Odd Lots - Nouriel Roubini Predicts a Crisis 'Worse' Than the 1970s

Episode Date: October 19, 2022

Nouriel Roubini is known for his bearish prognostications. And unfortunately, he still doesn't see any good news on the horizon. In fact, things are going to get much worse, says the famous economist and author of the new book "MegaThreats: Ten Dangerous Trends That Imperil Our Future, And How to Survive Them." He believes that due to a rolling series of supply shocks, some of which are still unfolding, we'll have a severe downturn before we get relief from inflation. Unlike the 1970s he says, high levels of private sector debt will make it harder to fight higher prices, and that central banks will reverse course as things start to break in financial markets. See omnystudio.com/listener for privacy information.

The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off.

And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend.

Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, I'm thinking back to the spring of 2020, the depths of the COVID-19 pandemic and the big market sell-off. I don't like thinking back. I mean, it was a terrible time. It was a bad time. So why are you reminding us of that? Well, I remember we spoke to one particular guest in, I think it was May of 2020. And he came on

and basically said that we're going to see a bad economic recovery and we're going to see inflation as a result of what was happening. And I think at the time, both you and I were a little skeptical. At that particular moment, everyone was talking about deflation and the possibility of a prolonged depression, really. Yeah, you're totally right. And then also by like sort of late 2020 or even like summer 2020, optimism started to grow. Oh, yeah. Oh, we're going to have this. We're going to come out of this with a boom, that we got the policy just right, that we're going to have all, you know. We avoided the mistakes of 2008.

Yeah, that's right. That's right. And the stock market was surging. And I think there was just a lot of optimism, even outside of the stock market, that like we were going to be on this new superior trajectory post-pandemic. Yeah. And of course, now fast forward about two years. And we're talking about the pain of higher interest rates as the Federal Reserve tries to tamp

down on inflation that is at its high. highest in I think four decades. People are talking about stress in the financial market, the potential for something to break as these rate increases go through. And we're already seeing some stuff internationally start to break. So I think it's a perfect time to catch up with that original guest who did get a lot right in May of 2020 when, you know, there was a lot of uncertainty. Yeah. You know, something, you mentioned, this fears of that something is going to break. And I'm thinking, you know, our regular guest, John Turk has written about this and others, this idea that what if, you know, the real economy, employment is holding up okay, but the financial

system starts to creak and that something breaks in the financial system, creating this real tension for central banks that still want to fight inflation, it's a pretty confusing time. It is. So why don't we bring in Noriel Rubini, of course. We're going to let him do a victory lap on the show. But we also want to talk to him about the risks that he's seeing now. because he has a new book out. It's coming out on October 18th. It's called mega threats, 10 dangerous trends that imperil our future and how to survive them. So hopefully the perfect person to be speaking to right now. Nourio Rubini. Thank you so much for joining us. Great being with you. Such a pleasure to do it again.

Should we let you have that victory lap? So, you know, what did you see in early 2020 that you think other people, notably perhaps certain policymakers might have missed? Well, at that time, the entire talk was about the risk of not just an economic contraction, but also of deflation because it was a shock to aggregate demand and a credit crunch. But I think what I saw that other people saw as well, you know, early on, people like Larry Summers, Mohamed Elaviani and others, talked that the amount of the stimulus, monitoring fiscal will be excessive. Of course, we didn't do enough on the fiscal side in 2008, but between Trump and Biden, we had about $5 trillion of fiscal stimulus that is something like about 20% of GDP. That was excessive.

And of course, the Fed went back to zero, credit easing, quantitative easing, backstopping, money market, commercial paper, high-heel, high-grade, banks, non-banks, corporates, households, you name it, everybody under the sun. I think the difference between me and people like Larry was that they were stressing that there would be inflation because of a aggregate demand shock, too much stimulus. And I agreed on that that half of the problem was bad policies to lose monetary fiscal and credit easing. But from early on, I also realized that this will be a negative aggregate supply shock. the disruption that came to global supply chains, the shutdown of economic activity from services to initially manufacturing, the reduction in the labor supply, and then we ended up with a great resignation. And those initial negative supply shop was amplified, of course, this year by the Russian invasion of Ukraine, this brutal invasion, has led to a spike in oil and natural gas prices, food, fertilizers, industrial metals. That's another negative supply shock.

