Speaker 1: Welcome to Kobe time, a podcast series on markets and
Speaker 1: economies from devious group Research. I'm Taimur baig chief economist
Speaker 1: welcoming you to our year ending 91st episode.
Speaker 1: I first met Nouriel Roubini during the summer of 1998
Speaker 1: in Washington D. C. Where he was serving at the
Speaker 1: White House Council of Economic advisors. I remember vividly asking
Speaker 1: Nouriel one day if he had any favorite stock picks
Speaker 1: to which he replied, I don't know about individual stocks
Speaker 1: but I know that the overall market will be up
Speaker 1: in the long term.
Speaker 1: I want to ask him the question at the end
Speaker 1: of this podcast if he thinks the market will be
Speaker 1: up in the long run again. But that's later. But
Speaker 1: think about that if you had invested $10,000 after that
Speaker 1: conversation with no real back in the summer of 98
Speaker 1: you would have registered a cumulative return of over 400%
Speaker 1: by today which is an annualized return of well over 10%.
Speaker 1: Which I suppose would put that passive strategy to the
Speaker 1: top decile of any investment league table. Great advice way
Speaker 1: back then, even coming from dr Doom,
Speaker 1: Nouriel Roubini is Ceo of Roubini macro Associates LLC global
Speaker 1: macro consulting firm in new york city. He is also
Speaker 1: chief economist for atlas Capital LP and co founder of
Speaker 1: Rosa and Roubini Associates,
Speaker 1: he served as a professor of economics at N. Y. U.
Speaker 1: Stern School of Business from 1995 to 2021 has already
Speaker 1: mentioned in the nineties late nineties. He worked at the
Speaker 1: Council of Economic advisers and later at the U. S.
Speaker 1: Treasury department and some of you may know that he
Speaker 1: has recently released a book mega threats, 10 dangerous trends
Speaker 1: that imperil our future and how to survive them. Nouriel Roubini.
Speaker 1: Welcome to Covid time.
Speaker 2: Great being with you today. Timer Pleasure.
Speaker 1: Pleasure is all mine. Uh Well I look forward to
Speaker 1: talking about some of the mega threats discussed at length
Speaker 1: in your book and in a series of articles that
Speaker 1: you have published and project syndicate through the course of
Speaker 1: this year. But first on the near term outlook
Speaker 1: this year has been characterized by a spike in inflation,
Speaker 1: soaring interest rates war in europe and china's pandemic struggles.
Speaker 1: And still we are ending the year with global growth.
Speaker 1: Oh about 3%. And our friends and I M. F
Speaker 1: are forecasting only a 50 basis point slowdown next year.
Speaker 1: Your take on that near term Muriel?
Speaker 2: Well, in the near term the biggest question is of
Speaker 2: course is about growth and inflation
Speaker 2: in advanced economies and also some key emerging markets.
Speaker 2: My baseline for next year would be that there will
Speaker 2: be a hard landing for the global economy. The IMF
Speaker 2: is not predicting a global recession but at 2.5% that
Speaker 2: the lowest growth we've had globally in a long time.
Speaker 2: So they certainly predict economic slowdown. That is very very sharp.
Speaker 2: Um if you look at the data, I would say
Speaker 2: that the United Kingdom is already
Speaker 2: in a recession and actually stack elation as inflation is
Speaker 2: double digits. The eurozone is headed towards a recession with
Speaker 2: the latest economic indicators suggesting a significant slowdown of economic
Speaker 2: activity in the U. S. Is not yet into a
Speaker 2: recession right now. But I do believe that we were
Speaker 2: gonna see also recession in the United States uh in
Speaker 2: us uh
Speaker 2: History in the last 60 years we have never had
Speaker 2: a situation where the inflation rate is above 5% and
Speaker 2: right now headline is 7.7 and where the unemployment rate
Speaker 2: is below 5% and it's currently 3.7 that when the
Speaker 2: Fed then starts hiking rates to bring back inflation to target,
Speaker 2: you never get a soft landing, you always get a
Speaker 2: hard landing.
Speaker 2: So the issues only whether it's gonna be a real
Speaker 2: hard landing as opposed to a short and shallow recession.
Speaker 2: China is in a sharp slowdown and well technically it's
Speaker 2: not in a recession for china to grow this year,
Speaker 2: barely 2 to 3% is the equivalent of a recession.
Speaker 2: Uh I think that the
Speaker 2: easing of the covid restrictions gonna have only a limited
Speaker 2: impact on economic activity. Overall, I have to say stance
Speaker 2: of this new
Speaker 2: Regime is one of caring less about growth and about
Speaker 2: political and geopolitical factors. We are still bashing the private
Speaker 2: sector that is still overhang of debt. There's still too
Speaker 2: much state capitalism. So I fear that China is going
Speaker 2: to be stuck into a 23% growth range for the
Speaker 2: next few years. That is a significant drug, not just
Speaker 2: for China but also Greysia and for global growth.
Speaker 2: And so my baseline is one in which advanced economies
Speaker 2: enter an economic contraction, inflation peaks and starts to fall,
Speaker 2: but it's not gonna fall fast enough towards the target
Speaker 2: in part because there are still the lingering effects of
Speaker 2: the negative supply shocks. They agree at the level
Speaker 2: the lingering effects of covid, the lingering effects of the
Speaker 2: Russian invasion of Ukraine on commodity prices and the zero
Speaker 2: covid policy of china. It maybe it's going to be
Speaker 2: phased out only gradually. And the impact on growth is
Speaker 2: gonna be only modest given the rest of the stance
Speaker 2: of
Speaker 2: chinese overall economic policies. So it's a bit of a
Speaker 2: hard landing for the global economy somehow more pessimistic than
Speaker 2: the I. M. F. Baseline. Right?
