Kopi Time E091 - Dr Nouriel Roubini on MegaThreats

White House Council of Economic advisors. I remember vividly asking Nouriel one day if he had any favorite stock picks to which he replied, I don't know about individual stocks but I know that the overall market will be up in the long term. I want to ask him the question at the end of this podcast if he thinks the market will be

up in the long run again. But that's later. But think about that if you had invested $10,000 after that conversation with no real back in the summer of 98 you would have registered a cumulative return of over 400% by today which is an annualized return of well over 10%. Which I suppose would put that passive strategy to the top decile of any investment league table. Great advice way back then, even coming from dr Doom, Nouriel Roubini is Ceo of Roubini macro Associates LLC global

macro consulting firm in new york city. He is also chief economist for atlas Capital LP and co founder of Rosa and Roubini Associates, he served as a professor of economics at N. Y. U. Stern School of Business from 1995 to 2021 has already mentioned in the nineties late nineties. He worked at the Council of Economic advisers and later at the U. S. Treasury department and some of you may know that he has recently released a book mega threats, 10 dangerous trends

that imperil our future and how to survive them. Nouriel Roubini. Welcome to Covid time.

Oh about 3%. And our friends and I M. F are forecasting only a 50 basis point slowdown next year. Your take on that near term Muriel?

Um if you look at the data, I would say that the United Kingdom is already in a recession and actually stack elation as inflation is double digits. The eurozone is headed towards a recession with the latest economic indicators suggesting a significant slowdown of economic activity in the U. S. Is not yet into a

recession right now. But I do believe that we were gonna see also recession in the United States uh in us uh History in the last 60 years we have never had a situation where the inflation rate is above 5% and right now headline is 7.7 and where the unemployment rate is below 5% and it's currently 3.7 that when the Fed then starts hiking rates to bring back inflation to target, you never get a soft landing, you always get a hard landing.

So the issues only whether it's gonna be a real hard landing as opposed to a short and shallow recession. China is in a sharp slowdown and well technically it's not in a recession for china to grow this year, barely 2 to 3% is the equivalent of a recession. Uh I think that the easing of the covid restrictions gonna have only a limited impact on economic activity. Overall, I have to say stance of this new Regime is one of caring less about growth and about

political and geopolitical factors. We are still bashing the private sector that is still overhang of debt. There's still too much state capitalism. So I fear that China is going to be stuck into a 23% growth range for the next few years. That is a significant drug, not just for China but also Greysia and for global growth.

And so my baseline is one in which advanced economies enter an economic contraction, inflation peaks and starts to fall, but it's not gonna fall fast enough towards the target in part because there are still the lingering effects of the negative supply shocks. They agree at the level the lingering effects of covid, the lingering effects of the Russian invasion of Ukraine on commodity prices and the zero covid policy of china. It maybe it's going to be

phased out only gradually. And the impact on growth is gonna be only modest given the rest of the stance of chinese overall economic policies. So it's a bit of a hard landing for the global economy somehow more pessimistic than the I. M. F. Baseline. Right?

Um your view on asset markets around that hard landing scenario for 2023?

and dividends. Uh that is the long bond rate is rising and that leaves a correction in equity prices more so for long duration assets like growth and tech stocks, but then a yield going up in price, the price of the bond is falling and the yield went up so much that the price of bonds fell more than the price of, of equities in terms of the year ahead, I'm still bearish about global equities because I expect the hard landing for the global economy.

The markets have recently rallied. But in my view, this is gonna be a bear market rally like the one we saw in july and august. And the rally is based predicated on some combination of inflation dropping sharp enough, the softest landing of the world and then central banks being able to cut rates from the middle of next year on and so on.

I think the, that conventional wisdom is gonna prove incorrect, inflation is gonna be more sticky growth is going to be weaker than expected and how you get growth we can expect of inflation higher if there is persistent of negative aggregate supply shocks. So only in a real soft landing scenario from current levels, Stock prices should be going higher. Even if you had a short and shallow recession, the market has to correct downward another 10%. If it's a more severe recession it

can correct another 20% or more. So unless you have a strong view that is going to be a real soft landing. I think the downsides to us and global equities for fixed income, I think that the markets uh expect that the inflation is gonna pick Central bank's gonna ease and therefore uh the inversion of the yield curve is suggesting that uh you know, first rates will be higher

but then they're gonna drop. And uh and in that scenario probably long rates would fall as well next year as you fight inflation successfully and then expected inflation remains anchored. I'm more bearish. I'm of the view that the the great moderation is over and the greater stack inflationary and

that instability is upon us. I think that inflation is gonna remain high even if some of even if some of the short term supply constraints are phased out because as I describe in my book that at least 11 forces, they're more medium long term that are speculation ery that reduce potential growth, the increased cost of production And therefore they caused calculation.