And the third one is the continuation of the zero tolerance policy of China towards COVID. It's creating further bottlenecks. So most people were saying we're going to get inflation because of excessive overheating because of the bad policy and excessive stimulus. I think my contribution to that discussion was to emphasize the aggregate supply shocks. I'm old enough and I've gray air. And I remember the two oil shocks of 73 and 79 that led not only to, inflation, but also to staflation. So most people were worried about inflation and overheating

and excessive growth. I started to worry about instead not only inflation, but also recession because of the negative supply shock. So that was maybe the new twist that I gave to that debate. So looking at the situation today in October 2022, we still have obviously extremely elevated inflation, really no signs that it's turning the corner yet at all. Maybe a little bit if you look at headline of the elevated inflation today, how much would you at this point attribute it to the persistence of these supply shocks that you identify, including the ongoing war, versus still paying the price in some way for what you characterize as excessive fiscal and monetary policy? Because I think it matters when thinking about how much the Fed is going to have to tighten to

get inflation back to its target? Well, it depends on the countries. I would say the solomonic answer is half and half. But of course, in Europe, given exposure to Russian energy, is more debt shock. In the U.S., we had, in terms of monetary fiscal and credit easing even worse than Europe. And Europe did a lot. In the UK, in addition to that, there was another negative supply shock, self-inflicted. It was the Brexit decision that was stackflationary, reduced the growth and increase. increase the cost of production. Same thing in China.

Some of it is self-inflicted. So I would say it depends on the country, but I would say it's a combination of both of them. You had serious negative supply shocks, and you had really a policy stimulus that was by any standard, massively excessive across the world in all advanced economies.

Now, in my book, what I point out is that, while in the short term, there are three negative aggregate supply shocks that are COVID initially, Russia, Ukraine, and now the China policy. I identify in the book where I have a chapter about the great coming stifflation, that there are 11 medium-term aggregate supply shocks that are negative. They're going to reduce potential growth, and they're going to increase cost of production.

And if then you have a loose monetary fiscal policy, because I expect that central banks got a blink for a reason I can discuss, then we end up like the 70s with inflation and stackflation and with a debt crisis as well. So it's going to be worse than the 70s. So this is not just a shortened phenomenon. People say the global supply bottlenecks my end after November when Xi Jinping is going to care about growth. I think there are many other forces is a protectionism and de-globalization, French shoring and reshoring of manufacturing from China to high cost Europe and U.S. aging of population, restriction of migration, decoupling between U.S. and China, geopolitical risk and depression that's going to fragment the couple,

Balkanize and de-globalize the global economy, the impact of global climate change, the impact of cyber warfare, the impact of the current pandemics, the backlash against income and wealth inequality is leading to policies pro-labor workers and so on. And of course, the de-dollarization of the dollar when eventually people are going to get out of dollar assets

because of the financial sanction and so on. Those are 11 forces that are not. medium term. They have nothing to do with COVID and Russia, Ukraine. They're going to be reducing growth, increase cost of production. And I think central banks will have to blink. Like the first example is what happened in the UK. If you're going to have an economic crash, you're going to have a financial crash as you increase interest rates, you're going to wimp out, guarantee it. The Fed did it in 2019. The BEO has done it now. The ECB is going to have to do it. The Fed is going do it. It's going to happen for sure. And therefore, we're going to have an unhinging of inflation

expectation. I don't believe central banks when they say, we're going to do fight inflation at any cost, even if there is a recession, even if there's a hard landing. First of all, it's not going to be a short and shallow recession. It's going to be ugly. And then you'll have financial stresses, and a financial and a debt crisis. At that point, they're going to whimp out. It went out actually worse than the 70s. Because in the 70s, we had two statutory shops. And with inflation and recession, but debt ratio were 100% of GDP for private and public sector in advanced economies. After the GFC, we had a debt crisis, mortgage, housing, bank debts, but we had deflation because it was a negative aggregate demand shop and a credit crunch. So we could ease monetary and fiscal policy like we wanted.

