Money Rehab with Nicole Lapin - Apocalypse-Proof Investments with Nouriel Roubini

Episode Date: January 4, 2023

World-renowned economist Nouriel Roubini was given the nickname “Dr. Doom” after voicing his concerns on the housing market… right before the housing crash in ’08. As it turned out, he wasn’t fear-mongering, he was just paying attention.  While he doesn’t like this nickname, on today's episode, Nouriel tells Nicole that a little doom-and-gloom isn’t a bad thing; if you expect the worst and hope for the best, you can protect your finances from major downturns. In this episode, he tells Nicole how to do that in the face of the current financial landscape. Plus, Nouriel slams crypto so emphatically that even the most passionate crypto bros might start second-guessing themselves. You can find Nouriel's latest book, Megathreats, here: https://nourielroubini.com/books-op-eds/

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Since 2022, I think we've all had a what's the next curveball attitude. Globally, we've all had major challenges thrown our way since the outset of the pandemic. And all of these challenges have affected our finances, often for the worst. I know this all sounds a little doom and gloom,

but my guest today has an outlook that a little doom isn't the worst thing. Today, I'm talking to Dr. Nouriel Rabini, who is a rock star in the finance community and is debatably the most famous and well-respected economist of our time. And he has a resume to match. He is Professor Emeritus and Professor of Economics at Stern School of Business at NYU. In the late 90s, he served as the Senior Economist for International Affairs on the White House Council of Economic Affairs. And the IMF, the International Monetary Fund, and the World Bank are among other prestigious institutions that draw on his consulting experience. He was given the nickname

Dr. Doom after voicing his concerns on the housing market right before the housing crash in 2008. So as it turns out, he wasn't fear-mongering. He was just paying attention. While he doesn't like the nickname, I think he'd also argue that a little dose of doom isn't all that bad, so long as you're not actually resigning yourself to doom's day and instead looking realistically at difficult outcomes in order to prepare for and survive them. Today, he tells us what he sees as the major challenges facing the economy and the best strategies for navigating them. Dr. Nouriel Roubini, welcome to Money Rehab. Great being with you Nicole today. So you are known as Dr. Doom. I know you don't like this moniker, but for those who aren't

familiar with your work, how did you get that nickname? Well, I got this nickname because I was one of the very few economists or even people in the markets who predict the global financial crisis that started in 2006 and 2007. There was a New York Times Magazine feature of me in August of 2008 titled Dr. Doom. And that's where maybe I became a household name. Before that, I was known in academia, in policy and Wall Street. But even today, people see me in the streets and they say, are you Dr. Doom? They don't even say, are you Nui Rubini? So it stuck. I say I'm Dr. Realist rather than Dr. Doom. But of course, Dr. Doom is more catchy.

I do think that Realist makes sense for this new book that you just came out with, Mega Threats. The subtitle is 10 dangerous trends that imperil our future, which is doomy and scary, but also how to survive them, which seems optimistic. So for our listeners who haven't read your book just yet, can you talk about some of the motivation behind writing this book and some of the major threats you see to our financial lives right now? Yeah, I'm sure that most of your audience is a bit younger than me. I was born in 58 in the Middle East and then end up in Europe and grew up between the 50s, 60s and 70s and 80s until 83 when I came to the U.S. for grad school. But also your accent is so interesting, right?

Didn't you go from Iran to Israel and Italy? Like it's a whole... Yeah, Turkey to Iran to Israel to Italy. But most of you are much younger. But when I was growing up, for example, I never worried about the risk of war among great powers and of a nuclear war. Because, you know, in the 70s, Nixon went to China. There was the detente between U.S. and Soviet Union. And the risk of war that was already low became minuscule. While today we are having China, Russia, Iran, North Korea, Pakistan, revisionist powers that challenge what the U.S. and the West does.