Speaker 1: And that's very clear and I really appreciate your china points.
Speaker 1: I think the energy markets are sort of reflecting that
Speaker 1: lukewarm response that you know, we're getting some news about
Speaker 1: reopening but we're not seeing any rally in the energy
Speaker 1: markets around china's demand picking up anytime soon
Speaker 1: On the asset markets. And real. I mean 2022 is
Speaker 1: going to be one of those very rare years where
Speaker 1: both the fixed income and equity markets sold off substantially.
Speaker 1: Um your view on asset markets around that hard landing
Speaker 1: scenario for 2023?
Speaker 2: Yes, as you point out this past year, equity prices fell,
Speaker 2: but long duration treasury fell even more as the yield
Speaker 2: went from below 1% towards flourish. Um So you have
Speaker 2: the positive correlation between equity and bond prices. Historically, it's
Speaker 2: the opposite, you know, it's a negative correlation risk Congress
Speaker 2: cough growth and recession,
Speaker 2: but that assumes that inflation is low and stable when
Speaker 2: inflation is rising even gradually. The discount factor for equities
Speaker 2: and dividends. Uh that is the long bond rate is
Speaker 2: rising and that leaves a correction in equity prices
Speaker 2: more so for long duration assets like growth and tech stocks,
Speaker 2: but then a yield going up in price, the price
Speaker 2: of the bond is falling and the yield went up
Speaker 2: so much that the price of bonds fell more than
Speaker 2: the price of, of equities in terms of the year ahead,
Speaker 2: I'm still bearish about global equities because I expect the
Speaker 2: hard landing for the global economy.
Speaker 2: The markets have recently rallied. But in my view, this
Speaker 2: is gonna be a bear market rally like the one
Speaker 2: we saw in july and august. And the rally is
Speaker 2: based predicated on some combination of inflation dropping sharp enough,
Speaker 2: the softest landing of the world and then central banks
Speaker 2: being able to cut rates from the middle of next
Speaker 2: year on and so on.
Speaker 2: I think the, that conventional wisdom is gonna prove incorrect,
Speaker 2: inflation is gonna be more sticky growth is going to
Speaker 2: be weaker than expected and how you get growth we
Speaker 2: can expect of inflation higher if there is persistent of
Speaker 2: negative aggregate supply shocks. So only in a real soft
Speaker 2: landing scenario from current levels,
Speaker 2: Stock prices should be going higher. Even if you had
Speaker 2: a short and shallow recession, the market has to correct
Speaker 2: downward another 10%. If it's a more severe recession it
Speaker 2: can correct another 20% or more. So unless you have
Speaker 2: a strong view that is going to be a real
Speaker 2: soft landing. I think the downsides to us and global
Speaker 2: equities
Speaker 2: for fixed income, I think that the markets uh expect
Speaker 2: that the inflation is gonna pick Central bank's gonna ease
Speaker 2: and therefore uh the inversion of the yield curve is
Speaker 2: suggesting that uh you know, first rates will be higher
Speaker 2: but then they're gonna drop. And uh and in that
Speaker 2: scenario probably long rates would fall as well next year
Speaker 2: as you fight inflation successfully and then expected inflation remains anchored.
Speaker 2: I'm more bearish. I'm of the view that the the
Speaker 2: great moderation is over and the greater stack inflationary and
Speaker 2: that instability is upon us. I think that inflation is
Speaker 2: gonna remain high even if some of even if some
Speaker 2: of the short term supply constraints are phased out because
Speaker 2: as I describe in my book that at least 11 forces,
Speaker 2: they're more medium long term that are speculation ery that
Speaker 2: reduce potential growth,
Speaker 2: the increased cost of production And therefore they caused calculation.
Speaker 2: And the other view in the book is that while
Speaker 2: central banks are talking hawkish now
Speaker 2: saying we're going to fight inflation at any cost in
Speaker 2: my view they will have to wimp out and blink.
Speaker 2: Uh Not only because there is fiscal dominance meaning in
Speaker 2: the game of chicken between fiscal and monetary authorities, the
Speaker 2: monetary will have to blink when the fiscal policies to lose.
Speaker 2: But there is a broader idea of a debt trap.
Speaker 2: That's a concept developed by the B. I. S. Economies.
Speaker 2: There's so much private and public debt in the system,
Speaker 2: private and public debt has assured G. D. P. Has
Speaker 2: gone from about 100% of GDP in the seventies to
Speaker 2: 350 rising last year globally. 420 rising advanced economies that
Speaker 2: if central banks fight inflation, not only they cause an
Speaker 2: economic crash a severe recession
Speaker 2: given the amounts of debt but there is also a
Speaker 2: debt crush, crush in credit markets in bond markets and
Speaker 2: faced with an economic and a financial crash central banks
Speaker 2: will have to win power because there is this debt trap.
Speaker 2: So
Speaker 2: and also see forces that are long term inflationary. Not
Speaker 2: only we have large fiscal deficits and debts today, but
Speaker 2: I see that the pressure are gonna be to spend
Speaker 2: much more with limited ability to raise taxes and if
Speaker 2: you have larger structural budget deficits
Speaker 2: either you finance them with bonds and that's going to
Speaker 2: crowd out growth with higher real rates or eventually that's
Speaker 2: demonetized and you know if you think about it where
Speaker 2: in a geopolitical depression today, so we'll have to spend
Speaker 2: more on security in europe against the Russian there, whether
Speaker 2: you like it or not in Asia us, its allies
Speaker 2: are going to spend more China's gonna spend more. There
Speaker 2: is this cold war they may get holder and eventually
Speaker 2: even end up into a hot war. So security spending
Speaker 2: is going to be higher.
