Nouriel Roubini, the economist known as Dr. Doom for predicting the 2008 financial crisis, has turned his forecasting skills on the current economy and foresees a “long and ugly” recession beginning at the end of this year and lasting well into next year, reports an article in Bloomberg. Roubini also expects the S&P 500 to undergo a sharp correction in which the index will fall up to 40%.
Roubini points to the high debt ratios carried by corporations and governments around the world as evidence to back up his prediction. Rising rates and debt servicing costs will expose “who’s swimming naked,” he told Bloomberg. Debt levels are something that Roubini has warned about before, even during bull markets, as he believes they will drag down stocks. And given the persistence of inflation, the Fed will “have no choice” but to continue raising rates, eliminating any hope for a soft landing. Rates could go as high as 5%, and the Fed’s current goal of sending the economy into a lengthy period of slower growth and higher unemployment will be difficult to achieve, especially as the war in Ukraine drags on and China continues its strict Covid policies.
Governments who are carrying too much debt won’t be able to implement fiscal stimulus solutions to ease a recession, resulting in stagflation and a debt crisis that will make a recession “severe, long and ugly.” The recession will span the globe and last all of 2023, Roubini expects, but rather than households and banks being hit the hardest as they were in 2008, corporations and “shadow banks” like hedge funds, private equity and credit funds, will take the most beating. Roubini advises investors go lighter on equities and weight more toward cash; even with inflation chipping away at cash, its nominal value remains zero, as opposed to equities and similar assets which can plummet as shocks hit the market. As a hedge against inflation, Roubini suggests adding short-term treasuries or bonds such as TIPS to your portfolio, the article concludes.
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