Secondly, when I was growing up, I never worried about climate change. When I grew up, I never heard about global pandemics. So this is a world in which I grew up. And today we have to worry about war among great powers and the nuclear winter, about the destruction of the planet through climate change, severe pandemics, deglobalization, backlash against liberal democracy, economic crisis, financial crisis, debt crisis, aging crisis, and so on and so on. So it's a very different world that looks much more dangerous and with lots of mega threats that did not even exist. Okay, so I am officially

depressed. It sounds like you went from worrying about nothing to worrying about everything. So let's try to shift gears from imagining the future and the apocalypse to protecting ourselves from it, shall we? In your book, you talk about an investment strategy for a changing volatile world. Can you talk us through how to protect ourselves? Yeah. Traditionally, the investment advice is 60-40. Put 60 in equities and 40 in safer bonds, or 70-30, depending how risky averse you are. But that assumes that the correlation within the price of bonds and the price of equities is negative.

Risk on, risk off, growth, recession. When equity goes down, price of bond goes up, yields are falling. You make money on your bonds. When equities go up, maybe bond prices are falling, yields are going higher. But that assumes that you have low inflation. When inflation is low but rising, like this past year, you lose money on your equities because the discount factor for those dividends is a long-term interest rate is rising, say from 1% to 4% for 10-year treasuries. So you lose money on S&P, but you lose also money on your bonds because there is an inverse relation between the price of the bonds and the yield.

When the yield is higher, the price is lower, so you lost money. So the idea that bonds are safe is is higher, the price is lower. So you lost money. So the idea that bonds are safe is not true because the price falls and you can lose more money like this year on bonds than you did on equities. So this year, there was nowhere to hide. Public equities were down. Private equity was down. Growth, tech, VC, startups were down even more because they're long duration assets that They're more sensitive to rising interest rates than traditional firms. REITs that are real estate investment trusts were down. Even cash gave you zero nominal return. In real term, gave you minus 10 because

inflation was 10. So traditional investment doesn't work in a world in which you have inflation, the basement of fiat currency, social political risk, geopolitical and environmental. So what can you do to protect yourself? One, you can hold the short-term treasuries, one-monthy bills rather than 10 years. As the yield goes higher, you make money on the yield, but you don't have the price action downward of long duration bonds. Two tips, inflation index bonds, that if inflation is higher than expected, are going to do well. Three, gold. Gold does well when you have inflation, the basement of fiat currency, financial crisis, where the money in the bank is not safe, you want to keep gold. When there is social political turmoil, like civil war, violence, strife, instability, people want gold.

And geopolitically, if the Chinese, like the Russian and the Iranian and the North Korean are going to have their dollar assets seized, they have to get rid of them. What's the only global reserve asset cannot be seized is gold, as long as in a vault, not in New York, but in Beijing or Moscow. So gold and precious metal should do well in this world. It's a hedge against inflation, financial crisis, and geopolitical and political risk. And finally, real estate does well when there is moderate rising inflation because it's

in fixed supply, unless the fact is tightening interest rates a lot, like they did this year. The only problem with real estate is lots of real estate assets are going to be stranded because of climate change, flooding, sea level rises, hurricanes, droughts, wildfires, and you name it. So you have to invest into the types of real estate assets that are in part of North America that are not going to be damaged by climate change, essentially Midwest into Canada, because a lot of the U.S. is going to have lots of stranded real estate. So this combination of assets is the assets for the world where the great moderation is over and the great stagflationary debt instability is upon us. So this connection between climate change and the economy,

can you link it for us? Because oftentimes they're siloed in the way that people talk about them. Well, climate change is going to cause increasing economic damage. First of all, if you're going to have stranded assets that are real estate assets or energy assets as we move from fossil fuels to renewables and financial firms and banks and others have lots of those real estate or energy or other assets. That's why the Fed asked them to do stress tests. So it has an economic and financial impact, of course, the damage economic and financially of climate change,

but vice versa. If we deal with climate change and we want to reduce the amount of global warming, there's an economic cost. Today with current technology, we cannot reduce emissions to zero without having negative economic growth. So mitigation with current technology doesn't work. Adaptation, that means that build the walls and dams so that the damage from climate change, rising temperature is not there, is very costly's a plan to build some levees around Manhattan so that storm surges and sea level rising doesn't cause the damage that was caused by Hurricane Sandy. It's a $125 billion plan. It's going to take 20 years. You don't even know whether it's going to work. And that's one city. 40% of the global population lives near coastal areas.

