ASH BENNINGTON: We're here with Nouriel Roubini,
a man who needs no introduction especially
at a time like this.
Nouriel, I was listening to a talk you gave
recently, where you frame this that your best
case for what we were seeing moving forward
was a greater recession, meaning a recession
worse than the Great Recession and the worst
case was a greater depression, meaning a depression
that could be worse than even the Great Depression.
How did you get to where you are right now,
and what are we looking at?
NOURIEL ROUBINI: Well, I was looking very
carefully at what was going on with the economy
and the markets, and already literally at
mid-January, I have a proprietary tool that's
called the BoomBust dot-com signal.
That market was signaling that the S&P 500,
when it reached about 3300, it was vastly
overbought.
Every major of price action, of valuation,
and so on was suggesting that we were in a
bubble territory.
Then the signal was sent out and was said
this is the time in which a bear market might
be starting.
It took only a few weeks until we got to that
bear market and since that signal, the market
moved sideways, didn't go much higher.
The market fundamentals were suggesting already
that we were in a bubble, in an equity bubble
certainly in the United States, and that any
shock could lead them to a market downturn.
Now, nobody could have predicted that it would
have been a pandemic but there are plenty
of other things.
When you are in a market in which the economy
has too much data leverage, asset prices are
way overbought, then any macroeconomic shock
or other shock can lead to not just a correction,
but there's significant bear market so the
trigger ended up being the COVID crisis.
Also, early on the market commentators were
kept on saying, this is going to be just a
market correction, maybe market down 5%, 10%
percent, not the bear market, they're saying
the economy is not going to go into a recession
or if there's going to be a recession, it's
going to be just a quarter, and then a very
rapid V-shaped recovery.
I was looking at the data and seeing how the
pandemic would spread from China to the rest
of the world, anybody scientifically could
say that's got to go first China, then Taiwan,
Korea, Hong Kong, Japan, and then it was spreading
to Italy, it would get to the United States
so the WHO predicted this will be a global
pandemic only later on, but anybody looking
at the data could tell it was coming.
Given the sharp economic activity in China,
you knew that if in China, you had a shutdown
of economic activity, something similar, if
not worse, would happen in the rest of the
world.
The idea there will be correction, or a V
shaped recovery did not make any sense.
That's why January into early February, and
then with a long piece on the Financial Times
and [indiscernible], I say that this is delusional
to think this is going to be just a correction
or a V-shaped recovery.
This is going to be something like a bear
market first of all, and there's going to
be a severe recession, not just in China,
but globally, and it's not going to be a V-shaped
recovery.
Guess what, at that time, pretty much every
market commentator kept on talking of their
books and their book was that hold your position.
Don't go shorts, don't sell.
It's going to be just a correction.
It's going to be a mild economic slowdown.
Now, guess what, a month later, literally
the consensus now, we're not speaking about
me, the consensus says this is going to be
a recession greater than the Global Financial
Crisis.
You look at what Morgan Stanley, JP Morgan,
Goldman Sachs are predicting, they are predicting
that Q1 economic growth in US is going to
be sharply negative between 5% to 10%.
In the second quarter, the economic activity,
GDP is going to fall in the second quarter
at the annual rate of 25% to 30%.
25% to 30%.
We have never seen anything like this, we've
not seen it during the Global Financial Crisis,
we've not seen it during the Great Depression.
Those were slow motion train wrecks, this
is just the front loaded, not financial shock,
but the real medical, economic shock.
Now, consensus and conventional wisdom speaks
about the greater recession.
That's baked in already in the market, the
fact that the market went down 35% to 40%,
as reverse itself, but only 10%.
In my view, there were still to come for reasons
I'm going to be discussing.
Now, the consensus says this is not a correction,
it's not a V-shaped recovery, and it's going
to be as ugly or probably uglier than the
Global financial Crisis.
That's baked in in the prices, the question
is whether instead of a great recession, greater
than the Global Financial Crisis, we could
end up into a greater depression, and in my
view that our condition on the wage went up
into a greater depression, not a greater recession
at this point is guaranteed to happen.
ASH BENNINGTON: You also mentioned in one
of your pieces the speed at which this happened
15 days to go into a bear market meaning a
20% decline from peak in US equity prices.
NOURIEL ROUBINI: Absolutely.
If you look at the Global financial Crisis,
or the Great Depression of the 1930s, we're
at slow motion train wreck.
They started with a financial shock, stock
market crash in one case, bust of housing
and mortgage in the other one, then the economy
slows down, then you go into a recession,
then you have distress in debt markets, then
your rising unemployment rate, then it becomes
acute in the case of the Global Financial
Crisis around the collapse of Lehman.
In the case of the Great Depression in '32
to '33, in which where we go into a great
depression, so yeah, you had the collapse
of stock markets of 50% plus in the previous
episodes, you had credit spreads going through
the roof.
You had the debt crisis, you had massive bankruptcies,
you had the economy tanking, and GDP growth
becoming massively negative.
Unemployment going to 10% or 20%.
We took three years.
This time around, it didn't take three years.
It didn't take three months, it took three
weeks.
In three weeks, you had a drawdown of the
market of 35%.
The fastest bear market in history usually
takes about three, four months.
This time around though, two weeks, 15 days,
and you got then the credit spreads that went
from, for high yield, from 300 basis points
of Treasury to over 1000 basis points.
Last time around when those things happen,
it took about a year.
This time around, it took literally less than
three weeks.
Same thing for economic activity.
We are going to negative growth in a matter
of weeks and it's going to become much more
severe.
By the second quarter starting soon, we're
going to have economic activity collapsing
at the rate of 30% per year, and the unemployment
rate is skyrocketing.
The number came out recently about unemployment
claims and the number before was 200,00, markets
are expecting 2 million, it ended up being
3.3 million, 15 times higher than the average,
not even 10 times, much worse than expected.
All these things have happened in three weeks,
not three months, not three years.
This is like an asteroid, literally hitting
planet "hurt" and stopping economic activity
everywhere.
Usually, in previous recessions, you might
have a recession in Europe, but not in US
and China.
You're going to have a recession in US but
not in the rest of the world, or vice versa.
This is a case in which we have a synchronized
global recession, literally happening all
at the same time and going from economic growth
to negative sharp growth in a matter of a
month, we have not seen anything like these
ever before.
That's why this is worse than the great recession
of 2007-2009.
The risk is we're going to end up into a greater
depression, even worse than the Depression
of the 1930s.
ASH BENNINGTON: That chart for new Unemployment
Claims is unlike anything I've ever seen before.
NOURIEL ROUBINI: Yeah, absolutely.
Markets were talking about initially a correction,
then a V-shaped recovery where you have one
growth that is slow or negative, and then
fast recovery, then people start to say, well,
maybe it's not going to be a V, maybe it's
going to be a U, like the Global Financial
Crisis, a downturn and then a garage of recovery
to potential, then some people start to say,
wait, it's going to go down and then it's
going to stagnate, or people start to talk
about the double dip recession, a W. It's
not a V, it's not a U, it's not an L, it's
not a W. Currently, it's an I.
It's a straight line, which are freefall of
everything, GDP, consumption of goods, of
services, CapEx, residential investment, import,
exports.
Pretty much every component of aggregate demand
is collapsing, the only one that can actually
use its balance sheet to support the economic
activity in a free fall, of course, is the
government.
We're going to talk about it, but everything
is happening at the speed we have never seen
before.
It's a freefall, number like these and the
speed at which are occurring did not even
occur during the Great Depression.
