He has warned us about the crisis in 2008. Time Magazine has named him one of the 100 Most Influential People in the world in 2009. He became a world-renowned economist and has increasingly gained respect and credibility.
Now he says, "The road to recovery from COVID-19 will be long and painful.” Be prepared.
He is Nouriel Roubini, a professor of economics at New York University's Stern School of Business. Senior economist for International Affairs in the White House's Council of Economic advisors. Afterwards, he became the senior advisor to the undersecretary for international affairs at the U.S. Treasury Department. He has worked on many other global crises and issues including the World Bank, the International Monetary Fund, and many other pressing topics.
Nouriel Roubini
James Dean said: "Dream as if you'll live forever. Live as if you'll die today."
I love this quote; it carries a message.
I converted it to my business.
"Do business as if you are in a growth pattern. Prepare for business difficulties."
- Not only am I preparing every day, but I’ve also created products so you can be prepared, too.
We must remember: Actions taken to prevent a problem present an opportunity. The opportunity can be life changing.
Nouriel Roubini gained fame after he warned us of:
- 1. The Housing Bubble
- 2. The ticking time bomb of subprime mortgages
- 3. The spike in oil prices
- 4. The possibility that the United States would drag the world into an economic crisis. This was stated in a lecture at the International Monetary Fund in 2006.
Roubini’s warnings were met with skepticism and even ridicule. Later, his predictions began to come true.
On August 15, 2008, before the crash, The New York Times published an extensive profile article about Pro Roubini, calling him "Dr. Doom."
The nickname has not left him since.
He then said, "It may be the beginning of the end of the American Empire." A month later, the investment bank, Lehman Brothers, collapsed and the world then plunged into the biggest economic crisis since the Great Depression.
I wasn’t ready!
Did You?
Preparation is inevitable.
While the stock markets were on the rise in the beginning of 2020, he reiterated that China's disease outbreak would harm the financial markets.
The rest of the U.S. population was in denial.
That scenario came to fruition.
- If we were prepared properly for COVD-19, thousands of lives, people’s livelihoods, businesses, and trillions of dollars would have been saved.
The Coronavirus has dragged down the stock market and the world economy. Realistic, down-to-earth people made millions betting against the stock market!
Are you prepared to move business forward knowing your online presence and digital communication will be where you’ll be financially in the next 12 to 24 months?
Now he has forecasted a weak recovery, followed by further inflation. However, he believes it is in our hands. Like everything else, proper actions will help overcome financial challenges.
Is Recovery Imminent?
The U.S. and the world’s economic activity was in free fall in the first and second quarters of 2020. Economic activity was in sync as everyone tried to control the spread of the COVID-19 pandemic and smooth the financial curve. Unfortunately, the second quarter began to show terrible news for future quarters.
Once the economic activity reopened in the U.S., the third quarter recovery will look like the letter V. Two quarters fall, followed by a quick jump back to create a V shape chart.
This leap, Roubini explains, is misleading. In the first half of 2020, the U.S. GDP shrank by a cumulative 12% -13%. Suppose there is even 4% or 5% growth in the third quarter (data will be published at the end of October) - we are still 8% below the level of economic activity we had before.
There is a tremendous amount of economic pain. People cut vacation plans. Many cannot pay rent or mortgages. Ten thousand people stood in line for food.
If measured correctly, the unemployment rate is more than 10%.
What concern me the most is the 2020 graduates who cannot find work. The have student loan that needs to be paid. They inject millions in to the economy each year.
Anyway, the third quarter might look like the letter V, but data shows that there is a slowdown in economic activity because of the COVID-19 pandemic.
The recovery may start off looking like the letter V, but at best it will be in the shape of the letter U.
That means a slow, frail, and gradual recovery.
If a safe and effective vaccine is not found by the end of the year, the cold weather may cause a second wave of the virus. It is not clear how severe it will be, but the slowdown from V to U could turn into a W (i.e. a recession).
The Gaps: Economic Downturn for Half of The Population
COVID-19’s second wave is not the only matter that could pull the economy down, Roubini argues. The hidden debts in the balance sheets of American companies will make a recovery difficult. Before the pandemic, a lot of companies were highly leveraged. They had too many debts, reaching the trillions.
A lot of companies are at insolvency risk. We only hear about companies like Apple, Google, and Amazon. These companies are profitable, with a lot of cash, and do not compare to the many companies who are struggling to survive with the amount of debt that they carry. Smaller companies are fragile. To survive, they must cut costs and make less investments.
Cutting costs means cutting employees' expense. That translates into a decline in overall consumption which leads to a slowdown. Even when companies hire back, as they did after the financial crisis, these employees will not be offered full-time jobs with full benefits. As a result, households will spend less and save more.
Those who have good jobs, who can work from home, who work for big-tech and profitable companies, who have stock market savings - their situation is improving.