So it's usually expensive. And we have even green inflation, meaning the green metals like cobalt, copper, zinc, and others that are needed to have electric vehicles or electric batteries, and you name it, they're becoming more expensive because they use a lot of energy. And if the price of fossil fuels is high, then you have green inflation of the green metals. So those are some of the challenges of addressing, for example, climate change in terms of economic costs. What do you think is one impactful thing individuals can do to combat climate change? Well, individually, we can all try to reduce our own carbon footprint by using reusable bags and things of that sort when we go to the supermarket.

So that small and big things, we should have solar panels in our homes. But climate change is a national and global phenomenon. Individuals can do this much, but you have to give the incentive to move away from fossil fuels to renewables. And unfortunately, there are studies suggest that if you want to achieve the Paris targets of 1.5 degrees above pre-industrial, the average carbon tax should be $200 per ton. Today, the average carbon tax globally is $2 per ton. Which government is going to increase it from $2 to $200? No one. If anything, now that you have a rise in gasoline prices, heating fuel prices, everybody and every country is cutting the fuel taxes and the carbon taxes to avoid the squeeze of inflation on the income. So

we're doing the opposite of what a transition to a more green energy system requires, rather than doing the right thing. Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests.

Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble. So I don't end up making time to make my house look guest friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. And now for some more money rehab. You didn't mention crypto, of course, in your options for hedging this uncertainty. You describe crypto as dangerous, that it represents a failure of faith in the government

and a threat to order because it funds terrorism and is used for money laundering and other criminal activities. Can you first talk about how crypto is dangerous from a broad civil society lens? Well, first of all, these cryptocurrencies are not currencies. Anybody who knows anything about money knows they're not a unit of account, not a scalable means of payment. They're not a stable store of value. They're not really money.

Two, most of crypto is a scam. Out of the 20,000 ICOs, 80% of them were a scam in the first place. 17% of them have already lost 100% of their value. So 19,000 and 300 out of 20,000 were a scam. And what did they use the money? To buy Lamborghinis, to buy boats, to buy planes, to buy villas, to go to Puerto Rico or other offshore financial centers, even to pay for prostitution as strip clubs in Miami having bills of millions of dollars

from these crypto guys. This is what the money was used, just a scam. Most of them were scammers. SBF is not the exception, is the rule, literally. 99% of crypto is crooks, criminals, conmen, carnival barkers, and assorted scammers and criminals. That's the reality. And whoever bought Bitcoin in the last year at 69, now it's at 16, lost 80% of their value. Same thing for Ethereum. The other top 10 lost 90% of their value. The other shitcoins lost 99% of their value. Same thing for Ethereum. The other top 10 lost 90% of their value. The other shitcoins lost 99% of their value. So if you want to gamble, go to Las Vegas. You have a great time.

Go to Atlantic City, but losing your money. Made off at the Ponzi scheme, a few thousand people lost their savings. FTX alone was 1 million customers. In the US today, there are 40 million Americans who hold some crypto. And 99% of them bought at the peak, not when Bitcoin was 100. They bought a year ago when it was a bubble and it was FOMO and everybody was getting into it. They bought at the peak when the whales sold into them. And now they lost 80%. So stay away from crypto.

It's the biggest scam. It's the biggest fraud. And it's the biggest bubble in human financial history. There's nothing equivalent to it. Just stay away from it. I have long said that. Why do you think there was this huge crypto craze? Did people just want to get rich quick?

Listen, we live in a world in which millennials, Gen X, Gen Zs were shafted, were shafted because of the global financial crisis. Those who graduated then didn't have good jobs. And now with COVID and many people in this society where there is rising income and wealth inequality, economic malaise, new generation are going to do less well than their parents. They're hopeless, they're helpless, they're skillless, they're jobless, they're restless. So they think that you can become rich overnight.

And that's impossible for one person to become rich overnight. As you well know, to do well in life, you have to study hard. Something's going to give you a stable job. Work hard, long hours, save money, not live from paycheck to paycheck. People say, I cannot afford it. Not true. You don't need 10 t-shirts or pieces of apparatus. You can have five of them. You can save. And you save in a diversified portfolio of global equities and some bonds. And you save year after year. You don't gamble.