It took three years between the stock market
crash of '29 in 1932, when we got into a real
collapse of economic activity and a spike
in unemployment rate, not three weeks.
This is totally unprecedented.
ASH BENNINGTON: For those who may not have
followed your work as closely as I do, the
reality is over the last several years in
fact in the recovery from the Great Recession,
you've actually-- despite your nickname, you've
been very constructive about US growth and
about US equity.
This is really a significant turn from the
position that you've held for some time now.
NOURIEL ROUBINI: Yeah, usually people refer
to me as Dr. Doom.
I prefer to be called Dr. Realist, and on
many occasions before, like for example, in
2015, and '16, where people were worrying
about hard landing of China and a global recession,
I said, no, China's going to have a softer
landing.
It's going to be bumpy, but it's not going
to trigger its own collapse and a collapse
of the global economy, or in 2015, when people
say that even Wall Street baseline and consensus
was Grexit, that Greece is going to leave
the Eurozone and that's going to be a nightmare
for the Eurozone, I followed that carefully.
Then that game of chicken in Greece and the
rest of the [indiscernible] cut, Greece had
the low, not the upper hand and therefore,
they're going to stay in and therefore the
contagion and the collapse of the Eurozone
will not occur, or my signal that this BoomBust
dot-com single, the BoomBust dot-com signal
tells you when markets are overbought, and
we got to write literally something like 8
out of the 10 correction that occurred in
2010 for the S&P 500, because there've been
a number of correction, but we also got right
at the bottom.
Whenever the market was going down, then when
would they recover based on the macro dynamics
and the financial dynamics and the macro fundamentals?
The markets have been going up and down, the
economy had been slowing down and accelerating.
I've been constructive.
I've been warning, of course, about the number
of downside risk in the global economy.
Guys, this time around, people are totally
delusional, thinking this will be a correction
or a V-shaped recovery.
This nonsense was repeated in January, and
all of February into literally the middle
of March.
It was only recently when people have gotten
finally a reality check and realizing this
is more than the Global Financial Crisis.
We've had a drawdown not of 10%, not of 20%,
of 35%.
Even now, people are saying we reached the
bottom, and from here, there's going to be
a rally and we're going to finish the year
maybe higher than when we started.
That's the view of many Wall Street commentator
that now because of the stimulus, then the
economy is going to recovery, the market's
going to reach higher than the beginning of
the year.
I don't know whether they are smoking something
strange, frankly speaking.
ASH BENNINGTON: Nouriel, one of the interesting
things that you've written about in terms
of your frame for how to determine whether
this becomes a greater recession or a greater
depression, you have listed three broad categories
that you're focusing on in terms of watching
government response.
The first is pandemic containment.
The second is the monetary response.
The third is the fiscal policy response.
Could you talk a little bit about those points
and what it is that you're watching specifically
to determine what trajectory we're headed
on next?
NOURIEL ROUBINI: Well, the first one and the
key element of it is really the health policy
rescue because unless you're going to stop
this pandemic, there's going to be millions
of cases and millions of people are going
to die, then there is no way you can restart
economic activity.
I think that the last one that came out of
China, and also what happened in some of the
Asian countries and also the last one out
of Italy, that initially did not take it seriously
and now is following a Chinese style of quarantine,
is that really, you have to have the right
policy response, that means from very beginning,
massive testing, massive essentially tracing
of people, you need to have social distancing
and social isolations.
You need quarantines, you need lock downs
and the quarantines and lockdowns unfortunately,
cannot be voluntary, because if they're voluntary,
people don't take them seriously.
I'm all in favor of democracy, but China literally,
people getting out of their homes without
a good reason, you're kicked back home, or
you can be arrested, or you can be fined.
Eventually, even Italy implement that one.
What has happened in the US with people partying
during spring break or taking it not seriously
throughout the country is nonsense.
The lesson is that either you accept the economic
pain that the country is going to be shut
down, and of course, GDP can fall 30%, 40%
for a quarter or two, but you need to do it,
you shut it down, and then you stop the spread
of the pandemic.
Like in China, now, you can restart gradually
economic activity.
You have pain by this front load that is short
and then you have a recovery.
If you don't do that response, then the thing
is going to spread like wildfire, and it's
going to be too late when you're doing the
mitigations.
Mitigation policies are not sufficient.
You have to go from nothing to serious mitigation
to serious suppression and then you can restart
economic activity.
If you start, you do mitigation or mitigation
light and it's spreading like wildfire because
it's not enough, then eventually, you'll have
to do even more severe shutdown of economic
activity.
It's better to take the pain front load there
for two or three months, and then jumpstart
growth, rather than doing stop and go.
You stop, then you go, then you have to stop
again, and then you go again and so on.
It's going to end up being a nightmare where
everybody is going to get sick, and then millions
of people are going to be dying.
This past week, Dr. Fousey, now and even the
US government says, we'd be lucky.
Now, we'd be lucky if we have millions of
cases and we'll be lucky if the number of
dead people is only between 100,000 and 200,000.
Trump on TV on Sunday night, said hey, if
we have number of dead being between 100,000
and 200,000, we would have done a very good
job.
200,000 people dead and that's a very good
job?
That's optimistic because at the rate at which
this thing is going in the United States,
you are having 20% increases of the cases
literally per day, we're going to have 5 million
cases at least by the end of April, could
be 10 million, could be 20 million, could
be 50 million.
Then the numbers of death is going to be not
100,000 or 200,000, it could be half a million
to 2 million.
That's what we're facing.
To have response is key, unfortunately, we're
not doing the right thing on the outside.
ASH BENNINGTON: To put some of those numbers
into context that even at the low end of the
estimate, 100,000 Americans dead is twice
the level of the casualties we experienced
in Vietnam, which is of course, one of the
great national tragedies and traumas of the
20th century.
Now, where do you think we are in terms of
a letter grade based on where we are today?
We've made some improvements.
We've got a while to go.
What's your view of that?
NOURIEL ROUBINI: Well, some of the policy
response on the health side, I think it's
a near fail.
It's certainly embarrassing because in China,
the number topped at 80,000.
Now, they may be lying, might be not 80,000,
but maybe 200,000, 300,000.
We don't know.
The number of people might not be the few
thousand that they announced, maybe 3000,
might be 10,000.
We don't know.
We know that the number is not in the millions
is in China, and people are going back to
work.
That's a risk, of course.
In the US now, the government is telling us
our baseline is going to be a few million
people, and between 100,000 and 200,000 people
dead.
That's considered by the president a very
good job.
It's just unprecedented.
The fact when I accept that, because now the
genie's out of the bottle, they cannot deny
anymore that we totally screwed up, that we
were first doing nothing, then doing mitigation
light, then more mitigation light, then the
president wanted to essentially even go back
to business as usual after April 1st or after
Easter, and only once his advisor told them
you're crazy, you're not.
Now, he's saying while we're going to continue
this mitigation light, because it's not even
serious mitigation, because we're not doing
testing and isolation and compulsory quarantines
and lockdowns the way other countries are
doing so we're still in mitigation light,
let alone trying to do suppression.
We're going to get millions of cases and hundreds
of thousands of people dead.
That's our baseline right now.
It's scary compared to even other bad examples
like Italy.
Italy is getting it under control right now.
They started too late but now, the rate of
increase per day has gone down to less than
10%.
Eventually, it's going to stop because they've
done Draconian style, Chinese style of lockdowns.
That's what we should have done one month
ago, or two months ago.
We totally blew it up.
On the health response to me, that failed,
accepting that 200,000 people are going to
die is a fail, is an F by any standard.
It's not even a D, it's a fail.