Speaker 2: We'll have then spent so much more to deal with.
Speaker 2: Climate change, will have to spend so much more to
Speaker 2: deal with the next pandemic. Either to prevent it or
Speaker 2: if you don't do it. Exanta will spend a fortune
Speaker 2: like we did this time around to deal with the
Speaker 2: effects of it.
Speaker 2: We have also a i robotic automation machine learning that's
Speaker 2: gonna lead gradually over time to structural technological unemployment will
Speaker 2: have to support those left behind. Eventually even universal basic
Speaker 2: income that's going to be expensive.
Speaker 2: And finally there is so much income and wealth inequality,
Speaker 2: so much social strife, so much of a backlash against
Speaker 2: liberal democracy with populist parties that seem right and left
Speaker 2: coming to power that either they come to power and
Speaker 2: they become physically loose or to prove
Speaker 2: random from coming to power establish the parties will have
Speaker 2: to spend more to deal with these consequences. Transfer more
Speaker 2: money to workers unemployed, partially employed left behind the minorities.
Speaker 2: You name it. So we have a war
Speaker 2: against security issues. We have a war against climate change.
Speaker 2: We have a war against pandemic. We have a war
Speaker 2: against the consequences of ai we have a war against
Speaker 2: the income and wealth inequality. All that implies much more spending,
Speaker 2: limited ability to raise taxes structurally higher deficits and eventually
Speaker 2: they need to modernize them. You know, my friend Neil
Speaker 2: Ferguson recently wrote a piece saying when there are wars
Speaker 2: really hot wars, there are deficits and eventually you get
Speaker 2: inflation because you monetize them. It's not only called the
Speaker 2: not wars there are these other wars we're gonna be
Speaker 2: fighting and they'll be all expensive. They're gonna all lead
Speaker 2: to deficits and eventually monetization in inflation.
Speaker 2: Right?
Speaker 1: So no. Well I was gonna say let's talk about
Speaker 1: your book but I think you have preempted it very nicely.
Speaker 1: I just want to share with the listeners one coat
Speaker 1: from john Thornhill of F. T. He wrote. And I quote,
Speaker 1: readers of a nervous disposition may want to file this
Speaker 1: book in the bin before they turn the page, those
Speaker 1: brace for an ice bath of pessimism may profit from
Speaker 1: its gloom
Speaker 1: insights about the state of the world rubens warnings may
Speaker 1: be alarmingly scary, but they're also disturbingly plausible. And I
Speaker 1: think you know, you just did a very very nice
Speaker 1: summary of the key issues that you mentioned your book.
Speaker 1: I want to talk about them in greater detail, but
Speaker 1: I just want to stay with the short term just
Speaker 1: a little longer if I may to follow ups to
Speaker 1: your prognosis in the short term one is in the stagflation.
Speaker 1: I think in your book you use this phrase sticky
Speaker 1: stagflation
Speaker 1: material in the last few months around the global economic
Speaker 1: slowdown we have seen a substantial decline in energy and
Speaker 1: food prices. We will probably see rent prices begin to
Speaker 1: come down as high interest rates start denting the real
Speaker 1: estate market. So wouldn't you say at least in the
Speaker 1: near term this expected trajectory of inflation falling is also plausible.
Speaker 2: Yeah, no inflation may have picked
Speaker 2: in advanced economies and also in emerging markets where inflation
Speaker 2: was high in double digits. The issue is not whether
Speaker 2: it's a speak, but whether it's gonna fall
Speaker 2: Sharp enough and fast enough towards the 2% targets in
Speaker 2: advanced economies, my view is gonna be more sticky in
Speaker 2: part because the wage inflation is gonna be more sticky
Speaker 2: in part because some of the short term aggregate negative
Speaker 2: supply shocks are gonna remain with us. I consider the
Speaker 2: fall in commodity prices
Speaker 2: as driven not by a significant increase in their supply,
Speaker 2: but rather by expectation of lower demand. Given that the
Speaker 2: baseline is one of a something of a hard landing
Speaker 2: in the global economy. So those are a reflection of
Speaker 2: the weaker demand, not of easier supply condition and as
Speaker 2: I point out in the book,
Speaker 2: There are at least 11 forces that are medium long term,
Speaker 2: but they're all materializing even today that are speculation, very
Speaker 2: reduced growth, increased cost of production. We have the beginning
Speaker 2: of the globalization and protectionism and talk about, you know,
Speaker 2: secure trade rather than free trade. We have a re
Speaker 2: shoring of manufacturing from Lok
Speaker 2: because china to higher cost europe or US or even
Speaker 2: french shoring and even friends sharing is not going to
Speaker 2: be totally cheap but cheaper certainly than reassuring. We have
Speaker 2: aging of populations both in advanced economies and some key
Speaker 2: emerging markets like china like south Korea like Russia young
Speaker 2: people produce and they tend to save elder people don't
Speaker 2: produce and tend to spend and the safe that's inflationary
Speaker 2: in the past, the migration from south to north from
Speaker 2: poor to rich kept a lead on wage growth in
Speaker 2: advanced economies but now restrictions. The migration are becoming quite
Speaker 2: draconian
Speaker 2: in europe UK eurozone and europe. But even in the
Speaker 2: United States, you know, the migration policies of biden are
Speaker 2: not really different from those of say donald trump. We
Speaker 2: have this decoupling between us and china is becoming increasing
Speaker 2: by the day trading goods and services, movement of capital
Speaker 2: FBI labor technology. That information that that circulation erI we
Speaker 2: have the impacts of global climate change
Speaker 2: even before the Russian invasion of Ukraine. Food prices were
Speaker 2: rising sharply because there's desertification lack of water last summer
Speaker 2: with droughts from Pakistan to India to western europe sub
Speaker 2: Saharan africa. Most of the US in the west central
Speaker 2: America that's that's circulation eri. And on energy
Speaker 2: uh we're bashing right beso a big oil producer of
Speaker 2: fossil fuels there under investing into new capacity as they should.
