporates, banks, shadow banks, and zombie countries” would perish as interest rates rose and debt servicing expenses rose. “So we’ll check to see who’s swimming naked.”
According to Roubini, the Federal Reserve will find it “mission impossible” to achieve a 2% inflation rate without a harsh landing. Roubini has warned during bull and downturn markets that high levels of global debt will cause stock prices to fall. He anticipates a rate increase of 75 basis points at the upcoming meeting and 50 basis points in November and December. The Fed funds rate would consequently range between 4% and 4.25 percent at the end of the year.
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He said that the Fed “probably won’t have much option” but to raise interest rates further as a result of persistent inflation, which will especially affect wages and the service industry, with funds rates heading around 5%. Additionally, negative supply shocks from the pandemic, the conflict in Russia and Ukraine, and China’s zero-tolerance stance on COVID will increase costs and slow economic growth. This will make it impossible for the Fed to achieve its present “growth recession” goal, which is to maintain low growth and rising unemployment in order to contain inflation.
As governments with excessive debt are “running out of fiscal bullets,” Roubini doesn’t foresee fiscal stimulation cures once the world is in a recession. If there is high inflation, “you’re overheating aggregate demand if you do fiscal stimulus,” according to the economists.
Roubini predicts huge debt distress similar to the global financial crisis and stagflation similar to that of the 1970s as a result.
It won’t be a brief and shallow recession; rather, it will be harsh, protracted, and nasty, he predicted.
Depending on how severe the supply shocks and financial hardship would be, Roubini anticipates that the US and worldwide recessions will span the entire year of 2023. The hardest damaged by the 2008 financial crisis were banks and households. He predicted that businesses and shadow banks like hedge funds, private equity, and credit firms “are going to crumble” this time.
Roubini lists 11 medium-term supply shocks that are detrimental to growth potential by raising the cost of manufacturing
In his most recent book, “Megathreats,” Roubini lists 11 medium-term supply shocks that are detrimental to growth potential by raising the cost of manufacturing. Deglobalization and protectionism, the shifting of manufacturing from Asia and China to Europe and the US, the ageing of the population in developed and developing countries, restrictions on immigration, the uncoupling of the US and China, global climate change, and recurrent pandemics are a few of these.
It won’t be long until the next deadly pandemic strikes, he predicted.
“You have to go light on equities and have more cash,” he advised investors. Cash’s nominal value declines with inflation but remains zero, “while equities and other assets can fall by 10%, 20%, or 30%.” He advises avoiding long-duration bonds in fixed income and providing inflation protection through short-term treasuries or inflation index bonds like TIPS.
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