Now, the better news are on the macro policy
response, both monetary and fiscal policy
with some caveats.
On the monetary side, both the Fed, ECB and
other central banks have massively front loaded
every type of support of the financial system.
Again, during the Global Financial Crisis,
it took them maybe three years to do that
entire kitchen sink of unconventional monetary
policy.
Now, it took them with a less than the amount
and most of these decisions were not made
at formal meetings of the Fed or ECB, but
outside of that meeting, intermeetings.
We've gone back to zero policy rates or more
negative in some parts of the world, quantitative
easing, forward guidance, credit easing.
This purchase of private assets, backstopping
of banks, of non-banks, of primary dealers,
of investment banks, of other financial institution
backstopping the money market fund, of the
muni bond market, of commercial paper, of
investment grade bonds issued by corporations,
pretty much flooding the market with unlimited
amount of liquidity, unlimited amount of QE.
Literally, all the tools that were created
over time during the Global Financial Crisis,
they took them out of the toolbox and then
brought them back in a matter of a month,
everybody's doing the right thing.
Then measures like this, providing liquidity,
preventing that illiquidity is going to become
insolvency is unnecessary but not sufficient
condition.
Now, the third element of the policy response,
it's a mixed bag.
On this one, the US is ahead of Europe and
other parts of the world, because in addition
to their monetary bazooka, they're also doing
the fiscal bazooka.
Now the $2 trillion of the fiscal stimulus
is not only two, 3 million of our stimulus,
because a lot of it is just credit guarantees
to small enterprises, to the corporate sector,
the actual fiscal impulse of how much you
spend directly, or you transfer to the private
sector or households is less than that, is
less than a trillion.
The amount of its liquidity or lending support,
you could say it's going to be closer to 2
trillion.
We have the monetary bazooka, we have the
fiscal bazooka.
It's not optimized in terms of reaching those
who need it the most.
I think too much money is going to go to large
corporations who don't need it, not as much
money to households that are desperate in
the United States.
Think of it, in US, 40% of households have
less than $400 of liquid cash to deal with
an emergency.
People are not going to have money even with
these checks to buy food.
If you're that household, and you have lost
all of your income and half of the economy
is not fully employed people, when unemployment
insurance, healthcare and access to paid sick
leave.
You have all these gig economy, contractor,
freelancers, part time workers, hourly workers,
entrepreneurs that are business of one, self-employed
people, literally half of the economy is like
this.
If you live like me, in New York, anybody
works in a hotel, in restaurants, in bars
in theater band, in music, they're not employed.
They're just there as gig economy workers,
they get paid by the project or by the day
and so on.
The income of these people has gone to zero,
zero.
These people don't have money to pay rent,
and either there is a rent moratorium, or
they're going to go and stop paying rent on
their own.
They don't have money to pay their utility
bills like electricity, water, gas, internet,
phone, and the amount of money they're going
to get from the government is going to be
barely enough to pay for food and essentials
for a month or so.
Literally, month or so because people have
less than $400 of cash savings.
Unless you're going to double down later on
on that subsidy to the households, you'll
have people who don't have enough food to
eat, they're going to go and ride in the streets
and get rides and people mopping the supermarkets.
We're going to have civil violence down the
line.
That's the situation.
We're doing the fiscal, but other countries
are not doing it, but what I'm doing enough
of the right target at fiscal stimulus.
In summary, the health response is an F, the
monetary response is an A-, and the fiscal
response is a bad stop, a B- right now.
Even with that, my fear is that we may end
up not into a greater recession, but in a
greater depression for a number reasons that
are not related only to these points, but
also to other ones.
ASH BENNINGTON: You've been talking about
the structural transformation of the labor
market into a gig economy for a long time
now, and now we're starting to see what some
of those risks may look like.
One of the things that you're hearing in,
for example, on economics, Twitter is this
phrase, "we're all modern monetary theorists
now".
Can you talk a little bit about what modern
monetary theory is, how it relates to the
union of fiscal policy and monetary policy,
and whether it's an appropriate policy response
to this particular crisis we're in right now?
NOURIEL ROUBINI: Well, modern monetary theory
was a leftist idea supported by a bunch of
leftist academic, that essentially said that,
if you're accounted as your own currency in
your own central bank, you can run large budget
deficits forever, you can monetize them, and
then you're not going to even have an inflation.
Now, that extreme view that you can run it
forever under good times and bad times, even
at full employment, and you can monetize fiscal
deficit doesn't make sense but in a situation
which you have a collapse of economic activity,
you have a recession and deflation, and there
is a collapse of velocity, we learned that
lesson during the Global Financial Crisis,
you can do a variant of modern monetary theory,
budget deficits and the way you monetize them
is through QE.
It's not officially modern monetary theory,
but essentially is a monetary theory, and
you avoid the deflation and you avoid a deep
recession.
It used to be called MMT, modern monetary
theory or used to be called helicopter drop
of money meaning the government spends by
issuing bonds, the central bank gives the
government the cash and then you value drop
it on people like transfer it like what they're
going to do with the checks right now, used
to be called so people's QE by UK labor, it
was labeled as a leftist idea.
Guess what, it has become mainstream.
People like Ben Bernanke, former Fed Chairman,
Stan Fischer, former Vice Fed Chair, together
with that used Philipp Hildebrand that used
to be running the Swiss National Bank, he's
now at BlackRock, the biggest asset managers
in the world, have come up with a proposal
for an idea that's a variant of essentially
a helicopter dropper, [indiscernible] Turner,
William Mauter, pretty much mainstream economists.
I wrote extensively about the idea of MMT
for the next recession already literally a
year ago and I said, when this stuff is going
to hit the fan, and we're going to have the
next recession, zero rate is not going to
be enough, negative is not going to be enough.
Forward guidance, quantitative easing is not
going to be enough.
We're going to go to MMT.
Guess what?
It happened in less than a month, literally,
because the way they talk about it right now,
Bernanke or Dalio, is not MMT, is not helicopter
drop, they call it coordination of monetary
and fiscal policy.
What does coordination mean?
The Treasury is going to issue $2 trillion
of bonds, notes and bills to finance this
budget deficit.
Additional budget deficits on top of the initial
trade on and the Fed is going to buy every
single note, bill and bonds issued by the
Treasury.
That's what's called coordination.
What is it?
What's the difference between coordination,
and then helicopter drop or between coordination
and QE with a fiscal deficit is close to zero?
Deficit then QE, you're buying the bonds in
the secondary market, the government sells
it to the market and then the Fed buys it
from the market.
When you do MMT or monetary financing, or
helicopter drop, you're buying it directly
in the primary market but the impact on long
term interest rate is the same.
Who cares whether the Fed buys it at issuance
or a month later?
Substantial doesn't make any difference, even
large deficits and QE is effectively MMT.
Whether you call it that way, or you call
it something else, or euphemistically coordination
of monetary fiscal policy, it walks and quacks
like a duck, it's helicopter drop.
That's what it is, and we're going to see
my same helicopter drop.
Now, the point that I made however, is the
following one, in the short run, doing a helicopter
drop makes sense.
Makes sense because we have had a collapse
not only of supply and disruption of supply
chains, but also we had a collapse of demand.
We've had recession and right now, deflationary
pressures, and therefore doing a massive fiscal
stimulus and monetizing it makes sense when
you have staggered deflation, recession and
deflation.
That makes sense in the short run.
As people say, you can fool some of the people
all of the time and all of the people some
of the time, but you cannot fool all of the
people all of the time.
