Stagflation, Debt Crisis, and a 50% Crash on Wall Street Await Us According to Nouriel Roubini.

Dr. Doom is more than pessimistic about the coming months.

Nicknamed “Dr. Doom”, the American economist Nouriel Roubini has never worn his nickname so well. The man who predicted the explosion of the subprime bubble and the collapse of the real estate market that led to the financial crisis in 2008, paints a more than bleak picture of the months to come in America.

For Nouriel Roubini, there is no doubt that the worst is ahead. America is headed for a severe recession, and it is time for the government to worry about what is in store for the economy.

Roubini also points out that the Fed is being “dangerously naive” by banking on a soft landing. In the long run, he believes it will “eventually chicken out and accept high inflation”.

The pressure of high inflation and interest rates that make loans more expensive will, according to Roubini, cause a further 50% fall on Wall Street, where prices are already off to their worst start in more than 50 years. When prices start to rise again (as they regularly do, despite a general decline), this should not be a reason to rejoice and buy, he believes, but rather be interpreted as “a dead cat bounce”.

His analysis of the double whammy of unchecked inflation and high-interest rates echoes a recent analysis by Ray Dalio. The well-known investor does not believe that interest rate increases will make things better. He believes they are as much a problem for purchasing power as inflation. Eventually, the economy will be in a stagflationary situation, according to him.

The picture painted by Ray Dalio, who is often characterized as a pessimist and a great critic of the United States, is particularly worrisome for consumers: on the one hand, with interest rate hikes, they lose purchasing power, and on the other hand, with inflation that would remain rampant, they lose it again.

Nouriel Roubini predicts stagflation and debt crisis

“The next crisis will not resemble its predecessors,” Roubini writes.

“Today, we are facing supply shocks in a context of much higher debt levels, which implies that we are heading for a combination of 1970-style stagflation and 2008-style debt crises - that is, a stagflationary debt crisis.”

Stagflation is a situation where inflation is high and GDP is stagnant (which can also be the antecedent of recession). For many economists, this is a dreaded situation, from which it is difficult to escape. For now, despite interest rate hikes by the Federal Reserve, inflation continues to rise in the U.S., lending credence to those who predict that stagflation or even recession is coming.

Especially since inflation is also linked to things that are beyond the reach of the Fed or any other central bank, such as supply chain delays and energy prices. In Europe, inflation is also high, but there the ECB has not yet lifted a finger.

“There is no real puzzle to solve,” concludes the professor emeritus at New York University's Stern School of Business. “Things will get worse before they get better.”

The picture painted by Nouriel Roubini does not inspire optimism. Those who were already anxious about the current situation might even end up capitulating and dumping all their market positions. However, I think you should analyze what Roubini says with hindsight as I do.

Roubini was right in 2008, but since then he has been predicting the end of the world in the markets almost every month. Having been right once when no one believed it, except for a certain Michael Burry, does not indicate that Nouriel Roubini will be right every time. The coming months will be difficult, but there are still reasons to hope, and Roubini's warnings should be taken for what they are: predictions based on his still very pessimistic views.

Other, more optimistic scenarios can be envisaged, and it is, therefore, advisable to mix these approaches to remain aware that even if the worst is possible, it does not always happen.