Investors who are hoping the worst of the stock and bond market declines are over may see equities decline 50% further, warns economist Nouriel Roubini.
In a Marketwatch editorial, Roubini covers six key questions about the global economy that point to a “stagflationary debt crisis” combining the worst of the 1970s and the Great Recession—and “confound central banks and fiscal authorities.”
The first, and most important, question is whether or not inflation is temporary, as the U.S. Federal Reserve and other central banks have argued, or is going to persist, says Roubini, nicknamed "Dr. Doom" for accurately predicting the U.S. housing and market crash of 2008.
Increasingly, it appears that inflation and an inevitable recession are going to nag at the U.S. and other major economies for the foreseeable future, Roubini says.
Stocks will be directly impacted, causing the stock market to have “much more room to fall before it bottoms out.”
The debate over whether the COVID fallout, or monetary and fiscal policies, are to blame for inflation is Roubini’s second question. While both are implicated, he says, inflation was more the cause of “stagflationary negative aggregate supply shocks” than it was the error of central banks’ ways.
Thus, Roubini, chairman of Roubini Macro Associates LLC, says inflation was primarily the result of “the initial COVID-19 lockdowns, supply-chain bottlenecks, a reduced labor supply, the impact of Russia’s war in Ukraine on commodity prices, and China’s ‘zero-COVID’ policy.”
Third: can the Fed orchestrate a soft landing (or, a euphemism for sidestepping a recession)?
Roubini notes how Fed Chair Jerome Powell and other officials have been touting a “soft landing”—but have recently been quick to change their tune.
“Several prominent Wall Street institutions have now decided that a recession is their baseline scenario (the most likely outcome if all other variables are held constant),” Roubini explains. “In both the United States and Europe, forward-looking indicators of economic activity and business and consumer confidence are heading sharply south.”
Inflation vs. Recession
That leads to Roubini’s fourth question: Will the Fed and other central banks reverse course with their interest rate hikes and quantitative tightening, once a recession appears on the horizon?
While market analysts believe central banks will remain steadfast in their actions to tamp down inflation, Roubini thinks “they will eventually wimp out and accept higher inflation—followed by stagflation—once a hard landing becomes imminent because they will be worried about the damage of a recession and a debt trap.”
Fifth question: “Now that a hard landing is becoming a baseline…will the coming recession be mild or short-lived…or more severe and characterized by deep financial distress?”
In short, Roubini says that central banks are out of monetary and fiscal ammunition. Plus, public debts are “unsustainable.”
With all of the world’s central banks tightening in unison, it is as if they are creating a “synchronized global recession,” Roubini warns.
The hard reality for investors and those saving for retirement, says Roubini, who also teaches at New York University’s Stern School of Business, is that multiple bubbles are bursting and real wealth is being wiped out.
50% Decline in Equities
“That brings us to the final question,” Roubini sums up. “Will equity markets rebound from the current bear market or will they plunge even lower? Most likely they will plunge lower….
“Things will get much worse before they get better.”
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