Suppose that you are in a world in which these
budget deficits of 10% of GDP fully monetized
occur not only this year, but actually in
the downside scenario, by that, the next year
and the following year, in the short run,
we have a demand shock more than a supply
shock and that's the way you fight it.
Think about this shock.
Over time, this is a negative supply shock
that reduces output and potential output and
increases costs and essentially, the production
costs and the prices of every type of goods
and service.
There is a rupture of global supply chain,
soon enough, we're not going to have enough
farm workers in California to pick up the
fruits and the vegetables.
Over time, what this shock is going to lead,
it's going to lead to an exacerbation of the
decoupling between US and China.
Even before that, I wrote last year and before
we had a cold war, we have to see the strap,
we're going to have deglobalization, we'll
have decoupling and fragmentation, all these
trends are going to be emphasized.
More [indiscernible], more equalization, more
reshoring, more fragmentation, more balkanization
of the global economy.
More tariffs, more protectionism, more defending
your own firms and your own workers, more
inward policies, more restriction to trade
in goods, in services, in labor, in capital,
in technology.
This is a massive negative supply shock to
the global economy.
You monetize it and you fiscalize it for two
or three years, eventually, you end up into
not staggered deflation, but in stagflation,
recession, and inflation like the 1970s.
Look, what happened in the '70s.
We have to oil shocks, '73 Yom Kippur, 79
Iranian Revolution, we reacted by trying to
boost economic growth.
We had deficits and monetization through easy
money.
We ended up with double digit inflation, and
stagflation.
By next year, we can be in stagflation.
The worst of all worlds, high inflation and
recession.
That's what gets us to a depression, not just
a recession.
ASH BENNINGTON: Nouriel, one of the things
that I found so interesting as someone who's
followed your work very closely, you wrote
in a project syndicate piece, and I think
it's probably worth quoting here, moreover,
the fiscal response could hit a wall if the
monetization of massive deficits starts to
produce high inflation, especially if a series
of virus related negative supply side shocks
reduces potential growth.
One of the things that's very interesting
for people who followed your work during the
Great Recession, you talked about how there
was a collapse and the response to the Great
Recession, how there was a collapse in the
velocity of money and that we didn't see these
inflationary pressures building, this is a
significant shift from that position.
Perhaps you could talk a little bit more about
what it would look like and how we would start
to notice that risk case coming online.
NOURIEL ROUBINI: Well, the Global Financial
Crisis I analyzed, it was a credit shock,
the latter collapse in aggregate demand, the
big output gap, slacking goods and labor market,
the wages going down, prices going down, deflation,
and therefore if you did that, effectively
MMT, that's what we did through the backdoor
through QE and deficits.
You're essentially avoiding that recession
from becoming a depression with deflation.
That was the right policy response because
there was a collapse of aggregate demand and
there was a huge output gap.
Today is different.
The type of shocks that are going to eat the
global economy are all negative supply shock.
As I pointed out, the coronavirus, the breakdown
of global supply chain is going to get worse.
I fear that we're not going to be able to
produce food, that in many parts of the world
as the price becomes worse, food workers and
the food supply chain is going to be disrupted.
If you cannot produce food, then you'll have
a shock to food prices.
Look at what's happening in China, you had
a small shock that was last year, the swine
flu, and the swine flu alone led to production
of pigs to collapse by 50%, better kill all
of them and price of pork went up 100%.
This was just a little tiny swine flu in China.
Think about how these pandemics can disrupt
a global supply chains in and around the world,
and especially food supply chains.
That's a huge negative supply shock.
After the crisis, decoupling between US and
China is going to get worse.
The US is blaming China for this, China's
blaming the United States.
It's for the Cold War before, it's for the
[indiscernible] trap on technology, on trade,
on services, on finance, on currency.
It's going to get worse.
Look at the rhetoric between the two sides.
We'll have more balkanization, more decoupling,
more deglobalization, more reshoring that's
costly, because instead of producing in the
lowest cost parts of the world, we're going
to produce them expensively at home.
That's a massive negative supply shock.
Trade wars, in the turn, the Smoot-Hawley
tariff led to the worsening of the financial
shock and lead us to the Great Depression.
Now, we're starting trade wars with China
and the rest of the world.
They're going to get worse.
Everybody's going to say, I'm going to protect
my workers, my firms, my tariffs, and so on.
That's a recipe for a negative supply shock
becomes global.
We're not even sharing medical supplies.
Every country wants to have their own ventilators,
their own mask at home.
We're not even letting export of these things
across country.
This is the beginning of restricting trade
in goods and services, and [indiscernible]
labor.
Trump is going to say I was right bashing
China, I was right to build the wall.
Guess what?
You can build any wall you want to, we have
a Mexico or Canada, but the disease is going
to be beyond the wall.
It transmits regardless of whether you have
a wall or not.
This is the nature of global pandemics.
These supply shocks become global.
I'm not yet at the point where there are other
supply shocks.
I really worry there'll be a war between US
and Iran this year in the Middle East.
We'll have another supply shock on all prices
like we saw in '73, '79 or 1990.
That's still to come.
That will be another huge supply shock.
We're going to be going in a world where most
of the shocks are not aggregate demand, but
their nature is negative supply shock through
essentially deglobalization, pandemic, oil
shocks, protectionism, nationalism and inward
policies.
In that world, you have essentially the condition
for stagflation, recession and inflation like
the '70s because, as I said, because of the
main struggle of the Global Financial Crisis,
you monetize, you fiscalize it, you return
the growth, but if it is a negative supply
shock, you monetize it, you fiscalize it,
and eventually, you end up with stagflation.
Now, we're not bad enough to end up like Zimbabwe,
or Venezuela, Argentina with hyperinflation.
Even if advanced economies after World War
I, like the Weimar Republic in Germany had
hyperinflation or Hungary.
Those things can happen if you have a total
collapse.
If we get a depression and in this depression,
we're going to run budget deficits or print
them, we may end up like Hungary, or Germany
during the Weimar Republic after World War
I, we could get hyperinflation.
I don't expect that to happen now, but certainly,
we could get stagflation with rising inflation
and recession like the '70s if we keep on
kicking the can down the road and stimulate
the economy, if the persistent sets of negative
supply shock keep coming and coming.
That's not the risk this year but by next
year, two years from now, that will be a meaningful
rising risk.
ASH BENNINGTON: Nouriel, that's a grim and
sobering outlook.
Let me shift gears a little bit here.
I think we have a pretty good frame for what
your view is and what your outlook is.
Can you talk to us about some of the data
that you're seeing, what's led you to these
conclusions?
Importantly, what could lead you to reverse
your conclusions in that it could potentially
be a shorter, shallower, less severe recession
that you anticipate?
What are you looking at that brought you to
these conclusions, and what could lead you
to reverse them?
NOURIEL ROUBINI: Now, before I go to that
one, let me finalize the point.
The argument about a greater recession becoming
greater depression is based essentially on
three key columns.
Column number one is the health response is
wrong.
We're doing mitigation, we're not doing suppression.
Even if we're doing suppression, the virus
is going to mutate and by next winter, we're
supposed to go back to growth after recession
of three quarters, we could have another spike
in the pandemic, even under suppression.
If we're not going to have suppression, but
only mitigation, it's going to be a nightmare
as any epidemiological model suggests.
[Indiscernible] we're going to go back another
recession.
Yes?
ASH BENNINGTON: I'm sorry.
What's the difference between those two points,
mitigation versus suppression?
NOURIEL ROUBINI: Well, mitigation is this
voluntary social distancing, isolation, stay
at home.
We're going to shut down maybe businesses
in New York and California, but the rest of
the country can all stay open, stores, business,
economic activity, restaurant.