Today, we have levels of debt to GDP of 350% of GDP globally, 420 in advanced economies, private and public. we have these massive negative supply shocks. So we're not going to have only inflation. We're not going to have only stockflation. We'll have a stockflationary debt crisis. The worst of the 70s and the worst of the post-GFC period. I got to say you're not helping with my anxiety levels right now. I'm going to go to all.

I'm moving my portfolio to cash one second. I got to pause. Well, cash is not enough because it's going to be wiped out by inflation. You have to go to assets. And I can discuss they can hedge you against inflation. All right. So this idea of a stagflation, a great coming stagflation, I mean, stackflation already seems like the nightmare scenario for central banks if you have high prices and lower growth. But if you tack on to that a debt crisis plus stagflation, that just seems like incredibly difficult for any central bank to navigate. What is the appropriate policy response, especially if inflation is being driven by supply side bottlenecks as you described? Well, some people say if inflation is driven by negative supply shops, we shouldn't tighten

too much because central bank can affect aggregate demand, not aggregate supply. But the reality is that like in the 70s, if you don't fight inflation, you have a de-anchoring of inflation expectation, you have a wage price parallel, and then you end up in a nightmare. So unfortunately, even if it's a negative supply shock as opposed to aggregate demand, you have to tighten monetary policy to make sure that you don't. have an inging of inflation expectation. Otherwise, you make the same mistake. It was done in the 70s when they replied to these two negative supply shop, we have loose monetary policy and lose fiscal policy. It went up in circulation. So the right response would be to fight it. But in the

70s, we had a nasty recession, 74, 75, and a double-deep recession in 80 and 82, when Volcker came to power, and it caused a double-deep recession to finally break the back of inflation. expectation, and we're at the beginning of the American carnage, because a lot of the industry went bust for good. But in the 70s, we did not have a debt crisis in U.S. or advanced economies. We had the debt crisis, of course, in Latin America, because they borrowed like crazy in the 70s, and when the Fed went to 20 percent interest rates, of course, Brazil, Argentina, Mexico, they all default and went bankrupt. So we had the structuration, but not a debt crisis. Today, the problem we're facing is that if you fight inflation, not only you're going to have a recession, and the idea they're going to have a short and shallow recession, plain vanilla, garden variety, is totally delusional. I mean, it's totally delusional because we have amounts of debts like we've never seen before. In previous recession, like COVID-GFC, we could do monitoring fiscal easing because you have deflation. Now we have to tighten monetary fiscal policy into a recession. In fact, we have to tighten monetary and fiscal policy into a recession.

Inflation is global and everybody's tightening. And therefore, as I pointed out, we get the worst of the 70s and the worst of the GFC. It's going to be long, ugly protracted with financial stresses, financial instability and debt crisis. That's what we're facing right now. So what would be the optimal response? Try to avoid an unhinging of inflation expectation. But you have two problems if you do the right thing. One, you have a recession to get nasty.

Second, you have a financial and debt crisis like you're not seeing before, and that's going to lead central banks to whimp out. Because between causing an economic crash, this is severe and a financial crash, or blinking and wimping out and monetizing those deficits and wiping out a real value of nominal long-term fixed nominal debt at long duration, the part of this resistance politically is going to be to monetize it. And therefore, to cause inflation and stratration like the 70s. And the first example is exactly the BEO. Faced with a financial shock, what they do, they totally winped out. And they go back to MMT. So that's going to happen across the board. So I don't believe central banks, when they say we're going to fight inflation at any cost,

because they have delusion of either a soft landing or a hard landing that is short and shallow, two quarters of negative growth, and then you return to growth and easing. That's not going to happen. is going to get ugly the recession, and you'll have a financial crisis. So how can they do it? They're not going to do it. I'm Francine Lacquah, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious who are these people as leaders.