You don't day trade. And hopefully, when you retire, you're going to have enough buffer to supplement a shrinking social security check. That's the way you are financially and income stable. But unfortunately, people feel hopeless. They don't have jobs. They don't have skills. They feel left behind. They think that if you gamble in crypto or Mimi stock or Spax or day trading or Robinhood, they're going to become rich. Not only they don't become rich, 99% lose their shirt. minced words whatsoever about your feelings on crypto. You call it manipulative Ponzi scheme.

Also, you envision, though, AI as the high tech financial innovation that will solve a lot of the problems that crypto claim to solve. Right. How do you envision that in the future? Well, AI applied to finance. The future of finance is not crypto, is not blockchain, is fintech. Fintech has nothing to do with crypto and blockchain. It's all centralized. It's a different type of approach. So the future of money and finance is that one, not crypto. Of course, AI applied not only to finance, but applied to pretty much every sector, every good and service, can increase productivity, can increase economic growth.

The problem with AI is that it is leading to some technological unemployment that is permanent. Initial routine jobs that are blue-collar, then cognitive jobs that can be automated, that are white-collar. Eventually, even creative jobs from creating music or writing a piece of financial reporting to even being a Fed watcher. Eventually the machine is going to do it better. So we're going to have massive permanent technological employment. Okay. So humanity's over soon. All apocalypses are coming. When are we going to get to the positive part of the subtitle of how to survive all of this, Dr. Realist? If you are a young person and you're asking yourself, how don't I become obsolete? What should I study? I would say you should major

in something related to STEM, science, technology, engineering, mathematics, computer science, and then minor in some liberal arts, because if you're going to have to change jobs every few years, of course, you have to think well, critically, read well, write well. Some combination of those more technical skills and more general intelligence skills are going to be necessary. They have to learn all your life. You have to retrain yourself. It's not enough to go to college or grad school.

You have to always be one step ahead to make sure that technology doesn't make you obsolete. There's no easy way of making money. Study hard, work hard, retrain yourself, save, invest, diversify, and be patient rather than trying to think that they will make a quick buck by doing something else. Embrace yourself for the apocalypse. Hope for the best and prepare for the worst

and make it true that you're not going to be swept away by all these megathreats. There are things you can do individually, as I said. What you study, your savings behavior, your investment behavior. And of course, many of these problems are collective, cannot be resolved only individually. So young people have to be really organized, social groups, politically to deal with climate change, with pandemic, with financial instability, to have more long-term policies.

So you have to collectively also resolve these problems because many of them cannot be resolved at the individual level. We have to care about other people because we are going to either swim or sink together. We're on the same boat. Yes, we are. Thank you so much. Thank you. So as I mentioned to Nouriel, this conversation was depressing at times, and it's my goal to make finance something that doesn't bum you out. However, first and foremost, I have to be honest, and the economy is not sunshine and rainbows all the time. And even though Nuriel could tone it down a bit, I think in general, he does have it right when he says, hope for the best, but expect the worst.

He definitely has the expect the worst part covered. And now the hope is up to us. So as I mentioned to Nouriel, this conversation was depressing at times. And it's my goal to make finance something that doesn't bum you out. However, first and foremost, I have to be honest, and the economy is not sunshine and rainbows all the time. So even though Nouriel could tone it down a bit, I think in general, he does have it right when he says hope for the best, but expect the worst. He definitely has the expect the worst part covered. And now the hope is up to us. Today's tip you can take straight to the bank is literal. Nouriel and I both agree that tips,

which are treasury Inflation Protected Securities, are a smart investing choice right now. Even though the Fed is working on curbing inflation and aims to lower it this year, investing in TIPS will help you hedge against the chance that inflation is hard to shake. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Our executive producer is Morgan Levoy. Do you need some money rehab? And let's be honest, we all do. So email us your money questions at moneyrehab at moneynewsnetwork.com to have your question answered on the show or even have a one-on-one intervention with me. And follow us on Instagram

at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. Seriously, thank you for listening and investing in yourself, which is the most important investment you can make.