We're doing mitigation is actually mitigation
light.
Suppression means sorry, guys.
We shut down every economic activity apart
from basic essentials.
You stay at home compulsory, you cannot work
unless you work from home, you cannot go out
unless you go and buy food and medicines and
take a walk for half an hour just to refresh
a day and no more.
I'm going to monitor you and we're going to
punish you.
If you do otherwise, fines, arrest, whatever.
Like in China, they used drones and robots
and literally an app that gives everybody
a green, yellow, or red card.
It's big brother in China, we don't want to
go there, but the reality is they have to
find an enforcement.
If you don't enforce it and you're basing
yourself on people doing it voluntarily, it's
going to be mitigation, mitigation light.
We're not doing even mitigation or doing mitigation
light in the US, let alone suppression.
Suppression was what China did for three months
and what Italy is doing right now.
We're not doing it.
That situation is going to go like wildfire
this year.
Then once we control it, and summer comes,
the winter is going to come, the virus is
going to mutate.
We're not going to have a vaccine for 18 months.
These antiviral therapeutics are in limited
supply.
We don't even know whether they work, guaranteed
by next winter, we'll have another spike in
the pandemic.
That's why people say it'd be a three quarter
recession, Q1, Q2, Q3, but then by the fall,
we're going to start growing again.
What if by default, we have another round
of this pandemic, then we're going to go into
a depression.
Two, by next year, if we're going in and out
of the recession is continuing, then we'll
have to do another 10% of GDP fiscal stimulus
and monetize it.
Then we end up into the inflationary situation
that I warned about that leads us to stagflation.
Then you have a nightmare of stagflation.
Three, as I pointed out in a number of pieces
recently, there's a wide range of geopolitical
risk, literally, a global rivalry between
US, China, Russia, Iran and North Korea and
this camp, they're going to try to disrupt
the US economy, the US political system, we'll
have the first global cyber war in this country
this year, and it's going to create geopolitical
chaos or politically, even violence after
the US election, let alone the risk of a war
between US and Iran in the Middle East.
There's this trifecta or Bermuda triangle
of the wrong health response, and the fact
that the virus is going to come back next
winter, of running out of policy bullets,
once we monetize fiscal deficit forever, and
then geopolitical shocks that are negative
supply, and they lead us to a geopolitical
depression.
That's a recipe for a greater depression.
ASH BENNINGTON: How do you quantify some of
those risks in order when you look at-- when
you talk about things like, example, cyber
war or the potential for a hot war in the
Gulf, how do you quantify what those risks
look like?
NOURIEL ROUBINI: Well, right now, markets
are completely disregarded.
In the case of a war between US and Iran,
they're saying, we killed Soleimani.
They sent a bunch of rockets, we restrain
ourselves.
Now, Iran is contained and they're not going
to do anything.
I think that is the wrong analogy of what's
happening in Iran, and I happen to be a Persian
Jew, I understand how the Iranian think, and
I told you simply and I could discuss it for
hours.
If Trump is reelected, the regime in Iran
is dead because four more years of sanctions
and other pressure means they collapse, and
their regime wants to stay in power.
The only one goal there is to stay in power.
That's a fair amount.
It's not going to be an external shock that
leads to regime change, but an internal revolution.
Suppose that Iran escalates a situation in
Middle East to proxies, initially attacking
Israel and Saudi Arabia, creating chaos with
his own proxies, and then [indiscernible]
US in a conflict, what's going to happen?
Oil now is at below 20, it's going to spike
250.
The stock is going to crash, and the recession
is going to become more severe, like '73,
like '79, like '99.
Once that happens, there's not going to be
a regime change in Iran.
Why?
Even if we bombed the hell out of Iran in
that war with an aerial campaign, the regime
stays in power.
You need to have 1 million boots on the ground
in order to have regime change in Iran.
We're not going to have 1 million people,
American soldiers going and invading Iran,
it's going to be air campaign.
Once you bomb Iran, even half of the country
is against the regime is going to support
the regime, because they're nationalist.
If you attack them, even those who hate Khomeini
are going to support in the same way they
went and rallied by the millions when we killed
Soleimani.
We're not going to have regime change in Iran,
Iran can cause a spike in oil prices, a collapse
of the stock market bigger than this one and
a more severe recession.
Once that happens, regime change is going
to occur not in Iran, but it's going to occur
in the United States.
Look at the three previous geopolitical shocks
in the Middle East, '73, '79 in 1990.
After these shocks were the recession, stock
market crash and inflation.
Guess what?
Carter beat Ford in '76, Reagan beat Carter,
and Clinton beat the Bush.
Three times you had a geopolitical shock in
the Middle East with an oil price spike, and
you had regime change not in Iran, in two
of those three cases, you had the regime change
in the United States.
That's what happened.
If we're going to have that shock, Trump is
dead, literally, politically.
The Iranians know it, and even if they're
weaker right now, in my view, not now but
by the early summer, they're going to escalate
the tension in the Middle East, and mark my
word, there'll be a war between US and Iran.
ASH BENNINGTON: That's also a very sobering
assessment.
You've covered your view of the potential
impacts of the oil markets.
Another question that I had for you is, when
you look at the potential for credit shock,
when you think about bond yields, what's your
outlook on that front?
NOURIEL ROUBINI: Well, as I pointed out, even
before, for the last two years, we've had
the debt bubble in the United States.
That debt bubble was mostly in the corporate
sector.
The last debt crisis was households, mortgages
and leveraged banks.
This time around, we've been saying it's the
corporate sector and shadow banks that finance
them.
CLOs, leveraged loans, fallen angels in high
grade, there are trillions of dollars of high
yield junk bond issued in the way that we
kept covenants, covenant light, we have a
loosening of our lending and credit standards,
it was just toxic, it was a crisis waiting
to happen.
Guess what?
When a similar shock occurred in 2016, spread
went from 300 to 900 for high yield, but it
took about three months, and then they went
down back to normal once we realized we're
not going to have a global recession.
This time around, they've spiked in less than
a month from 300 to 1100, and the entire market
for high yield, leveraged loans, CLOs as completely
shut down.
Even firms that had high grade issuing commercial
paper, and corporate bonds could not issue
them.
That's why the Fed and the Treasury have come
to the rescue of the high grade.
There are two problems.
Even if you have a plan to essentially backstop
commercial paper and high grade their debt,
you're not going to take care of all the firms
that are issuing junk bonds, because of course,
the Fed cannot take that credit risk.
You can backstop high grade, but not high
yield.
You cannot backstop the mediums or those medium
and small firms that don't issue bonds, like
small and medium sized enterprises have no
access to the capital markets, it's only larger
firms, high yield and high grade.
You're taking a huge credit risk even for
the high grade, because within the high grade,
you have a trillion dollar of bonds that are
BBB minus, they are on the verge of being
downgraded to junk.
Ford was just downgraded to junk.
A big firm like Ford has been downgraded from
BBB to junk.
The Fed now is telling us we're going to take
and we're going to buy high grade bonds, including
BBB minus.
To me, it's a mistake.
Because most of these guys, even if you backstop
them, the fundamental's going to lead to a
downgrade, and once they're downgraded, you're
taking a market risk, because then there is
a spike in the spread and you do a mark to
market loss on your portfolio as a Fed, you
take a huge credit risk.
I would have said if you want to backstop
corporate bonds, do it for high grade and
exclude fallen angels.
Instead, they decided to save the fallen angels.