However, in the U.S. the top decile of households holds 88% of all stocks' value. The 1% to 5% of the U.S. population owns 51% of the stock market. 50% of the people, about 160 million people, hold more or less zero shares. They do not benefit from the stock market rising.
Why Wall Street turned negative last week?
The first correction was in technology bubble and growth. Now it's in cyclical stocks as well. There are many explanations:
- 1. A global rise in COVID-19 cases
- 2. The chances of a vaccine pushed towards 2021
- 3. The recovery slowing down to the U shape pattern
- 4. Failure to reach a fourth aid package in the U.S.
- 5. The fear in the markets that the central banks are starting to run out of ammunition
- 6. The U.S. election
- 7. The rising tension between China and the U.S.
There is an increase in various risks and markets can be justifiably nervous until this uncertainty becomes clear.
Long-Term Economic Damage
If you decide to look even further into the future:
After the global financial crisis, there may be a painful and anemic U-shaped recovery. This time I think the economic damage is even more severe. There is a risk of long-term damage to the economy. There is also a lot of uncertainty from other sources. There is a huge electoral uncertainty: Will we have a foreign intervention like Russia, China, or Iran, in the U.S. election who wants to create chaos and weaken the U.S.? Will we have more aid packages?
There is a cold war between the United States and China that is getting colder, leading to economic damage. There is a counter-reaction against liberal democracy against globalization. We are moving in the direction of de-globalization and fragmentation of the world’s economy. A situation in which every country tries to protect its workers and companies and yet harms world trade and world growth. Many things could cause long-term economic damage.
When We Put It All Together, How Will It Manifest Itself?
The actual world growth and potential growth will become slower.
Workers who are unemployed for a long time will likely lose their skills and human capital, companies will not invest in new equipment, and smaller companies will be involved in mass bankruptcies rather than growth and innovation.
But that's not all.
The actual world growth and potential growth will become slower.
If globalization flooded the world with cheap goods and products, then a withdrawal from it would have the opposite effect: increased production costs.
This combination of slowing growth and soaring production costs has a familiar name: it's called a 'Stagflation Shock' - something that slows growth and could raise inflation.
All this will not happen immediately, Roubini says, not this year or next, but in a few years. That is what happened in the 1970s. At that time, there were two adverse shocks. One was the war between Israel and the Arab countries. The oil prices tripled. Then came the Iranian revolution in 1977. The reaction of policymakers was economic incentives and easy money. What we got was a recession and inflation.
Will Incentives help?
If we did not use a deficit and did not have a monetary easing policy (i.e. low interest rates), this recession, which is bigger than the global financial crisis, could turn into a 'bigger slump.' A lot of the money goes to the wrong people. We have seen a rescue of the big Wall Street corporations. There is a gap between what is happening on Wall Street and what is happening on Main Street.
What Does This Mean?
"Wall Street is big companies, big banks, big tech. Main Street is workers, households, and small businesses. The market share of big companies grows, and millions of small businesses that create jobs will go bankrupt.”
- 1. On every job created by Amazon, ten positions are lost in retail.
- 2. These incentives need to help the small sector instead of those who are in a good situation anyway.
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A Little Optimism: This Will Prevent Deterioration
Few steps could lead to higher growth and a more controlled deficit. There are courses of action that may lead to a more optimistic future for the U.S. as a whole along with each individual business.
They called him Dr. Doom. He thinks he is Dr. Realistic. The direction of the economy and each business is not determined mechanically. It is driven by economic policy, policymakers, and leaders or business owner. Leaders’ choices and policies may turn some of the problems we face. It will take time, but it will ease the way for growth. It will prevent disaster.
Still, What Likelihood Do You Give to A Double Recession Scenario Followed by A Period of Stagnation?
He gives a low probability of a V-shaped recovery. The damage done will lead to a weak economy and a U-shaped recovery. The possibility of having a W, or a double recession, depends on whether or not a business owner takes appropriate measures. Reducing infection while reopening economic activity and responding to the need of the time are necessary when taking such measures. We still do not know when there will be a vaccine. Realistically, it is unlikely to expect quick recovery, but smart actions can prevent something worse and lead to a slightly better path, even for those left behind.
Are Some Countries Going to Get Out of It Better Than Others?
Some key countries have been able to control the pandemic quickly. China and neighboring countries, such as Singapore, Vietnam, and Korea, have gradually improved.
Emerging markets are in trouble, including Russia, Brazil and parts of South America. Argentina and Ecuador are forced to reach a debt settlement, Lebanon is already bankrupt, and its banks are insolvent, and Turkey may experience financial pressures.
We have to spend more on health in order to be cautious and prepared for future pandemics. We cannot continue with insane deficits. Eventually, we will have a debt crisis or an inflation crisis. We must be prepared to increase revenues as well - including anti-tax evasion and avoidance measures. There are reasonable ways to raise revenues. Low-interest investment is needed to get out of a recession and below interest investment leads to growth.
Is this a prophecy of Dr. Doom or is it a realistic assessment?