I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. Talk a little bit more about hiking rates and fighting inflation in a period of high levels of private sector debt. And I could see it going both ways because on the other one hand, I could imagine that in a heavily indebted economy, interest rate increases have a quick transmission mechanism

and that that significantly impedes private sector activity and helps you fight inflation sooner. Or I could see it the other way that high levels of private sector debt create over-sensitivity, maybe the debt crisis scenario that you're talking about. Walk through us specifically how it unfolds, the intersection in the U.S. of higher rates and high levels of indebtedness. In short, it becomes very ugly. And it becomes very ugly because the indebtedness. the indebtedness of the private sector in the U.S. was very high and rising even after the GFC

because we had zero rates, QE, credit easing and so on. And then we doubled down on it during the COVID crisis. And of course, during the GFC was household debt and banks, but then the buildup in the next decade was of corporate debt and of shadow banks, leverage loans, CLOs, high-yield, high-grade, fallen angels, and you name it. And while the debt of the household sector is now reduced, there are significant pockets of the household sector, those who have low-income and low wealth and they're borrowing, they're going to be under stress, especially as they get unemployed.

So the biggest stress is going to be corporates and shadow banks, but eventually the official banks are linked to the shadow banks, and the household sector is going to also get in trouble. Those who have low-income, they don't have much wealth, they have a lot of debt and their income is fragile to a recession. So we'll have a debt crisis. So what's happening in this situation is that if you don't fight inflation, if you fight inflation, first of all,

you have to jack up interest rates to the point in which there is a debt crisis, a recession and then interests are so high that the zombie hassle, corporate banks, shadow banks, government, countries that are insolvent, are going to go bankrupt. And they were bailed out twice during the job. GFC during COVID, we had high debt ratios, but we had low debt servicing ratio because of zero rates on the short end, on the long end, and all the other policy of easing. Now instead, into a recession, we have to raise rates because there is inflation. So those who are swimming

naked as the tithers see, you'll see where they were. Those who were the emperor without clothes, you'll see where they are. And the zombies are going to be recognized that zombies are going to default. We're not going to be able to bail them out this time around. We'll have to raise rates. and they're going to go bankrupt across the board. And I'm not saying everything and everybody in every country, but the amounts of debts, private, public, across advanced economy and emerging market implies a severe debt crisis.

Now, interest rates for the public sector are going to rise, and in the UK with stupid fiscal policy, those spreads widened in significant terms, but then the private sector has spread over a riskless rate, right? You have spread over Treasury, mortgages, high-heeled, high-grade, consumer loan, and so on. So if you are an insolvent agent, it's not going to be just increasing long-term interest on Treasury. It's going to increase your cost of servicing your debt, but the spread widening on your own private debt is going to cause another reason for default. And already high-yield right now is gone from 300 to over 600.

The entire CLO and leverage loan market right now is shut down, literally shut down. And this is only the beginning of it, of that stress on the private sector. So we're going to see significant financial distress in the corporate sector, in the shadow banks, in parts of the household sector. So, I mean, you just laid out basically the stuff that you think could break first as interest rates rise. Where do you see other pockets of weakness? And I'm thinking specifically about some of the international developments, the impact of the stronger dollar. We've seen that way already on a number of emerging markets who have taken out dollar-denominated debt.

That's getting a lot more expensive as rates go up and the dollar strengthens at the same time. Talk to us about the sort of international repercussions here. Well, the international repercussions for emerging market is that many, not all of them, of these emerging markets are in deep, deep trouble. want to lump them together. There are better credits, worse credits, better sovereigns, worse sovereigns. So you're about 40 countries. But I would say good two-thirds of them are in trouble. And they're in trouble for several reasons. One, interests are rising in US in advanced economies. So their interest rates and their spreads are rising even more. Two, their currencies are weakening as the dollar is strengthening. And unless you are a commodity exporter, mostly

the guys in the Gulf who are making a fortune, everybody else among emerging markets tend to be, with your exception, a commodity importer, especially in Asia, but also in other parts of the world. And therefore, you have also terms of trade shock. So it's a quadruple whammy. You have, first of all, the raise of interest rates in an advanced economy pushing your interest is higher. You have the weakening of your currency, and you have a lot of dollar debt, and the real value goes higher. You have a negative terms of trade shock, and the slowdown of growth in the recession in the U.S.,

in Europe, in the U.K., in China, effectively there will be a recession, weakens your export markets in your own economic growth. So it's the perfect storm for the weakest emerging markets. And I would say a good third of these emerging markets right now have these types of economic and financial fragility. Now, if we're going to have a recession in the U.S. is going to be even worse in Europe, in my view. For several reasons, reason number one, Europe is more exposed to the Russian energy shock

