Former New York University economics professor Nouriel Roubini warns that traditional investment advice of investing in stocks and bonds will not work in an impending “perfect storm” of inflation, recession, stagflation, and debt.
Speaking to Australia’s ABC News last week, Roubini — the economist who predicted the housing and market crash of 2007-2008 — is warning that “stagflation” is going to emerge this year, putting negative pressure on both stocks and bonds.
Roubini says the Fed and other central banks are trying to combat inflation by raising interest rates, but are also risking a “financial crash” by doing so.
U.S. interest rate policies will lead this year to a contraction of equity markets in the U.S. and Europe, with a 50% chance of a global recession, he says.
Roubini argues the Fed has to raise interest rates above 6% to return to a 2% inflation target.
These efforts, he said, will lead to a “hard landing, then you’ll have also a crash in financial markets, then a severe correction of equity markets."
In the end, a wave of financial defaults will rock economies around the world, he predicts.
He thinks the “Fed and other central banks will wimp out and blink,” and will move to cut interest rates and allow for higher inflation — in the mid-single digits.
The economist says a “geo-political shock,” such as a war between Israel and Iran, could cause additional problems, with oil soaring to $200 a barrel.
Certain that equity markets will contract this year, Roubini advises investors to look at four areas to put their money:
- Gold, a traditional hedge for inflation
- Inflation-indexed bonds
- Short-term bonds “whose yield goes higher and you don’t have the price impact that you get on long-duration bonds
- Sustainable forms of real estate
He notes that since real estate is in fixed supply, when there’s inflation, it “tends to be a good hedge against inflation, better than equities.”
“So you have to think about a very different portfolio from the traditional 60 equities, 40 safe bonds,” he said, referring to the percentage in portfolios.
“Those safe bonds are not safe when inflation is higher.”
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