Speaker 2: But we're not ramping up the production of renewable fast enough.
Speaker 2: So there is a structural supply lack given even normal demands.
Speaker 2: That's inflationary. That's why
Speaker 2: uh Brent was already at 100 even before the Russian
Speaker 2: invasion of Ukraine. And the fall right now in energy
Speaker 2: prices driven by expectation of a recession. We have this
Speaker 2: broader geopolitical depression
Speaker 2: is not just Russia, Ukraine is the U. S. And
Speaker 2: Israel against Iran is US. Uh And China over Taiwan
Speaker 2: is the noises that north Korea does and so on
Speaker 2: and so on. That's gonna lead to decoupling fragmentation, balkanization
Speaker 2: divisions of the global uh economy and
Speaker 2: global supply chains. We have cyber warfare. This exploration eri
Speaker 2: we have this backlash against a liberal democracy because of
Speaker 2: inequality is leading to fiscal policy. Pro labor, pro union
Speaker 2: for unemployed produce left behind. And finally the U. S.
Speaker 2: And its allies are weaponizing the U. S. Dollar as
Speaker 2: a tool of foreign policy
Speaker 2: that may eventually to a weakening of the dollar is
Speaker 2: gonna be inflationary for the U. S. Uh As I say,
Speaker 2: the strategic rivals of US diversify away from dollar assets
Speaker 2: plus you need the for the global trading system to
Speaker 2: work properly. And officially you need something that's like an
Speaker 2: oil in the system and they're all in the system
Speaker 2: that Greece is the system is the US dollar. If
Speaker 2: you throw some in the wheels of the global trading
Speaker 2: system by having all these weapons
Speaker 2: US dollar eventually, that creates a greater cost of transactions globally,
Speaker 2: whether trading goods and services, capital, labor, technology, data information
Speaker 2: and that it's also stuck inflationary. So all these forces,
Speaker 2: some of them are slow motion, but they are all
Speaker 2: actually happening right now and they're all reducing potential good
Speaker 2: and increasing cost of production. And I think those are
Speaker 2: forces are going to make the inflation rate more sticky
Speaker 2: than the consensus predicts right now.
Speaker 1: So real when we look at, say, the five cross
Speaker 1: five metric for inflation expectations or the steepness of the
Speaker 1: inverted yield curve that we have. So for you, a
Speaker 1: rally in long duration assets next year would be not
Speaker 1: necessarily a signal for holding onto them for a long time.
Speaker 1: You would actually take profit and be ready for long
Speaker 1: duration to sell off again past 2023.
Speaker 2: Yes, you know, of course the measures of expected inflation
Speaker 2: are not the anchor because so far the sabian other
Speaker 2: central banks are credible in saying we're gonna fight inflation
Speaker 2: at any cost.
Speaker 2: I don't think that's credible, given my analysis of the
Speaker 2: supply factors of the debt trapped in the longer term,
Speaker 2: how to say debt and deficits trends. And I'm not,
Speaker 2: by the way expecting in advanced economies hyperinflation. I'm not
Speaker 2: even expecting double digit inflation like the
Speaker 2: 1970s. I'm assuming that over time because of all these pressures,
Speaker 2: the average inflation rates say in advanced economies from a
Speaker 2: target of two could be actual 56. Now it doesn't
Speaker 2: sound like a lot
Speaker 2: But if average inflation were to be 6% then long
Speaker 2: rates have to capture expected inflation of six plus some
Speaker 2: real rates and that real rates are gonna be higher
Speaker 2: because once inflation is high and volatile the inflation risk
Speaker 2: cream have to be higher. So you get six for
Speaker 2: expected inflation plus another 2% real.
Speaker 2: You get 10 year Treasury 8% and then mortgage there
Speaker 2: is gonna be spread over that. There'll be double digits
Speaker 2: and then high grade and high yield that's gonna be
Speaker 2: spread of that will be double digits in nominal terms
Speaker 2: and they're gonna be significantly higher in real terms. Considering
Speaker 2: also the amount of debt in the system private and public.
Speaker 2: So so you know Tiny Treasury went from less than
Speaker 2: 1 to 3.73 point eight depending on the day. But
Speaker 2: if they have to go say eventually to 8% from
Speaker 2: 3.8 to 8% of another 40% plus losses depending on
Speaker 2: the duration of the those bonds. That's a huge further
Speaker 2: loss for fixed income. So it's only if they are
Speaker 2: able to fight inflation successfully
Speaker 2: And push it down to 2% inflation expectation. I mean
Speaker 2: anchored and then you get the persistent rally in long
Speaker 2: duration Treasury assets. Um but that's not my baseline.