Even by doing that, you still have all their
high yield that is essentially not backstopped,
you have leveraged loans and you have CLOs
and you have every firm that is not even issued
debt, that is the majority of firms in the
country who are not issuing bonds.
They have to use either banks or other forms
of lending.
We have already a debt crisis, let's speak
about it.
With oil at 20, most of shale gas and oil
producer in a matter of months are going to
be bankrupt, completely bankrupt.
There's not only them, anybody, hotel, cruise
lines, hospitality bars, restaurants and big
chains, retail, they were highly leveraged
before that segment of the market also is
effectively bankrupt.
These are not illiquid but solvent firms,
we should not bail them out.
These are illiquid, at that current economic
conditions, they are solvent and if we're
going to bail them out, there'll be a massive
loss for the Treasury and for the US taxpayer.
The whole point is you want to save those
are illiquid but solvent, but in the high
yield, and in the junk area, there's tons
of stuffs that is illiquid and it's insolvent,
and you should not backstop them.
Otherwise, you're literally privatizing the
gains again, socializing the losses again,
for equity holders and for other bull holders
and a creditors, that would be unfair.
We're not going to do it hopefully.
ASH BENNINGTON: One of the things that comes
up in this context is the risk of moral hazard
for backstopping debt and for companies that
have effectively been engaging in massive
share buyback programs that's generated an
incredible amount of angst and blowback against
corporate America.
NOURIEL ROUBINI: Absolutely.
For the last decade, the amount of share buybacks
has been huge, has been artificially increasing
earnings per share and the growth of earnings
per share, boosted valuation.
Since compensation of many CEOs, and senior
managers are based on valuation, they literally
pocketed those gains for themselves, and that's
something reckless, because if you do share
buyback, you're changing your capital structure.
You're reducing the amount of equity in your
firm, and you're increasing the amount of
debt, because most of these share buybacks
were financed for those who are not profitable
by essentially issuing debt.
You have essentially leveraged up your capital
structure with more debt, less equity.
You made yourself vulnerable, and now, the
shock occurs, and they go bankrupt.
There's a huge moral hazard because even if
the law says you cannot use this money for
a share buyback, that's the minimum, of course
that you need to do.
The share buybacks were done in the past.
You've made yourself financially fragile.
You've made yourself near insolvent.
Now, you're asking for a government bailout
because you screwed up and you've privatized
the gains, you socialized the losses for a
decade.
Now, I'm supposed to backstop the equity holders
and the existing creditors by giving you a
bailout?
It is still bailing out people and socializing
the losses even if you say that you get an
increased compensation of CEOs, and you got
to do more of share buybacks.
The damage in the moral hazard occurred for
the last decades.
ASH BENNINGTON: Let's shift gears here a little
bit.
I think most people think of you in your background
in acting in the academic world, but you've
also spent a long time in government and in
supranational organizations.
I think I can get these right, you're at the
IMF, the World Bank, the Fed, Bank of Israel,
at the White House, the Council of Economic
Advisers during the Clinton administration,
at Treasury is a senior advisor Tim Geithner,
help us understand, especially on the monetary
policy side, I think that a lot of people
have been going up to the, for example, the
Fed website, they see this alphabet soup of
liquidity facilities, in addition to the low
interest rate policy that we're at, the reserve
policy.
Help us understand how some of these liquidity
facilities actually function and how they
transmit into the real economy some of that
liquidity.
NOURIEL ROUBINI: Well, these liquidity facilities
have the falling feature, there are many parts
of the financial system that are stressed,
that suddenly everybody wants cash, even government
bonds and let alone things like corporate
bonds or equities becomes too risky.
When there is this scramble and everybody's
going from equity to government bonds, and
from government bonds into cash, then there
is a demand for liquidity.
If you don't find that liquidity of this crisis
in what's called funding market with very
exotic markers like repo having interest rates
not close to zero, but close to 5%, 10% like
it happened even last year.
Some of it is highly technical, but essentially,
think of it this way to think of how the market
got distress in March.
Usually, when there is risk off, stock market
goes down, but then bond yields go lower because
people move money from equity into safe US
Treasuries, so bond yields go lower.
While you're losing money in your equity portfolio,
you make money in your bond portfolio.
Suppose you're a typical investor that they
recommend you 60/40.
60 equity and 40 bonds.
Whenever there is a negative shock, you lose
money on equity, and you make money in your
bonds because the yield goes down, the price
goes up, and that's a mark to market game.
That's the way you are insuring yourself.
Most of modern portfolio theory, most of institutional
investors, even the hedge funds, what is the
risk parity that Ray Dalio and Bridgewater
was doing is a variant of 60//40.
Instead of being 60/40, you're enhancing your
bond side of the portfolio by leveraging it
because you know that when there is a shock
to equity, you want to be even more than 40
into bonds.
Between this year, between March 9 th, and
March 21st, for almost two, three weeks, something
crazy occurred, and the crazy thing occurred
was the stock market was in freefall going
down 10%, 20% and then 30%, and bond yields
that initially went down because initially,
in February, they went from about 1%, down
to 0.3.
Initially, the market reaction was the normal
one.
Stock market's down, bond yields are down,
you lose money on the equities, you make money
on bonds, but after March 9 th , and until
March 23rd , something crazy happens.
The crazy thing that happened was that bond
yields in the Treasury market, instead of
going lower towards zero, they went from 30
basis points in a matter of two weeks to 125.
You had an increase of almost 100 basis points
in bond yields that made you made losses of
10% on your own bigger bonds.
On this portfolio, 60/40, even Ray Dalio's
risk parity, why did they lost so much money
in March?
Because they were losing money on equities.
They were losing money on bonds.
This was not supposed to happen, because the
risky asset go down in price, but safe asset
goes up in price.
During that three-week period, government
bonds were going down in price, not just credit,
government bonds, safe, treasuries were going
down in price, gold was going down in price,
the Swiss franc was losing, the yen, so every
risky asset, whether it was treasury bonds,
or bunds or JGBs or Swiss franc, or yen or
gold was going down in price so there was
nowhere to hide.
The only place where you could hide was literally
cash, was the only thing that gives you zero
return but doesn't fall in price.
We have not seen this thing ever before.
There were periods of stress during the Global
Financial Crisis where we have three weeks
in which every asset, risky asset then safe
assets were collapsing in price so you're
losing money.
That's why the genius of Ray Dalio lost a
fortune on his risk parity portfolio.
It was supposed to be the portfolio does well
in good times or bad times.
Even the smartest people in the world lost
money.
All the quant funds lost money.
Why?
Because the normal correlation between equities
and bonds broke down.
Instead of one going up and the other going
down, both of them were going down and you
were losing money.
That was the liquidity shock.
What happened was that when the Fed decided
then unlimited QE, support money market, support
commercial paper, support high grade, support
that give liquidity to the banks, to non-banks,
primary dealers, everybody in the financial
system.
The investment banks did not have access to
the liquidity of the Fed, that's why they
were leveraged to sell everything.
As they were selling everything, even Treasury
were collapsing.
Once the Fed realized we have a problem of
liquidity and we need to provide liquidity
and they did everything, then things normalized.
Stock prices were going down still after March
19th, they were going down at least for another
week, but bond yields that went to 125 went
back to 75 basis points.
The normal correlation became normal because
the shock to the market was one of illiquidity.
Once you've got the market liquidity, at least
you had safety.
You had safety in gold, you're safe in Treasury
and you are safe in other things.
There was a massive liquidity shock that was
destroying every historical correlation.
There was no to hide, but cash and there was
not enough, of course, cash out there until
the Fed started to print.
They printed stuff of the order of 70 billion
every day.