and it's going to get worse this war. And there'll be a total cutoff of natural gas. Secondly, the dollar is strong and that reduces inflation. The euro is weak, that increases inflation. Inflation is already double digit in the eurozone, let alone in the UK. Three, Europe is exposed to export to China and China is slowing down very, very, very sharply. And four, within the Eurozone, you have this fragmentation risk of the risk of a widening of spreads of the periphery. They have this new tool, TPI, but if the new Italian government follows policies that are on a collision course with Europe,

they're not going to qualify for the bailout that the ECB is going to make for those that have unwarranted widening of their spreads, as opposed to those that are warranted by poor economic and fiscal policy. So things are going to be even worse in Europe that they are in the U.S. And the basket case, of course, is the UK right now that is pricing like literally, like an emerging market. Usually you do fiscal stimulus in U.S., the dollar gets stronger, interest rates rise only little. In the UK, the pound is collapsing and the interest rates are to the roof, even with the support of the BEOE. So it's really becoming an emerging market. Is there a, you know, the way you describe things so much is already baked in, particularly with

these trends that are in place with de-globalization and these shocks that we've seen to all supply chains and then the accumulated debts that we've seen public and private. At this point, are there better policy paths than what you expect leader, policymakers to take? I mean, could there, is there, what is the, what is the, what would, what would you do? What would you advise policymakers and say the U.S. and Europe to do? Well, you know, there's always a difference between normative statements about how the world should be, as opposed to positive statements about what is the world that is going to be and likely to be.

Right. So I'm making for now positive statements about the fact that we're going to have a nasty recession, nasty speculation, and another severe financial crisis. I think that's the baseline. And I think that the policy trade-off, like during the GFC, is too late right now. Because if you fight inflation, you'll have a recession and a financial crisis. And if you don't fight inflation, you're going to have the anchor of inflation, and you get inflation and stacclation and still a financial crisis, because you can wipe out with unexpected inflation, the real value of nominal long-duration debt at fixed interest rates.

But you can fool all of the people some of the time, You can fool some of the people all of the time. You cannot fool all of the people all of the time. And if we use the inflation tax to wipe out private and public debt is nominal, long duration, at fixed interest rates, that's going to come to maturity, and then it's going to reprise either at very high interest rates if you borrow long term, or if you borrow short term, it's going to price in the inflation. So you can, for a couple of years, resolve a debt problem, private and public,

public with unexpected inflation, but then you're going to cause a bigger debt crisis because once prices reprised for inflation and the spreads, real spreads and nominal spread, and the inflation volatility leads you to higher nominal interest rates, then you have a bigger debt problem down the line. So I fear that right now we have three problems, a problem of inflation, a problem of growth and a problem of financial stability with too much debt and collapsing asset bubbles. And you cannot resolve them. I could tell you what I would do in principle, but whatever you do is not going to avoid a crisis at this point.

The margin for action is very, very limited. I would tell you, if I were you, I would avoid the 70s, avoid inflation by going real hard on fighting inflation and avoiding the anchoring of inflation expectation. But that's going to lead to a nasty recession and a financial crisis like we didn't have in the 70s, because we didn't have a debt problem. And the recession in the 70s was a decade-long stagnation.

This time is going to be worse because of the financial and the debt problem. So unfortunately, at this point, damn if you do, damn if you don't. There is no easy way out of this. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now. is a short five-minute audio report on the day's top stories.

Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news.

When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So let me ask you basically the same question, but from a different perspective, what should investors do here? And this is something I've been thinking about recently. And one of our recent guests, Toby Nangle, came on the show. He was talking about the moves in the guilt market, basically saying you can't unburn toast. So once you have this extreme volatility,

once interest rates start to reset higher, you can't kind of undo that. And all of that historic volatility, that anxiety for investors, it all weighs on them for years to come. And you potentially get a repricing of risk in general. Capital becomes more expensive. Asset prices start to deteriorate, as you just mentioned. So what can investors do here? Well, usually investors have some variant of a 60, 40 formula for their portfolio, 60 equity, 40, fixed income, long duration, treasuries, or 730 or even risk parity a la Bridgewater is a variant of the same. But usually the price of bonds and price of equities are negatively correlated in normal times, risk on equity. do well, bond on the well. Risk off, bond do well, equity don't do well. Growth, equity,