Speaker 1: Sure to follow up on the debt issue. So one
Speaker 1: is to your point that we might see higher bond
Speaker 1: yields around this higher inflation narrative and which probably would
Speaker 1: sort of force
Speaker 1: fed to not cut a lot. But if there is
Speaker 1: a deep recession around the high cost of interest rates
Speaker 1: and so on. The financial repression dynamic that we saw
Speaker 1: in many countries in the past that forcing sort of
Speaker 1: a negative real rate to be in the system. And
Speaker 1: from a debt equation perspective that sustainability equation perspective negative
Speaker 1: real rates of course you know create room for sustainability
Speaker 1: of death. So that's one question that you know, what's
Speaker 1: your view on the fact that negative real interest rate
Speaker 1: itself could be a support for the
Speaker 1: mountain of debt that we have. And the second real
Speaker 1: at least in the case of the U. S. Private
Speaker 1: sector balance is of course much stronger today than they
Speaker 1: were during the eight recession, which of course, you know
Speaker 1: you are famous for calling. Um but today it's really
Speaker 1: the public sector and haven't we seen that example in
Speaker 1: the case of Japan that the public sector can borrow
Speaker 1: a lot but if it is in its own currency,
Speaker 1: it has a privilege where the central bank and supported
Speaker 1: the issue ends. And it can just, you know, go
Speaker 1: on for a very, very long time.
Speaker 2: Well on the first question, my view is exactly that
Speaker 2: because there is a debt trap, you have to any
Speaker 2: unable to raise taxes or cut government spending or do
Speaker 2: adjustment enough in the private side to reduce those debt
Speaker 2: and deficits that then you need about of unexpected inflation
Speaker 2: and about unexpected inflation will reduce the real value of
Speaker 2: long duration fixed interest rates of dollar assets, but also
Speaker 2: other ones. Uh
Speaker 2: But but that's essentially reduces only by little that that
Speaker 2: burden for only a couple of years unless you have
Speaker 2: really high inflation hyperinflation, you cannot wipe out debts. So
Speaker 2: you you kick the can down the road, you reduce
Speaker 2: some real debts this way. But as soon as then
Speaker 2: that happens expected inflation becomes higher. So nominal yields go
Speaker 2: higher
Speaker 2: and real rates go higher because you have the inflation
Speaker 2: risk premium. So then you still get the debt crisis
Speaker 2: because especially in the private sector, those nominal and real
Speaker 2: spreads relative to Treasury become much higher. You know, you
Speaker 2: can fool all of the people some of the time.
Speaker 2: Uh some of the people all the time, you cannot
Speaker 2: fool all of the people all the time. And given
Speaker 2: that that burden 6% inflation doesn't do it for you.
Speaker 2: You had only about unexpected inflation for a couple of years.
Speaker 2: Then you end up into actually a worse scenario because
Speaker 2: nominal and real rates become much higher and you don't
Speaker 2: avoid the debt crisis in the private sector
Speaker 2: uh in the public sector. You have to distinguish between countries,
Speaker 2: you know us is still you know the major reserve
Speaker 2: currency extraordinarily privileged. It's gonna be maybe the last one
Speaker 2: to fall. But we saw what happens. You have reckless
Speaker 2: fiscal policy in a country like
Speaker 2: the U. K. And many others in europe are are
Speaker 2: also fragile from a data sustainability point of view. But
Speaker 2: the point is yes we may need long term and
Speaker 2: higher inflation to deal with the debt problem. We cannot
Speaker 2: we cannot resolve otherwise. So that that would be my
Speaker 2: view on why actually you're not resolving that problem to
Speaker 2: higher inflation. Actually make it worse. You're just postponing and
Speaker 2: you make it worse, what was the second part of
Speaker 2: your question? I forgot
Speaker 1: that if the debt isn't largely issued by the public
Speaker 1: sector as opposed to the private sector, which is the
Speaker 1: case in the debt build up in the U. S.
Speaker 1: Is that less of a risky dynamic?
Speaker 2: Well, you know, first of all my view is that
Speaker 2: uh in the private sector the balance sheets are not
Speaker 2: that strong, you know during the GFC of course was
Speaker 2: a problem with household debt mortgages and bank debt.
Speaker 2: But even before the covid crisis, the Fed and other
Speaker 2: central banks were issuing financial stability report worrying about the
Speaker 2: build up of corporate debt. You know high yield fallen
Speaker 2: angels leverage loans, C. L. O. S. Private debt, you
Speaker 2: name it. And the shadow banks that financed the build
Speaker 2: up of these types of corporate debt
Speaker 2: and and even some uh public sector were more fragile,
Speaker 2: some of them borrowing their own currency, some of them
Speaker 2: borrow in foreign currency. But even in the household sector
Speaker 2: there are a whole bunch of zombies, you know us
Speaker 2: half of the bottom of the distribution of income for
Speaker 2: the house
Speaker 2: sites are people that are going from paycheck to paycheck.
Speaker 2: Their assets are falling in value because of the stock
Speaker 2: market and of housing. While the debt servicing ratios are
Speaker 2: rising because you have higher interest rates on the short
Speaker 2: and the long end of the year curve. So you
Speaker 2: know we have tons of zombies
Speaker 2: before this Covid crisis, household corporate some banks shadow banks,
Speaker 2: government entire countries and we build them out during the GFC.
Speaker 2: We build them out against during Covid because at that
Speaker 2: time with the low inflation if not deflation, negative aggregate
Speaker 2: demand shocks a credit crunch. So we could do it.