And the other view in the book is that while central banks are talking hawkish now saying we're going to fight inflation at any cost in my view they will have to wimp out and blink. Uh Not only because there is fiscal dominance meaning in the game of chicken between fiscal and monetary authorities, the monetary will have to blink when the fiscal policies to lose. But there is a broader idea of a debt trap. That's a concept developed by the B. I. S. Economies.

There's so much private and public debt in the system, private and public debt has assured G. D. P. Has gone from about 100% of GDP in the seventies to

350 rising last year globally. 420 rising advanced economies that if central banks fight inflation, not only they cause an economic crash a severe recession given the amounts of debt but there is also a debt crush, crush in credit markets in bond markets and faced with an economic and a financial crash central banks will have to win power because there is this debt trap. So

and also see forces that are long term inflationary. Not only we have large fiscal deficits and debts today, but I see that the pressure are gonna be to spend much more with limited ability to raise taxes and if you have larger structural budget deficits either you finance them with bonds and that's going to crowd out growth with higher real rates or eventually that's demonetized and you know if you think about it where in a geopolitical depression today, so we'll have to spend

more on security in europe against the Russian there, whether you like it or not in Asia us, its allies are going to spend more China's gonna spend more. There is this cold war they may get holder and eventually even end up into a hot war. So security spending is going to be higher. We'll have then spent so much more to deal with. Climate change, will have to spend so much more to deal with the next pandemic. Either to prevent it or

if you don't do it. Exanta will spend a fortune like we did this time around to deal with the effects of it. We have also a i robotic automation machine learning that's gonna lead gradually over time to structural technological unemployment will have to support those left behind. Eventually even universal basic income that's going to be expensive.

And finally there is so much income and wealth inequality, so much social strife, so much of a backlash against liberal democracy with populist parties that seem right and left coming to power that either they come to power and they become physically loose or to prove random from coming to power establish the parties will have to spend more to deal with these consequences. Transfer more money to workers unemployed, partially employed left behind the minorities. You name it. So we have a war

against security issues. We have a war against climate change. We have a war against pandemic. We have a war against the consequences of ai we have a war against the income and wealth inequality. All that implies much more spending, limited ability to raise taxes structurally higher deficits and eventually they need to modernize them. You know, my friend Neil Ferguson recently wrote a piece saying when there are wars really hot wars, there are deficits and eventually you get

inflation because you monetize them. It's not only called the not wars there are these other wars we're gonna be fighting and they'll be all expensive. They're gonna all lead to deficits and eventually monetization in inflation. Right?

be alarmingly scary, but they're also disturbingly plausible. And I think you know, you just did a very very nice summary of the key issues that you mentioned your book. I want to talk about them in greater detail, but I just want to stay with the short term just a little longer if I may to follow ups to your prognosis in the short term one is in the stagflation.

I think in your book you use this phrase sticky stagflation material in the last few months around the global economic slowdown we have seen a substantial decline in energy and food prices. We will probably see rent prices begin to come down as high interest rates start denting the real estate market. So wouldn't you say at least in the near term this expected trajectory of inflation falling is also plausible.

supply shocks are gonna remain with us. I consider the fall in commodity prices as driven not by a significant increase in their supply, but rather by expectation of lower demand. Given that the baseline is one of a something of a hard landing

in the global economy. So those are a reflection of the weaker demand, not of easier supply condition and as I point out in the book, There are at least 11 forces that are medium long term, but they're all materializing even today that are speculation, very reduced growth, increased cost of production. We have the beginning of the globalization and protectionism and talk about, you know,

secure trade rather than free trade. We have a re shoring of manufacturing from Lok because china to higher cost europe or US or even french shoring and even friends sharing is not going to

be totally cheap but cheaper certainly than reassuring. We have aging of populations both in advanced economies and some key emerging markets like china like south Korea like Russia young people produce and they tend to save elder people don't produce and tend to spend and the safe that's inflationary in the past, the migration from south to north from poor to rich kept a lead on wage growth in advanced economies but now restrictions. The migration are becoming quite draconian

in europe UK eurozone and europe. But even in the United States, you know, the migration policies of biden are not really different from those of say donald trump. We have this decoupling between us and china is becoming increasing by the day trading goods and services, movement of capital FBI labor technology. That information that that circulation erI we have the impacts of global climate change

even before the Russian invasion of Ukraine. Food prices were rising sharply because there's desertification lack of water last summer with droughts from Pakistan to India to western europe sub Saharan africa. Most of the US in the west central America that's that's circulation eri. And on energy uh we're bashing right beso a big oil producer of fossil fuels there under investing into new capacity as they should. But we're not ramping up the production of renewable fast enough.