do well, bond yields go up, price falls. Recession, bond yields fall, price goes up, price of equity falls. So you're not only hedge. And a 64 to a 70, 30 portfolio has given you for the last few decades positive returns normally, more so in good times, less so in back times, and always. This year, for the first time in 30 years, you have lost money on your equity side and on your fixed income. Because 64 is based on low inflation. But when inflation is rising, two things happen. Long-term interest that go higher. That hurts equity because the discount factor for equity becomes higher. And we've seen the correction of equity. And growth stocks and tax stocks that are long duration hurt even more because they're long-duration assets and more sensitive to interest rates.

but you lost 25% on the SMP, but this year you have lost 25% on your own duration treasuries, because 10 new treasuries have gone up from one and a half to three and a half four, and that increase in interest rates is a 25% fall in their price. So you lost money on equity and you lost money even on the safe asset. There was nowhere to hide. And if you went into cash, you lost because of inflation. So that's the problem when you have rising inflation, that 60, 40 doesn't work. What's the solution is not cash that's been giving you zero nominal return wiped out by 10% inflation.

You have to go into assets that are hedge against inflation. One of them is tips, the reprise when inflation is higher. The second one is very short duration treasuries because as interests go higher, the price of them falls much less than the one of a 10-year or 30-year treasury. As interests are higher, you get higher return, be even in interest. expected inflation. That's one. Secondly, you might want to go into gold. Gold has not done very well in the last year, but once inflation expectations become an inch when the central bank's going to blink, and until now, central banks have played tough. That's why gold has done poorly, because the real rates were going higher. Then gold is going to outperform, like other precious

metals, like probably many commodities. But the commodities are going to be hurt by the recession. So gold is actually less cyclical. Three, in the 70s, both equities and real estate did poorly, but equity did much worse than real estate. The P ratio for S&P was down to eight in 1982 because real estate is in fixed supply. You can often reprise the rents and it's a good hedge against inflation as long as monetary policy is not very tight. Of course, the REITs this year have done poorly because the Fed was high. But again, when the Fed is going to winp out, I think that real estate is going to outperform equities because of the nature of being a fixed supply kind of asset, at least in the short run.

The only caveat is that a lot of real estate is going to be stranded because of global climate change. Literally, there are maps that show that half of the U.S. in the next 20 years are going to be either underwater on the coastlines or too hot or droughts or wildfires to be living in it. And people have stupidly moved from New York to Miami and from San Francisco to Austin, but Florida is going to be flooded and Texas is going to be too hard to survive there. So there will have to be a massive migration from south and the coastline towards the only part of the U.S. is going to survive climate change, is the Midwest into essentially Canada. So there will be trillions of dollars of real estate that are going to be damaged by essentially global climate change.

So if you have to worry about that, you have to find the top of the United States. of investment in the right parts of the United States. So it's a combination, short-term treasuries of tips and other inflation index bonds, gold and the right type of real estate is going to be the future. And I'm actually working on a financial product that is exactly creating first an index and then an ETF along the lines of hedging the risk of inflation in the basement of the yet currency by having a combination dynamically optimized of these assets. That's something I'm going to be launching.

in the next month or so. Yeah, I remember talking to you about it earlier in the year, this idea of a sort of tokenized dollar that's more tied to hard assets. Is that, you know, this is also something we've discussed many times on the podcast at this point, the idea of the dollar losing its reserve currency status. And one of the things about that is, you know, people have been talking about it for a long time and it hasn't yet happened. What, in your opinion, makes this time different?

Several things, of course, it's not going to happen overnight. The decline of reserve currency status takes many years, but there are at least two factors. One is that the US has very large current account and fiscal deficits. There are fiscal deficits in other banks economies, but they tend to run current account surpluses or a balance while we have a twin deficits. And historically, every time they had twin deficits

and the dollar was too strong, you have a cycle of dollar going up and then has to go down in order to do. restore the external competitiveness. And the fall of the dollar can be 30 to 40 percent on a weighted basis. So that's going to be something that is going to happen, especially as the Fed is going to win out while other central banks will have to start to tighten. Secondly, I think that the big revolution right now is that a change, a regime change, is that we have weaponized the U.S. dollar for national security and foreign policy purposes. And there might be the right thing to do.