Speaker 2: The difference today is that inflation is rising so we
Speaker 2: have to raise interest rates into a recession and therefore
Speaker 2: the zombies are gonna not be able to survive. More
Speaker 2: of them are maybe corporate. More of them are shadow banks,
Speaker 2: some governments are also seriously fragile. Those who could borrow
Speaker 2: in the wrong currency could deal with it through a
Speaker 2: bout of inflation but that inflation eventually is actually more
Speaker 2: damaging than not.
Speaker 2: Um and and there is a vicious cycle in w
Speaker 2: between private sector and public sector and the country and
Speaker 2: so on. So I think that that's why I predict
Speaker 2: the model of of that crisis that ratio went from
Speaker 2: 100 to 350% of GDP globally. 420 in advanced economies,
Speaker 2: 300
Speaker 2: 30 in china and there are enough parts of each
Speaker 2: one of the pieces of the private and public sector
Speaker 2: that fragile that eventually you're gonna see a variety of
Speaker 2: debt crisis and you know an inflation tax is still
Speaker 2: attacks a capital levy on creditors and savers to transfer
Speaker 2: income and well too
Speaker 2: doctors and borrowers. So it is a form of default,
Speaker 2: actually more sneaky and less democratic form of default than
Speaker 2: doing a form of default or doing a legislation to
Speaker 2: deal with that problem.
Speaker 1: And really I want to sort of shift the conversation
Speaker 1: a little toward your view on sort of potential growth
Speaker 1: in the G. Three universe. So you, in your book,
Speaker 1: you point out, you know demographics being a potential dragon growth,
Speaker 1: the debt overhang being a potential dragon growth. Um Sometimes
Speaker 1: you no one hears from policymakers that invest
Speaker 1: and and policies on climate change is the future engine
Speaker 1: of growth that we will have like a marshall plan
Speaker 1: or the Manhattan project of all time to, you know,
Speaker 1: bring us new ideas and investments and flows and so
Speaker 1: on and that we are not running out of growth
Speaker 1: engines for the west. Do you share that view?
Speaker 2: No, I don't share it. One on climate change, there
Speaker 2: is more talk than action. Lots of greenwashing growths of
Speaker 2: green wishing lots of BsG investments that are just talk
Speaker 2: rather than substance. There's also lots of green inflation because
Speaker 2: many of the green metals to do like the vehicle's
Speaker 2: batteries and you name it, use a lot of energy
Speaker 2: that is expensive fossil fuel today, cobalt, lithium and, and
Speaker 2: you name it,
Speaker 2: that's the first observation to it's true that we may
Speaker 2: need to do many more investments to deal with climate change,
Speaker 2: But it's like saying uh, it's like a war, I
Speaker 2: suppose there's a war, your capital stock is destroyed, then
Speaker 2: you can have a spurt of growth because you have
Speaker 2: to rebuild it but you're poorer because a lot of
Speaker 2: your capital stock became either destroyed or obsolete. Same thing
Speaker 2: happened in the 70s with the two old shops, right?
Speaker 2: We had to replace the energy intensive capital with different capital.
Speaker 2: There was a spirit of capital investment but we were
Speaker 2: poorer because we had stranded assets and now the stranded
Speaker 2: assets are not going to be only in the energy sector.
Speaker 2: There are also lots of stranded assets say in real
Speaker 2: estate as lots of real estate is gonna become flooded
Speaker 2: or too hard to live or damage hurricanes, typhoons, wildfire
Speaker 2: and you name it
Speaker 2: so yes. And then a lot of the capital stock
Speaker 2: because uh, is, is how to say greenhouse gas emission
Speaker 2: intensive will also have to be replaced. So first of all,
Speaker 2: are we going to do all those investments is happening
Speaker 2: too slowly even if we make it is to substitute
Speaker 2: a lot of strength that capital, private and public real
Speaker 2: estate energy industrial, you name it. And therefore we still
Speaker 2: are worse off
Speaker 2: because we have this we've destroyed effectively a good chunk
Speaker 2: of of the capital stock or made it obsolete.
Speaker 1: Okay, so related to that issue is the role of technology.
Speaker 1: So one is that, you know, technology itself can probably
Speaker 1: address some of the climate change related challenges. And more importantly,
Speaker 1: technology can help us become more productive in the future
Speaker 1: even as aging areas, productivity or technology can address some
Speaker 1: of the very naughty problems we have around the world
Speaker 1: right now. Um, can take innovation save the day and
Speaker 1: push up potential growth.
Speaker 2: Yes, they can definitely. Technology for the last few decades
Speaker 2: or 100 and 50 years has been the driver of
Speaker 2: increasing economic pie economic growth and you name it. And, and,
Speaker 2: and even in my description of a more utopian future,
Speaker 2: the starting point, these massive technological innovations. But you know,
Speaker 2: there are many caveats you have to do about technology
Speaker 2: cabin number one, there is all this innovation. We're not
Speaker 2: seeing it yet in the aggregate productivity numbers, it's a puzzle.
Speaker 2: Maybe it takes a delay, maybe it's not really something else.
Speaker 2: But we're not yet seeing it secondly,
Speaker 2: innovation in ai machine learning, robotics, automation gonna lead to
Speaker 2: permanent technological unemployment. It's not just routine jobs. Even cognitive
Speaker 2: jobs that are white collar can be sliced into various tasks,
Speaker 2: can be automated and now look at chatter Gpt. You know,
Speaker 2: stuff that is more creative.
Speaker 2: Somebody wrote actually asking a question a critique of my
Speaker 2: book and charging me three gpt gave a very good
Speaker 2: analysis of why my book.