So there is a structural supply lack given even normal demands. That's inflationary. That's why uh Brent was already at 100 even before the Russian invasion of Ukraine. And the fall right now in energy prices driven by expectation of a recession. We have this broader geopolitical depression is not just Russia, Ukraine is the U. S. And Israel against Iran is US. Uh And China over Taiwan is the noises that north Korea does and so on

and so on. That's gonna lead to decoupling fragmentation, balkanization divisions of the global uh economy and global supply chains. We have cyber warfare. This exploration eri we have this backlash against a liberal democracy because of inequality is leading to fiscal policy. Pro labor, pro union

for unemployed produce left behind. And finally the U. S. And its allies are weaponizing the U. S. Dollar as a tool of foreign policy that may eventually to a weakening of the dollar is gonna be inflationary for the U. S. Uh As I say, the strategic rivals of US diversify away from dollar assets plus you need the for the global trading system to work properly. And officially you need something that's like an oil in the system and they're all in the system

that Greece is the system is the US dollar. If you throw some in the wheels of the global trading system by having all these weapons US dollar eventually, that creates a greater cost of transactions globally, whether trading goods and services, capital, labor, technology, data information and that it's also stuck inflationary. So all these forces, some of them are slow motion, but they are all actually happening right now and they're all reducing potential good

and increasing cost of production. And I think those are forces are going to make the inflation rate more sticky than the consensus predicts right now.

1970s. I'm assuming that over time because of all these pressures, the average inflation rates say in advanced economies from a target of two could be actual 56. Now it doesn't sound like a lot But if average inflation were to be 6% then long rates have to capture expected inflation of six plus some real rates and that real rates are gonna be higher because once inflation is high and volatile the inflation risk cream have to be higher. So you get six for expected inflation plus another 2% real.

You get 10 year Treasury 8% and then mortgage there is gonna be spread over that. There'll be double digits and then high grade and high yield that's gonna be spread of that will be double digits in nominal terms and they're gonna be significantly higher in real terms. Considering also the amount of debt in the system private and public. So so you know Tiny Treasury went from less than

1 to 3.73 point eight depending on the day. But if they have to go say eventually to 8% from 3.8 to 8% of another 40% plus losses depending on the duration of the those bonds. That's a huge further loss for fixed income. So it's only if they are able to fight inflation successfully And push it down to 2% inflation expectation. I mean anchored and then you get the persistent rally in long duration Treasury assets. Um but that's not my baseline.

a negative real rate to be in the system. And from a debt equation perspective that sustainability equation perspective negative real rates of course you know create room for sustainability of death. So that's one question that you know, what's your view on the fact that negative real interest rate itself could be a support for the

mountain of debt that we have. And the second real at least in the case of the U. S. Private sector balance is of course much stronger today than they were during the eight recession, which of course, you know you are famous for calling. Um but today it's really the public sector and haven't we seen that example in the case of Japan that the public sector can borrow a lot but if it is in its own currency, it has a privilege where the central bank and supported

the issue ends. And it can just, you know, go on for a very, very long time.

other ones. Uh But but that's essentially reduces only by little that that burden for only a couple of years unless you have really high inflation hyperinflation, you cannot wipe out debts. So you you kick the can down the road, you reduce some real debts this way. But as soon as then that happens expected inflation becomes higher. So nominal yields go higher and real rates go higher because you have the inflation

risk premium. So then you still get the debt crisis because especially in the private sector, those nominal and real spreads relative to Treasury become much higher. You know, you can fool all of the people some of the time. Uh some of the people all the time, you cannot fool all of the people all the time. And given that that burden 6% inflation doesn't do it for you. You had only about unexpected inflation for a couple of years.

