Nouriel Roubini and Nassim Taleb, financial crisis experts credited with predicting the housing crash and ensuring bank collapses, now say they expect the recession to last 12 more months.
Roubini, chairman of consultancy RGEMonitor, said it will be a minimum of 12 months because there is currently a “fundamental” crisis.” For now, he, says, “cash is king.”
By 2010 we might see a mild recovery, but the current recession could instead prove to be three times as long and as deep as the previous two, he said during a joint interview on CNBC.
“If you don’t do everything right, and I think there’s a large probability that’s going to happen, then we may end up in a multi-year stagnation or near depression like the one that Japan had,” he added.
Equities and earnings could still see a downturn before there is a rally, Roubini said.
U.S. global equities could see as much as a 20 percent downside risk.
Investors need to stick with cash until the actual bottom hits, he said.
“Officially the write-downs have been about $1 trillion; I see another $2.6 (trillion) coming up,” Roubini warned.
“Losses are mounting and this severe recession is going to get only bigger.”
Nassim Taleb, an adviser to Universal Investments and author of “The Black Swan,” is also pessimistic about the near term.
He advised investors to hoard cash because it allows “you to pick up pieces” later, once the crisis abates.
Taleb said the current market needs to “deleverage so massively. It’s not a regular crisis.”
He suggests that there is just too much dependence on debt. Some private equity firms will go bust, he warned, and be forced to deleverage.
Taleb added that the market will not recover until job losses are stopped and that investors should get their portfolios prepared for financial Armageddon.
“If I follow my logic to the end, what I thought would happen was anything fragile … would break, namely the banks and people who have a lot of debt and private equity," he said.
"This is just happening. It’s not finished yet; it hasn’t probably started."
St. Louis Fed President James Bullard warned this week that Japan-style deflation remains a serious risk, even as Federal Reserve Chairman Ben Bernanke began to set out his ideas on containing future inflation.
"A key near-term risk for 2009 is disinflation and possibly deflation," Bullard told the New York Association for Business Economics.
"While the monetary base has expanded at an extraordinary fast pace during the fall and winter, much of that expansion has been closely related to the Fed's lender of last resort function, and cannot be counted on to keep expectations of disinflation and deflation at bay."
"Because of this, the Fed needs a more systematic method of keeping the persistent component of monetary base growth rates elevated in order to combat the risk of a deflationary trap."
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