Think about the printing machine, everyday
buying 70 billion of treasuries.
Within a matter of 10 days, you have almost
a trillion dollar.
That's what the Fed did, they became a huge,
the biggest printing machine in the world.
There was a liquidity problem over a lack
of dollar, not only in US, but also in the
rest of the world, in Asia, in Europe.
What did they do?
They restarted the swap lines, that means
that if you are the ECB or Bank of Japan,
you can borrow dollars from the Fed, hundreds
of billions, lend it to your banks, and your
bank can lend it to your corporates.
That's why the dollar was skyrocketing in
that period, there was a scramble for liquidity.
There was a dollar illiquidity and the dollar
was going through the roof.
You get this weird phenomenon of dollar in
spite of the Fed easing money going up rather
down in value.
It was again the same illiquidity, the shortage
of dollar liquidity was becoming lost.
This was just something we've never seen before.
ASH BENNINGTON: Do you think there's still
systemic risk there?
There was a lot of worry initially about the
breakdown of those correlations, about the
unwind of the risk parity trade, has that
trillion dollars in liquidity backstopped
it sufficiently or is there still potential
systemic risk in the future if that correlation
breaks down again?
NOURIEL ROUBINI: Well, the systemic risk doesn't
come only from that correlation breaking down
and what the Fed right now has done for the
time being stabilizing that correlation.
The systemic risk comes from the amount of
debt and leverage in the system.
It's not just that debt and leverage that
finance stock market position, most importantly,
the structure around of debt markets.
We have essentially, corporate debt within
CLO, leveraged loans, high yield and high
grade that is at historic highs, and the debt
crisis was going to happen regardless of.
In the household sector, is that who's going
to pay your student loans, your auto loans,
your mortgages, your credit cards if this
is going to become a great depression?
Currently, the bank look like safe.
Why?
I like the non-banks and the shadow banks,
they have liquidity and they have capital,
but that capital buffer is for a regular recession.
It's not the capital buffer for a greater
recession or for a greater depression.
People say shadow banks that financed the
corporate sector are going to go bust, but
many of these shadow banks by the way, PE
firms and capital markets and prime brokers
and insurance, where do they find themselves?
They find themselves from banks.
At the end of the day, the money comes from
the banks.
If they go bust eventually, banks are going
to lose money.
You have the massive exposure of the banking
system to both commercial and residential
real estate and to consumer credit, and also
to small businesses.
The current guarantee says that you do a credit
alone guaranteed by the SBA, you're going
to be essentially guaranteed 100% up to 10
million for each one of these loans for a
maximum of about 350 billion.
Now, 350 billion is spare change.
If many small business are going to go bust
and we're speaking about trillions of dollars
of bank loans, then those MPS are going to
sharply rise if you have a greater depression
and the banks could be in trouble.
The systemic risks come from the credit markets,
and the debt funds and the credit funds, they
can go bust and cause that fire sales, it
can go through a seizure, and then the default
and the crises in the corporate debt market
and only the high grade is being backstopped
by the Fed, and it could then spread into
the banking system.
That's a fundamental source of that systemic
risk.
It's not just risk parity, risk parity investors
in Ray Dalio's fund can lose money.
That's not the key thing.
There are bigger things happening.
ASH BENNINGTON: One of those bigger things
that you mentioned, you talked about the massive
dollar liquidity shortage that's being supported
now with cross border central bank swap lines.
How does that liquidity shortage develop?
What's the underlying risk there?
NOURIEL ROUBINI: Well, around the world, lots
of people, governments, corporations, even
households.
In some companies, your mortgages are priced
in dollars twice for various types of risk.
There is a huge amount of dollar debt of the
public sector, probably they issued dollar
debt in euro bond markets and private sector,
corporation banks and then even some households.
What happens is that now, given the shock
that occurred, risk off, the dollar was strengthening
and the value of currencies around the world
was falling.
Now, in local currency, if you bought it in
dollar and your currency depreciates, the
real value in peso, in real, in krone, or
whatever not, of your dollar that goes higher
because you have a devaluation of your currency.
That's called the balance sheet, the fact
of having foreign currency debt when your
currency depreciates and therefore, you have
a risk of illiquidity and insolvency.
As the currency of all these countries were
going down in value, the real value of your
dollar debt was going higher, everybody was
essentially long dollar debt, borrowed in
dollar and everybody was trying to buy dollar
to hedge essentially their dollar liabilities.
As people were trying to sell pesos and liras
and buy dollar, their currency were depreciating,
and the value of the dollar was skyrocketing,
and yet this massive dollar illiquidity, not
just in the US, but in Europe, in Asia, in
advanced economies and emerging markets.
Now, there are two solution to that.
One, the swap lines within the Fed and major
central banks in the world.
That helps Europe and Japan, doesn't help
emerging markets because most of the swap
lines initially were only with ECB, BOJ, SMB
and advanced economies.
They complicate the rules of lending money
to emerging markets directly from the Fed,
and certainly US doesn't want to lend money
to China.
In addition to the Fed providing global liquidity
and being an international lender of last
resort for advanced economies, somebody has
to provide liquidity to backstop emerging
markets when you have a huge amount of dollar
debt.
The international lender of last resort is
the IMF and the World Bank.
If you are the Central Bank of Mexico, you
can print pesos, but if you have dollar debt,
you cannot backstop your firms or your government
by issuing dollar by definition.
The IMF and the World Bank can help emerging
markets, their governments and then indirectly
their firms and their banks but the current
amount of capital of the IMF and the World
Bank allows them to lend only $1 trillion
globally.
Now $1 trillion looks like a lot of money.
In normal times, it is, because you have one
little Argentina, or one little Turkey needs
your money, so you have lots of funding and
lending capacity.
When you have now 50, 60 countries' government
bank, the IMF and World Bank lending money,
you're going to run over a trillion dollar
very fast.
That's why in emerging market, they need to
hedge your dollar risk is in the order of
$3 to $4 trillion.
The Fed cannot help you, the IMF can help
you only to the tune of a trillion dollar,
therefore, the downside risks for many emerging
markets are still severe.
You need a bigger lender of last resort at
the global level, you need to fund the IMF,
you have to use their capital so they can
lend more.
ASH BENNINGTON: This is all happening against
a backdrop of a collapse in global cross border
trade, much of which is denominated in dollars.
NOURIEL ROUBINI: Yes, it is denominated in
dollars.
When the dollar falls, the cost of imports
for these countries go higher.
Many of these economy in emerging markets
also are one, commodity exporters and the
price of commodities is collapsing because
there is a recession, not just oil.
Copper, industrial metal, and so on.
These economies are also export led growth.
If you have any collapse of your export because
there is a recession in US, Europe and the
rest of the world, you have another turn of
trade shock on commodities and on exports
of goods and services.
You have a recession that just transmitted
through commodity financial and trade channels,
you have huge amount of dollar debt of these
emerging markets, of the government and/or
of the private sector.
You don't have an international lender of
last resort who is willing and able to print
enough dollars or lend enough dollar to deal
with this shock.
That's why whenever there is a risk off in
advanced economies, things go south, and we
had that 30% fall in US and other advanced
economies' equities.
The shock in the emerging market is bigger
than a shock not just to their stock market
but to their debt markets.
EM spreads for sovereigns go sharply up, EM
spreads for corporates, not just in a foreign
currency, but even local currency, they go
higher.
The stresses for emerging markets are much
more severe.
If you're in advanced economies, you can print
your money, you can run a budget deficit,
your market is going to strengthen.
If you're an emerging market, you print money,
and you're on a budget deficit, you're going
to have inflation and collapse of your currency.