Then you end up into actually a worse scenario because nominal and real rates become much higher and you don't avoid the debt crisis in the private sector uh in the public sector. You have to distinguish between countries, you know us is still you know the major reserve currency extraordinarily privileged. It's gonna be maybe the last one to fall. But we saw what happens. You have reckless fiscal policy in a country like the U. K. And many others in europe are are

also fragile from a data sustainability point of view. But the point is yes we may need long term and higher inflation to deal with the debt problem. We cannot we cannot resolve otherwise. So that that would be my view on why actually you're not resolving that problem to higher inflation. Actually make it worse. You're just postponing and you make it worse, what was the second part of your question? I forgot

name it. And the shadow banks that financed the build up of these types of corporate debt and and even some uh public sector were more fragile, some of them borrowing their own currency, some of them borrow in foreign currency. But even in the household sector there are a whole bunch of zombies, you know us half of the bottom of the distribution of income for the house sites are people that are going from paycheck to paycheck. Their assets are falling in value because of the stock

market and of housing. While the debt servicing ratios are rising because you have higher interest rates on the short and the long end of the year curve. So you know we have tons of zombies before this Covid crisis, household corporate some banks shadow banks, government entire countries and we build them out during the GFC. We build them out against during Covid because at that time with the low inflation if not deflation, negative aggregate demand shocks a credit crunch. So we could do it.

The difference today is that inflation is rising so we have to raise interest rates into a recession and therefore the zombies are gonna not be able to survive. More of them are maybe corporate. More of them are shadow banks, some governments are also seriously fragile. Those who could borrow in the wrong currency could deal with it through a bout of inflation but that inflation eventually is actually more damaging than not.

Um and and there is a vicious cycle in w between private sector and public sector and the country and so on. So I think that that's why I predict the model of of that crisis that ratio went from

100 to 350% of GDP globally. 420 in advanced economies, 300 30 in china and there are enough parts of each one of the pieces of the private and public sector that fragile that eventually you're gonna see a variety of debt crisis and you know an inflation tax is still attacks a capital levy on creditors and savers to transfer income and well too

doctors and borrowers. So it is a form of default, actually more sneaky and less democratic form of default than doing a form of default or doing a legislation to deal with that problem.

the debt overhang being a potential dragon growth. Um Sometimes you no one hears from policymakers that invest and and policies on climate change is the future engine of growth that we will have like a marshall plan or the Manhattan project of all time to, you know, bring us new ideas and investments and flows and so on and that we are not running out of growth engines for the west. Do you share that view?

rather than substance. There's also lots of green inflation because many of the green metals to do like the vehicle's batteries and you name it, use a lot of energy that is expensive fossil fuel today, cobalt, lithium and, and you name it, that's the first observation to it's true that we may need to do many more investments to deal with climate change, But it's like saying uh, it's like a war, I suppose there's a war, your capital stock is destroyed, then

you can have a spurt of growth because you have to rebuild it but you're poorer because a lot of your capital stock became either destroyed or obsolete. Same thing happened in the 70s with the two old shops, right? We had to replace the energy intensive capital with different capital. There was a spirit of capital investment but we were poorer because we had stranded assets and now the stranded assets are not going to be only in the energy sector.

There are also lots of stranded assets say in real estate as lots of real estate is gonna become flooded or too hard to live or damage hurricanes, typhoons, wildfire and you name it so yes. And then a lot of the capital stock because uh, is, is how to say greenhouse gas emission intensive will also have to be replaced. So first of all, are we going to do all those investments is happening too slowly even if we make it is to substitute a lot of strength that capital, private and public real

estate energy industrial, you name it. And therefore we still are worse off because we have this we've destroyed effectively a good chunk of of the capital stock or made it obsolete.

Maybe it takes a delay, maybe it's not really something else. But we're not yet seeing it secondly, innovation in ai machine learning, robotics, automation gonna lead to permanent technological unemployment. It's not just routine jobs. Even cognitive jobs that are white collar can be sliced into various tasks, can be automated and now look at chatter Gpt. You know, stuff that is more creative.

Somebody wrote actually asking a question a critique of my book and charging me three gpt gave a very good analysis of why my book.

skill bias and labor saving. So if you own the machines or the capital gains the machine, you do well. If you're in the top 10% distribution of skill education, human capital like ourselves and many of our viewers and listeners probably for a while, technology is gonna make you more productive if you are a white collar or blue collar, low value added, medium value added, your job and your income will be increasing threat

and not just menial jobs. As I said, even cognitive and creative jobs, you know now chat gpt can even become a computer programmer and code. So even the software engineers and computer programs eventually may become paradoxically obsolete in this extreme case. Um the other dimensions of technology they have to consider is that one, there's a

dark side of technology. Usually technology innovation occur because governments want to build a bigger and more deadly weapons to win wars against their rivals. You know, we had massive technological innovation in the first industrial revolution. First stage of globalization. We still had World War One. And then in the twenties and thirties we build the weapons that allow us to fight a nasty

World War Two. And the end of World War Two was using nuclear weapons that were developed initially to bomb uh Cosima Nagasaki only eventually you got the commercial spillover effects in terms of, you know, nuclear energy and you name it. And right now there's a new race and who's gonna dominate ai machine learning, robotic automation, quantum computing between us and china.

