‘Dr. Doom’ foresees potential 40pc drop in S&P 500

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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.

‘Severe, long and ugly’

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.

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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”

‘Be light on equities’

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 detribalization and protectionism, relocating of manufacturing from China and Asia to Europe and the US, ageing 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.”

Though cash is eroded by inflation, its nominal value stays at zero, “while equities and other assets can fall by 10 per cent, 20 per cent, 30 per cent”.

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.

Bloomberg