We're to punish our enemies, whether Russia, North Korea, Iran, or even China with trade and financial sanction, because there is a geopolitical rivalry. It's going to get worse. But they know right now, even the Chinese, that the dollar can be seized like they were seized in North Korea, in Iran, and now in Russia. And not just the dollar, also the yen, the euro, the pound, the Swiss franc. So if you need another reserve currency, there is a reserve currency or asset, there's no. dollar, euro, yen, pound, and so on, or franc, which one is the only one out there that is going to be an alternative that cannot be seized by the U.S. or Europe or Japan? It's gold, but gold not in the vault in New York, New York Fed or London, but gold in your own vault or caves in Russia or China, wherever you have it. So I think that that's going to be what's going to lead to a sharp fall of the value of the dollar. The strategic rival of the U.S. have a plan to completely phase out.

their exposure to dollar assets. And that's going to be a regime change for the long run, as opposed to doing a short-term factor. It's going to happen. I really thought we might hear Noreal make the case for Bitcoin there. But I have basically just one last question. And you know, Bitcoin is another shit coin. Oh, good. We'll break that out to a separate story. It's going to be gold. It's going to be tips. It's not going to be Bitcoin, frankly. Last question for me. You know, investors are very big on this idea of like, when is the Fed going to

pivot. And the way you see it is not pivot per se, but essentially cry uncle, wimp out. What is that point? What will the Fed see, either in real economic activity or financial market conditions that you see would be the catalyst for the Fed and maybe other central bankers to wimp out in your words? What will it take? Well, the Bank of England already winked out. And if you remember what happened in 1819. In December of 18, the Fed went from 225 to 250, then they said, we're going to go to 3%. We're going to continue QT. What happened during that quarter?

Stock market collapsed by 20%. High yield spread go from 300 to 900 and the entire CLO leverage loan market shuts down. Two weeks later, January 2nd of 2019, Jay Powell comes up and says, I was kidding when I said we're going to go to 3%. I was kidding when I said,

we're going to continue QT. We're going to stop raising rates, going to stop QT. And two months later, because there was a slowdown of growth given the tension between the US and China on trade. And because there were some ripple problem in the repo market, what do they do?

The cut rates from two and a half to 175 and they resume QE through the back door through the reserve repo operation. This was for a mild, mild financial shop and a growth slowdown. That's what they did. They totally whipped out. They totally blink, even the Fed, later on the BEO.

So when they're gonna do it again, when the recession is gonna start and it's gonna get, get ugly. And it's part of the recession, inflation is not going to fall fast enough because we have the negative supply shop. Remember, when you have negative supply shop, you get the recession in high inflation. Therefore, we're not going to get a fall in inflation. It's rapid enough to go to 2%. And we're already in financial stress right now. Stock market down 25% of S&P, NASDAG more than 30%. Mimistock collapse, stock collapse, crypto collapse,

equity collapse, housing is collapsing, CLO market is shut down, leverage loan market shut down, high-year spreads are already at 600 plus, even high-grade is an interest rate like you're never seen in years. And this is just the beginning of that pain. Wait until it's a real pain, and then you have even a major financial institution that may crack globally, not in the US, maybe now, but certainly internationally, there are a couple of firms that are huge and systemic they can go under. You have to have another Lehman effect. Then the Fed will have to win out. You'll have a severe recession and you'll have a financial market shock. They're going to win out for sure. So just to add to my anxiety levels, which are already through the roof, I want to

talk about the social consequences of this because it seems like an environment where inflation is high, growth is slowing, you know, the Fed is explicitly trying to boost unemployment. It seems like that is probably the worst environment for, you know, your average person on the street. And it almost seems like the fed's like the fed's goals here. They're almost anti-American at this point or like anti-the-American dream, right? Like housing more expensive. Crushing the housing market. Crushing demand, crushing labor force.