And it's not just the race on who's gonna be dominating the industry of the future, who is going to be also the demonic military and sick security superpower of this century. As you know, drones, weapons system are all becoming more automated, more economies you have robot soldiers than you name it. And cyber warfare and

also some other stuff of that sort. So maybe these weapons, our technological asked to build weapons, asked to fight even more deadly worse than than the past And final thing people say as the economic pie becomes bigger, we can afford UBI. I write some people are gonna be left behind and then we have A U. B. I. And everybody can be better off universal basic income or universal provision of basic public services

and so on. So you tax the winners and you transfer money or services for free today to those left behind. But most people want the dignity of work. That's why in the U. S. Many people say I don't want a welfare check, I want the real job. So the idea of living your life where you're not a productive member of society and you receive, you know a check is a pretty actually dystopian future in the US. We already have these deaths of despair

that angus Deaton and anne case I've described. A vast underclass is mostly white of people that are skinless, hopeless, helpless jobless income lessons on what did they do all day long. Uh they play video games and live in virtual reality. Many of them are addicted to opioids. About two million people, 5% of them die of those overdoses every year, 100,000 is

a massacre and they cannot even reproduce themselves. They're in cells and celebrate involuntary celebrates because given the state's social and otherwise they don't even have made so a world of U. B. I. Is a world that effectively which a large part of society is unproductive and eventually becomes obsolete, doesn't even produce itself. So it's it's actually pretty dystopian future is not exactly a utopian. And frankly speaking,

And I. M. F. World Bank. So you take no comfort from the fact that we have numerous multilateral institutions with

is done. Secondly, there is an intergenerational conflict between young and old old are not gonna be around, the young is gonna be around for another 80 years. The young don't vote the old vote and anyhow, nobody wants to do the sacrifices in the short man to achieve the benefits of the long run because we discount the future. Even the younger are they willing to give up lots of stuff and to reduce their carbon footprint? Not not totally obvious internationally, you have a free rider problem.

The country does every cut is a mission to zero really costly. Nobody else does it, then it doesn't get any benefit and coordinating 200 countries to do it is mission impossible. There were a conflict within advanced economies and emerging markets, advanced economies tell China, India and others cattle emissions next 20 years And China and India say you created this problem for the last 200 years. The stock of emissions, 90% of

it historically, the cumulative comes from advanced economies. It's true that the new flow is coming increasingly from emerging markets. But the M says you want me to stay poor or middle income when you're high income and me not growing, no way I'm gonna raise my emission for another 20 years before I start cutting them unless you bribe me but unquote the bribes necessary are in the order of

a trillion dollars per year. What was chosen and decided Sharma chic or Glasgow spare change, 50 billion an O. E. M is going to do the right thing for that spare change. And finally in the world of geopolitical conflicts, I said U. S. And china don't agree on even how to deal with pandemics or global security or trade or financial issues and

and so on. They have a very hard time to agree even on on climate change with these fights between poor countries and advanced economies usually to provide global public goods. You need a global hegemon, right? This is a view of the demonic stability. 19th center was the pax Britannica with the UK empire. Rich empire in the 20th century was the pax Americana when you have a global hegemon that a human can internalize those things externalities and provide those global public goods.

But in the world of great powers, china, us europe India, you name it, we cannot agree and nobody wants to provide those global public goods to end up with a bad equilibrium. So we need those institutions of global governance. We even need a global government, but frankly they do the right thing are great respect for I. M. F. And all those institutions, but you know, they're constraint, they're constrained because their political masters are fighting with each other frankly.

to earning ratio of S&;P 500 was only eight. Today is twice as much or even more so depending on your measuring if I'm right, the next decade is going to be a decade of lower growth of inflation, of speculation, then you could have a bear market in global equity doesn't last just a year when there is a recession that could be more protracted, especially in a world of more geopolitical risk and political risk and various source of that sort.

So I would say and equity returns have been so high. Np ratio so high, then maybe you get them below historical values for a long period of time. So only if you believe in the recession is the only cyclical that you get then a rebound and long term you want to be in equities. If if the type of tail risk, I'm worrying about the mega threats materialized then then you could have at least a decade of subpar returns if not close to zero negative.

find them all by googling. Devious research library. Have a great day