Speaker 1: I have to check it out
Speaker 2: at the PhD level. So you know, that's what the
Speaker 2: creative stuff like painting, music
Speaker 2: arts can be done. So even creative jobs eventually, you know,
Speaker 2: braving extreme views that our species sapiens is gonna become
Speaker 2: obsolete once the machine become super intelligence. Unless we merge
Speaker 2: with the machine and become super intelligent ourselves. Additionally, technology innovation,
Speaker 2: especially in A. I. And robotics, automation is capital intensive
Speaker 2: skill bias and labor saving. So if you own the
Speaker 2: machines or the capital gains the machine,
Speaker 2: you do well. If you're in the top 10% distribution
Speaker 2: of skill education, human capital like ourselves and many of
Speaker 2: our viewers and listeners probably for a while, technology is
Speaker 2: gonna make you more productive if you are a white
Speaker 2: collar or blue collar, low value added, medium value added,
Speaker 2: your job and your income will be increasing threat
Speaker 2: and not just menial jobs. As I said, even cognitive
Speaker 2: and creative jobs, you know now chat gpt can even
Speaker 2: become a computer programmer and code. So even the software
Speaker 2: engineers and computer programs eventually may become paradoxically obsolete in
Speaker 2: this extreme case. Um the other dimensions of
Speaker 2: technology they have to consider is that one, there's a
Speaker 2: dark side of technology. Usually technology innovation occur because governments
Speaker 2: want to build a bigger and more deadly weapons to
Speaker 2: win wars against their rivals.
Speaker 2: You know, we had massive technological innovation in the first
Speaker 2: industrial revolution. First stage of globalization. We still had World
Speaker 2: War One. And then in the twenties and thirties we
Speaker 2: build the weapons that allow us to fight a nasty
Speaker 2: World War Two. And the end of World War Two
Speaker 2: was using nuclear weapons that were developed initially to bomb
Speaker 2: uh Cosima Nagasaki only
Speaker 2: eventually you got the commercial spillover effects in terms of,
Speaker 2: you know, nuclear energy and you name it. And right
Speaker 2: now there's a new race and who's gonna dominate ai
Speaker 2: machine learning, robotic automation, quantum computing between us and china.
Speaker 2: And it's not just the race on who's gonna be
Speaker 2: dominating the industry of the future, who is going to
Speaker 2: be also the demonic military and sick
Speaker 2: security superpower of this century. As you know, drones, weapons
Speaker 2: system are all becoming more automated, more economies you have
Speaker 2: robot soldiers than you name it. And cyber warfare and
Speaker 2: also some other stuff of that sort. So maybe these weapons,
Speaker 2: our technological asked to build weapons, asked to fight even
Speaker 2: more deadly worse than than the past
Speaker 2: And final thing people say as the economic pie becomes bigger,
Speaker 2: we can afford UBI. I write some people are gonna
Speaker 2: be left behind and then we have A U. B. I.
Speaker 2: And everybody can be better off
Speaker 2: universal basic income or universal provision of basic public services
Speaker 2: and so on. So you tax the winners and you
Speaker 2: transfer money or services for free today to those left behind.
Speaker 2: But most people want the dignity of work. That's why
Speaker 2: in the U. S. Many people say I don't want
Speaker 2: a welfare check, I want the real job. So the
Speaker 2: idea of living your life where you're not a productive
Speaker 2: member of society and you receive,
Speaker 2: you know a check is a pretty actually dystopian future
Speaker 2: in the US. We already have these deaths of despair
Speaker 2: that angus Deaton and anne case I've described. A vast
Speaker 2: underclass is mostly white of people that are skinless, hopeless,
Speaker 2: helpless jobless income lessons on what did they do all
Speaker 2: day long.
Speaker 2: Uh they play video games and live in virtual reality.
Speaker 2: Many of them are addicted to opioids. About two million people, 5%
Speaker 2: of them die of those overdoses every year, 100,000 is
Speaker 2: a massacre and they cannot even reproduce themselves. They're in
Speaker 2: cells and celebrate involuntary celebrates
Speaker 2: because given the state's social and otherwise they don't even
Speaker 2: have made so a world of U. B. I. Is
Speaker 2: a world that effectively which a large part of society
Speaker 2: is unproductive and eventually becomes obsolete, doesn't even produce itself.
Speaker 2: So it's it's actually pretty dystopian future is not exactly
Speaker 2: a utopian. And frankly speaking,
Speaker 1: it's not, gosh, you've depressed me real? Okay. I feared
Speaker 1: that
Speaker 2: might happen to you and I, but most people I
Speaker 1: know exactly. You know, I've been playing with both dolly
Speaker 1: as well as chad gpd. It is pretty extraordinary the
Speaker 1: scope of these things.
Speaker 1: Um just a little changed track. Um you have spent
Speaker 1: many years, you know advising and working for various organizations
Speaker 1: including the I. M. F. I myself worked there. So,
Speaker 1: you know, challenges like balance of payments, crisis, climate change, trade, friction,
Speaker 1: global security, food security, we have
Speaker 1: the World Food Program and the United Nations and the W. T. O.
Speaker 1: And I. M. F. World Bank. So you take no
Speaker 1: comfort from the fact that we have numerous multilateral institutions
Speaker 1: with
Speaker 2: our that those institutions have limited power. And in the
Speaker 2: world of geopolitical conflict is very hard to achieve uh
Speaker 2: to say the provision of those global public goods. And
Speaker 2: I'll just give you one example about climate change. We
Speaker 2: know what needs to be done why it's not done.