Then you'll have balance sheet problems, and
you have inflation.
That's because these emerging markets don't
have the same policy credibility as advanced
economies.
In Europe, US and Japan, we can run 10% budget
deficit and print money, and everything is
going to slightly improve over time.
In emerging markets, you run a 10% budget
deficit, you monetize it, you're going to
end up like Zimbabwe, or Venezuela or Argentina.
You don't have those options.
Your policy options are also restricted in
emerging markets.
ASH BENNINGTON: The final question before
we wrap up here, a place where we've seen
a lot of activity has been in the FX markets,
what's your outlook for the dollar, and what
are you looking for in that context?
NOURIEL ROUBINI: Well, usually whenever there
is a risk of episode, people tend to dump
other risky assets and currencies and go to
the safety of a few assets.
They tend to be US Treasuries, and the dollar
because the dollar is considered as a safe
haven currency.
However, during this financial crisis and
risk off episode, the dollar becomes the safe
haven for say, Europe and for Latin America
but the Swiss franc becomes the safe haven
currency for the Eurozone, or the Japanese
yen becomes the safe haven currency for Asia.
During that episode between March 9th and
March 20th, when everything was really, the
correlation were going berserk, the dollar
is going through the roof, but other safe
haven currencies like Swiss franc and yen
were falling sharply in value, because you
had these lack of dollar liquidity.
Now that the dollar liquidity problem is being
normalized by the Fed, at least the Fed does
it, the IMF can do it partly for emerging
markets, EM currencies are going to weaken
further out of the US dollar, because there
is no funding, but maybe the relation between
US dollar and Euro and yen is going to relatively
stabilize.
We are printing money like crazy, but they're
printing money like crazy also in Europe and
Japan.
Among major currencies, probably that you'd
have a currency stability.
Now, over time, of course, whether the dollar
goes up relative to Euro and yen depends on
what happens to the economy and the markets
in Europe and US relative to each other.
That's harder to say.
If we have another episode of severe risk
off, even with the flooding by the Fed of
liquidity, then if markets are going to go
south and people seek the safety of US Treasuries,
then they have to sell yen and Euro to buy
US Treasuries, that strengthens the US dollar.
The US dollar for now is still the only true
safe haven, and therefore other episodes in
my view, the current market has not bottomed
out.
People say when we fell 35%, that was the
beginning of a rally.
Guess what?
Last week, market went up 15%, they're still
25% below the peak.
They say this is the bottom.
It's not the case.
In any of these bear markets, and in many
of these recessions, you have a fake head
rally in a bear market.
You have a dead cat bounce.
I interpret what happened last week as a dead
cat bounce or a fake head rally.
Why do I say that?
The entire set of policy news now is priced
in.
People know huge monetary bazooka, huge fiscal
bazooka, that's already known and it's priced
in.
The two things that are not priced in is the
spread of the epidemic and how bad the economic
news are going to be.
All the good policy news are already out and
out in the market, they're fully priced.
What, everyday, we're reading the contagion
is spreading, US and globally worse than expected.
The economic news surprise on the downside,
as I said, instead of 2 million Unemployment
Claims, 3.3 million.
If you think about the flows of news in the
next two months, the bad news on the economy
and the macro and on the health situation
and the contagion are going to be worse than
expected.
While the good economic news that central
banks and governments are using their bazooka
is already known.
Now, there is a case in which we'll have more
fiscal stimulus as a surprise.
What will be that case?
If the economy becomes so bad and if the pandemic
becomes so worse, then we need a fort fiscal
package to give money to households that are
starving.
If that fiscal policy surprise were to occur,
it would occur only because the health news
are becoming so bad and the macro news are
becoming so bad that we need another fiscal
stimulus.
Even that surprise that we'll have a fall
package is not going to be good news for the
market because the trigger for that surprise
on that policy is going to be terrible negative
surprises on the macro and on the health situation.
It's going to be awash or [indiscernible]
actually the bad news are going to dominate
the positive one.
I fear that until we have positive news on
the macro, and we have positive news on the
health situation, the market can go only south.
Of course, they're not going to go south in
a mean that there'd be no way.
Someday, they can go up, someday, the come
down, but his is not the bottom of the bargain.
This is not the beginning of the rally.
We need to reach a point in which we've done
enough testing and we've done enough suppression
that we know that we're going to stop this
virus, maybe two months from now, maybe three
months from now.
The market need to be able to price risk.
They can price risk when you have distribution
is known, they cannot price uncertainty when
you have a distribution with fat tails.
Right now, we have huge fat tails on what
the health situation is going to be.
Are there going to be 100,000, 200,000, 1
million, 2 million people dying of these things?
We have no idea, and unless we do testing,
tracing suppression, we don't know what's
the end point where the second derivative
becomes negative and eventually, asymptotically
the number of new cases goes to zero.
Once we know that the market can price in
things from thereon.
Once we know that the economy has really bottomed
out, and we're going to see light at the end
of the tunnel, the market can go up.
This is a dead cat bounce.
This is a head fake rally.
This is not the bottom because of the reasons
I discussed, and if the geopolitics, if the
health pandemics and the policy response runs
out the battle and instead of a greater recession,
we end into a greater depression, that's not
priced in.
The market right now are fully pricing in
a greater recession, they believe that by
second or third quarter, we bought them out.
Then by the third or fourth quarter, we started
to grow positively.
If this recession is going to continue in
Q4 into 2021, because we have a greater depression,
there's a 30% probability, my view, is not
the baseline, the baseline is 60% greater
recession, that is the probability of a greater
depression occurs.
In a great depression, market go down, not
by 35%, they go down by 50% to 60%.
Then they don't rally back.
They stay down there for a while.
That's a tail risk that's not priced by the
market, and it's a rising thing in Greece.
ASH BENNINGTON: It's all the same meta themes.
It's unpredictable tail risk, asymmetric downside
risks, unknowns, and unknowables breakdowns
of historical correlations, and really, an
uncertain outlook.
Nouriel, thank you so much for joining us.
In conclusion, we've gotten a lot of information,
what should people be looking for very specifically,
key data points going forward that might influence
the chain of events that may unfold.
NOURIEL ROUBINI: First of all, as I said,
you have to be defensive.
This is not the bottom, it could be a fake
head rally.
It's not the time to plunge into risky assets.
You have to look, especially at the contagion,
at the health situation.
Is there light at the end of the tunnel?
Is the second derivative of the contagion
becoming negative?
Is that asymptotically at time, May, June
or July, when the number of new cases are
going to go to zero?
That's going to be key.
What's the healthcare response?
Are we going from mitigation light into true
mitigation?
Are we going from mitigation to suppression?
We're not going to go into full suppression,
we're going to do these mitigation, things
are going to get worse.
That's a key.
Secondly, the market economic data in my view,
for now, are going to surprise on the downside,
growth, unemployment, defaults and you name
it.
Until we start to see things are priced in
fully, and the economic news on the micro
becomes surprised on the upside, rather than
the downside, we're not going to see it through
bottom.
You have to look at the macroeconomic news
and you have to look at the health news.
Those are the two key things to understand
when we're going to bottom out whether this
is going to be a greater recession or greater
depression, and when there is light at the
end of the tunnel.
It's not yet at the moment, but you have to
monitor all of these factors, the health ones
and the macro ones and of course, the policy,
but for now, the policy is priced in ASH BENNINGTON:
Nouriel, thank you for joining us.
NOURIEL ROUBINI: Good being with you today.
Thank you.
JUSTINE: If you're ready to go beyond the
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