Does the name Nouriel Roubini ring a bell? If you live on Main Street, probably not. But on Wall Street, everyone has heard of this influential economist.
Roubini is best known for a forecast he made in 2006. Back then, he told the International Monetary Fund that in 2007-2008, the U.S. would face a once-in-a-lifetime housing bust, an oil shock, a financial crisis, and ultimately, a deep recession. Although this scenario seemed highly unlikely at the time, it proved to be spot-on, as were other forecasts he has made. Foreign Policy magazine ranked him #4 on their list of the top 100 Global Thinkers, and he has been invited to address Congress and speak to the Council on Foreign Relations and the World Economic Forum at Davos.
Roubini frequently comments about the economy, the market, and politics, but his most recent remarks, made in an interview with Germany’s Der Spiegel magazine, have raised eyebrows and made people gulp. He predicted that the fallout from the corona virus would lead to global economic disaster, and that as a result, President Trump would not be reelected.
“This crisis is much more severe for China and the rest of the world than investors realize,” he said. “First, this is not an epidemic limited to China, but a global pandemic. Second, it is far from being over. This has massive consequences.”
Because of those consequences, he thinks European countries should close their borders. However, they are afraid to, a decision he calls “a huge mistake” because of the serious health and business ramifications it has. But the problem is much worse than just one of refugees coming to Europe.
“Everyone believes there is going to be a V-shaped recession, but people don’t know what they are talking about. They prefer to believe in miracles, but this is simple math.
“If the Chinese economy were to shrink by 2 percent in the first quarter, it would require growth of 8 percent in the final three quarters to reach the 6 percent annual growth rate that everyone had expected before the virus broke out. If growth is only 6 percent from the second quarter onward, which is a more realistic scenario, we would see the Chinese economy growing by just 2.5 to 4 percent for the entire year. This rate would essentially mean a recession for China and a shock to the world.” Meanwhile, “The markets are completely delusional.”
In previous financial crises, central banks lowered interest rates and took related steps to stimulate economies. But in Roubini’s opinion, that option wouldn’t help the markets for more than a few days.
“This crisis is a supply shock that you can’t fight with monetary or fiscal policy. Monetary and fiscal measures do not help when you have no food and water safety. If the shock leads to a global recession, then you have a financial crisis because debt levels have gone up and the U.S. housing market is experiencing a bubble just like it did in 2007. It hasn’t been a time bomb so far because we have been experiencing growth, but that is over now.”
Politics And Economics Merge
Roubini says that conditions in China are much worse than the government is officially reporting. “A friend of mine in Shanghai has been locked in his home for weeks now.” And in order to stay in power and maintain control of the situation, the Chinese government will need a scapegoat.
“I assume that China will start trouble in Taiwan, Hong Kong, or in Vietnam. They’ll crack down on protesters in Hong Kong or send fighter jets over Taiwanese air space to provoke the U.S. military. It would only take one accident in the Strait of Formosa and you would see military action. Not a hot war between China and the U.S., but some form of action.....It’s the mentality of many people in D.C.
“Everything will change when the coronavirus reaches the U.S. You can’t build a wall in the sky. Already people in New York City are hardly going to restaurants, cinemas, or theaters, and when the virus reaches there we are in total trouble.”
Even as people are watching events regarding the virus, related developments are unfolding. Roubini believes there is a significant risk of a war between the U.S. and Iran in the coming months. “The U.S. government wants regime change and they will bomb the hell out of the Iranians. But Iranians are used to suffering. Believe me, I am an Iranian Jew and I know them. And the Iranians also want regime change in the U.S. The tensions will drive up oil prices sharply.
“This has always been the case in history. Ford lost to Carter after the 1973 oil shock. Carter lost to Reagan due to the second oil crisis in 1979. And Bush lost to Clinton after the Kuwait invasion. The Democratic field is poor, but Trump is finished politically. That’s for sure. Quote me on that.”
If the scenario unfolds as Roubini envisions, it will further rattle an already nervous market, and investors should brace for the impact.
“I expect global equities to tank by 30 to 40 percent this year,” says Roubini. “My advice is put your money into cash and safe government bonds.”
Over the years, Roubini has built an enviable record, and unlike many economists and political observers, he is not afraid to take huge risks in expressing his opinions. Still, we need to bear in mind that his views are not Torah m’Sinai; they are informed opinions but nevertheless are subject to error.
The exceptional volatility we are seeing on Wall Street, the terrible losses so many investors and businesses already have suffered, and concerns about what could unfold in the very near future means preservation of capital should be the investor’s top priority.
One of the themes of Purim is turnabout; even a life-threatening situation can quickly turn around and become a joyous occasion. Let’s pray that safety is quickly restored and that calm returns to the market and to the whole world. Miracles can happen at any time, and certainly during the Purim season.