Speaker 2: There are constraints about domestic and international, domestically take the
Speaker 2: us half of the country doesn't believe in human use
Speaker 2: the climate change when the Republicans are in power, nothing
Speaker 2: is done. Secondly, there is an intergenerational conflict between young
Speaker 2: and old old are not gonna be around, the young
Speaker 2: is gonna be around for another 80 years.
Speaker 2: The young don't vote the old vote and anyhow, nobody
Speaker 2: wants to do the sacrifices in the short man to
Speaker 2: achieve the benefits of the long run because we discount
Speaker 2: the future. Even the younger are they willing to give
Speaker 2: up lots of stuff and to reduce their carbon footprint?
Speaker 2: Not not totally obvious internationally, you have a free rider problem.
Speaker 2: The country does every cut is a mission to zero
Speaker 2: really costly. Nobody else does it, then it doesn't get
Speaker 2: any benefit and coordinating 200 countries to do it is
Speaker 2: mission impossible.
Speaker 2: There were a conflict within advanced economies and emerging markets,
Speaker 2: advanced economies tell China, India and others cattle emissions next
Speaker 2: 20 years
Speaker 2: And China and India say you created this problem for
Speaker 2: the last 200 years. The stock of emissions, 90% of
Speaker 2: it historically, the cumulative comes from advanced economies. It's true
Speaker 2: that the new flow is coming increasingly from emerging markets.
Speaker 2: But the M says you want me to stay poor
Speaker 2: or middle income when you're high income and me not growing,
Speaker 2: no way I'm gonna raise my emission for another 20
Speaker 2: years before I start cutting them unless you bribe me
Speaker 2: but unquote the bribes necessary are in the order of
Speaker 2: a trillion dollars per year. What was chosen and decided
Speaker 2: Sharma chic or Glasgow spare change, 50 billion an O. E.
Speaker 2: M is going to do the right thing for that
Speaker 2: spare change. And finally in the world of geopolitical conflicts,
Speaker 2: I said U. S. And china don't agree on even
Speaker 2: how to deal with
Speaker 2: pandemics or global security or trade or financial issues and
Speaker 2: and so on. They have a very hard time to
Speaker 2: agree even on on climate change with these fights between
Speaker 2: poor countries and advanced economies usually to provide global public goods.
Speaker 2: You need a global hegemon, right? This is a view
Speaker 2: of the demonic stability. 19th center was the pax Britannica
Speaker 2: with the UK empire. Rich empire in the 20th century
Speaker 2: was the pax Americana
Speaker 2: when you have a global hegemon that a human can
Speaker 2: internalize those things externalities and provide those global public goods.
Speaker 2: But in the world of great powers, china, us europe India,
Speaker 2: you name it, we cannot agree and nobody wants to
Speaker 2: provide those global public goods to end up with a
Speaker 2: bad equilibrium.
Speaker 2: So we need those institutions of global governance. We even
Speaker 2: need a global government, but frankly they do the right
Speaker 2: thing are great respect for I. M. F. And all
Speaker 2: those institutions, but you know, they're constraint, they're constrained because
Speaker 2: their political masters are fighting with each other frankly.
Speaker 1: Absolutely, that's sobering and very apt,
Speaker 1: No real 24 years ago, you gave me a fantastic
Speaker 1: piece of investment advice and you know, as I said
Speaker 1: at the beginning, you know investing in S&P 500, a
Speaker 1: passive investment strategy paid off handsomely. Uh if a summer
Speaker 1: intern came to you today and ask you to put $10,000,
Speaker 1: what would you tell them for the next decade?
Speaker 2: Well, for the next week is more complicated because in
Speaker 2: the long run, usually stocks do better than other asset
Speaker 2: classes or a variety of other risk assets. Uh if
Speaker 2: you can hold on for the long term.
Speaker 2: Um but there are periods of time, like in the
Speaker 2: 70s when you had massive circulation where equities fell by 50%
Speaker 2: state law for a decade. In the 1982, the price
Speaker 2: to earning ratio of S&P 500 was only eight. Today
Speaker 2: is twice as much or even more so depending on
Speaker 2: your measuring
Speaker 2: if I'm right, the next decade is going to be
Speaker 2: a decade of lower growth of inflation, of speculation, then
Speaker 2: you could have a bear market in global equity doesn't
Speaker 2: last just a year when there is a recession that
Speaker 2: could be more protracted, especially in a world of more
Speaker 2: geopolitical risk and political risk and various source of that sort.
Speaker 2: So I would say and equity returns have been so high.
Speaker 2: Np ratio so high, then maybe you get them below
Speaker 2: historical values for a long period of time. So only
Speaker 2: if you believe in the recession is the only cyclical
Speaker 2: that you get then a rebound and long term you
Speaker 2: want to be in equities. If if the type of
Speaker 2: tail risk, I'm worrying about the mega threats materialized then
Speaker 2: then you could have at least a decade of subpar
Speaker 2: returns if not close to zero negative.
Speaker 1: That's a really, really, you know, sobering note to end
Speaker 1: this discussion. But I I really appreciate you coming on
Speaker 1: the show and talk about and I think that you know,
Speaker 1: listeners should read your book to go deeper into it
Speaker 1: because it is not just a pithy observations about the
Speaker 1: past and the future, but you're in your book, you
Speaker 1: go very much deep into the each of the mega
Speaker 1: threads that you're talking about. So Nouriel Roubini, thank you
Speaker 1: very much for your time and insights.
Speaker 2: Thanks for being with me today. A great pleasure.
Speaker 1: Thank you Muriel thanks to our listeners to Kobe time
Speaker 1: was produced by Kendall bridge from Spy studios, Stacey Sharma
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