Like, what are going to be the social consequences of central banks, you know, having to do this in order to put a cap on price? increases? They're going to be severe. We're already seeing, of course, a backlash against free market, backlash against trade and globalization, even a backlash against technology, a backlash against, you know, less fair policies because there's been a massive, massive increase in income and wealth inequality. This is leading to populism of the extreme right and or of extreme left in many countries across the world, and authoritarian regimes becoming more popular across the board. It's a repeat of the 30s, literally. It's scary what's happening. And then if on the top of it to fight inflation now, you're going to have a severe recession and unemployment

going to 6, 7, 8% or more. And then your assets are collapsing, the value of your home, the value of your stocks and your debt servicing ratio are going to go to a roof. There'll be a revolution. That's why the Fed cannot but monetize it. Because we're already having huge amount of social tension. There is already massive political polarization. There are already so many people are angry, whether they are voting for the right or the left. It doesn't matter. There are those who are left behind, those who have been screwed by globalization and the current sets of policies, those who don't have jobs and skills and income and wealth.

You have 100,000 deaths of despair every year in the U.S. from opioids and other drug overdose. You have 2 billion people that are addicted to opioids. This is a massacre, literally a massacre. People are helpless, hopeless, jobless, skillless, wealthless, and they're desperate. That's leading to that resentment and people either voting for on one side, Trump or right-wing conspiracy types or for very extreme leftist policies, depending on whether you are socially and religiously conservative as opposed to liberal. But the economic policy are the same.

Nativeist, nationalists, against trade, against migration, against free market and so on. So it's going to get more ugly. It's going to get more ugly because we're ready at the best. breaking point, we could have literally in the U.S., as we know, the entire books written recently about the risk of civil war, violence, insurrection, secession. This is what is the risk that the U.S. is facing, let alone other countries, not maybe in this election by 2024. So we're already in a real time bomb in terms of social and political pressures, and an economic crisis and a financial crisis and a geopolitical crisis is going to make these things much worse.

Much worse. All right, Noreal, I think that's, I can't say it's a good place to leave it, but it is definitely a place to leave it. We really appreciate you coming back on all thoughts. As I mentioned before, your insights, you know, broadly proved to turn out. Correct. The last time we had you on the show. The book, Megathreats, 10 dangerous trends that imperil our future and how to survive

them is out on October 18th. Thanks so much, Noreal. Thanks for having me. Great pleasure again. Thank you, bye. So Joe, I think I need therapy after that conversation. And you know, last time we spoke to Nuriul, we had a lot of commentators who were like shocked that we were so shocked by what he was saying. But I got to, like, I'm trying to use humor to diffuse the situation.

Yeah, he sounds bearish. Yeah, you think? Just a little. He doesn't make me want to buy the dip. No. But I do think like, you know, this is what we've been talking about for a long time. the economic mix this time does seem different. Like at a minimum, inflation is a constraint on the central bank.

And it's going to be much more difficult for them to come in and stabilize financial markets, stimulate the economy if they need to, if they're having to deal with that price constraint. You know, something I keep thinking about how much this environment is sort of the mirror image of the great financial crisis. You know, coming out of the GFC, we had terrible growth, this big collapse. And deflation. Everyone was worried about we can't hit the 2% target. And then years of sort of basically a decade of moderate growth in the economy. And this time we had the crisis coincided with a stock market surge and a growth surge. So maybe it is maybe the mirror image is the long, ugly slog for current crisis.

I don't know. Something to look forward to. Something to look forward. Many episodes to come. All right. Shall we leave it there? Let's leave it there. Okay.

This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest on Twitter, Nouriel Rubini. He's at Nouriel. Follow our producer, Carmen Rodriguez, at Carmen Armin. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. This is Tom Keene, inviting you to join us for the Bloomberg Surveillance Podcast.

It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christophress. Bloomberg Surveillance also brings you the analysis behind the headlines. We do that through conversations with the smartest names in economics, finance, investment, and international relations. We do all this live each and every weekday that bring you the best analysis in our daily podcast.

Search for Bloomberg Surveillance on Apple, Spotify, YouTube, or anywhere else you listen. On the East Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keen, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening,

each and every business day.