Incoming Recession Isn't Plain Vanilla; US Stocks Could Tank as Much as 40%, Says Nouriel Roubini

We are fed up; Iranian women are burning hijabs, cutting their hair

Economist Nouriel Roubini has said the incoming US recession will be “long and ugly”, adding that it will cause a sharp fall in S&P 500 stock market index.

Even in a plain vanilla recession, the S&P 500 can fall by 30 percent, Roubini, adding that in a real hard landing, the fall could be as big as 40 percent. Roubini, the chairman and chief executive officer of Roubini Macro Associates, is known as Dr. Doom as he had correctly predicted the 2008 financial crisis.

Nouriel Roubini
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Repeated Warning

It is not the first time that Roubini has made grim predictions for the economy and the stock markets in the recent months. In July Roubini had warned that the economy was heading to a recession. He made it clear earlier this year that the global economy was headed for a severe crisis. He said that unprecedented debt levels and rising inflation has created a ‘stagflationary debt crisis’.

In June, Roubini said that a recession will set in by the end of the year. “We’re getting very close,” he said, adding that consumer confidence was dipping even as sectors like retail sales, manufacturing and housing were slowing down.

In his latest interview with Bloomberg News, Roubini said the belief among analysts that the recession will be a shallow one is wrong. He says they should look at the large debt ratios. With the Federal Reserve expected to hike rates again, the problems will worsen for corporations and governments. “…many zombie institutions, zombie households, corporates, banks, shadow banks and zombie countries are going to die,” he said.

Roubini says he expects the Fed to raise the rates by 75 basis points in this week’s meeting. This will be followed by 50 basis point rate hikes in November and December as well. This high rates scenario is complicated by the negative supply shocks due to the pandemic, China’s zero Covid policy and the Ukraine war, Roubini points out. All this, combined with the Fed policy, will result in a prolonged era of low growth and climbing unemployment.

This will result in a stagflation, as the governments around the world will not be able to offer generous stimulus packages as they are grappling with a recession.

Stagflationary Debt Crisis

Roubini, who had famously predicted the great financial crisis of 2008-09, had made it clear earlier this year that the global economy was headed for severe crisis. He says that unprecedented debt levels and rising inflation has created a ‘stagflationary debt crisis’.

“In the 1970s, we had stagflation, but no massive debt crises, because debt levels were low. After 2008, we had a debt crisis, followed by low inflation or deflation, because the credit crunch had generated a negative demand shock … Today, we face supply shocks in a context of much higher debt levels, implying that we are heading for a combination of 1970s-style stagflation and 2008-style debt crises .. that is, a stagflationary debt crisis,” Roubini said.

Nominal GDP of US states 2021
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Stagflation happens when slow economic growth is combined with high unemployment. In other words, it is economic stagnation worsened by rising prices. According to Investoopedia, stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.

Roubini has explained what is meant by stagflationary debt crisis. He is convinced that the next recession will be marked by a severe stagflationary debt crisis. Private and public debt levels are much higher today as a share of global GDP. The debt levels have risen from 200 percent in 1999 to 350 percent currently. The pandemic in partial caused the surge in the global debt levels. “Under these conditions, rapid normalization of monetary policy and rising interest rates will drive highly leveraged zombie households, companies, financial institutions, and governments into bankruptcy and default,” Roubini says.

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