Renowned economist Nouriel "Dr. Doom" Roubini warned the public that a "perfect storm" of recession, debt crisis and out-of-control inflation could hit the markets this year.
Roubini has been warning of a stagflationary debt crisis for months already. The looming economic collapse will combine the worst aspects of '70s-style stagflation and the '08 debt crisis.
"I do believe that a stagflationary crisis is going to emerge this year," Roubini said in an interview with Australia's ABC. "Now we're facing the perfect storm: inflation, stagflation, recession and a potential debt crisis."
According to the economics expert, the Federal Reserve would need to lift benchmark rates above six percent of the inflation to fall back to their two-percent target. Once this happens, a severe recession, a stock-market crash and an explosion in debt defaults may occur. This will leave the Fed with no choice but to back off its inflation fight and let prices spiral out of control. (Related: JPMorgan CEO Jamie Dimon: US could experience RECESSION within 6 to 9 months.)
"There's so much debt in the system that if they raise rates enough to fight inflation, there will be a real hard landing that leads to severe debt defaults," he said in a separate interview. "There would be economic and financial crashes. So central banks will have to wimp out." He has remained ultra-bearish on the economy, despite the market's growing hope that the U.S. could skirt a recession this year.
Markets Insider reported that Roubini has previously said the benchmark stock index could slide another 30 percent as investors battled extreme macro conditions, though more bullish commentators are making the case for a healthy rebound in the S&P 500, which fell 20 percent last year.
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"They will continue to go down," he said about stocks, citing the recent sell-off as investors priced in higher interest rates from the Fed. "The market is already correcting." He also urged investors to protect themselves by choosing inflation hedges, such as gold, inflation-indexed bonds and short-term bonds. Those picks are likely to beat stocks and bonds, he said.
Roubini was an adviser to former President Bill Clinton and has also been employed by the U.S. Treasury, World Bank and International Monetary Fund (IMF). He holds a reputation for being pessimistic about the global economy, which is why he has been nicknamed "Dr. Doom."
"I'm a realist," he said. "What I do is connect the dots."
Experts see different ways to mitigate inflation
As experts see a kind of gloomy U.S. economy in the near future, strategists are suggesting ways to mitigate inflation.
TD Securities strategist Priya Misra recommended that the Federal Reserve pushed the nation into a downturn in order to bring inflation down. According to Misra, the economy could tip into a decline by mid-year due to the threat of rising interest rates, especially since central bankers have raised rates 450 basis points over the last year to ease out of inflation.
"I think the Fed has no choice but to engineer a hard landing," she said, adding the Fed is sure to feel that pressure to continue to hike the rates. Markets are expecting a 25-50 basis-point rate hike in March.
The strategist predicted central bankers would ultimately raise rates from 5.25 percent to 5.75 percent this year, which is up at least 75 basis points from the current target of 4.5 percent to 4.75 percent. She also stated that officials weren't likely to pause or cut rates until prices start to near the Fed's inflation target, which could take until the third or fourth quarter of 2023.
Brett House, professor of professional practice in economics at Columbia Business School, is still seeing a possibility of the central bank's "soft landing." As per the latest jobs report, the unemployment rate is at 3.4 percent, the lowest since May 1969. Meanwhile, job openings increased to a record 11 million last December.
"The hope is that there will be an elimination of those open vacancies rather than an elimination of existing jobs," House said. "We have some evidence that we're simply seeing some of those job postings get pulled out, rather than people being laid off," notwithstanding cuts in the technology sector."
He also said there is a big pool of unfilled jobs that could simply be pulled out of the labor market without putting people out of work. "That would be the kind of 'Goldilocks scenario' that could get us to a soft landing."
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