Certain Recession Mutating into Possible Depression (w/ Nouriel Roubini)
ASH BENNINGTON: We're here with Nouriel Roubini, a man who needs no introduction especially at a time like this. Nouriel, I was listening to a talk you gave recently, where you frame this that your best case for what we were seeing moving forward was a greater recession, meaning a recession worse than the Great Recession and the worst case was a greater depression, meaning a depression that could be worse than even the Great Depression. How did you get to where you are right now, and what are we looking at? NOURIEL ROUBINI: Well, I was looking very carefully at what was going on with the economy and the markets, and already literally at mid-January, I have a proprietary tool that's called the BoomBust dot-com signal. That market was signaling that the S&P 500, when it reached about 3300, it was vastly overbought. Every major of price action, of valuation, and so on was suggesting that we were in a bubble territory. Then the signal was sent out and was said this is the time in which a bear market might be starting. It took only a few weeks until we got to that bear market and since that signal, the market moved sideways, didn't go much higher. The market fundamentals were suggesting already that we were in a bubble, in an equity bubble certainly in the United States, and that any shock could lead them to a market downturn. Now, nobody could have predicted that it would have been a pandemic but there are plenty of other things. When you are in a market in which the economy has too much data leverage, asset prices are way overbought, then any macroeconomic shock or other shock can lead to not just a correction, but there's significant bear market so the trigger ended up being the COVID crisis. Also, early on the market commentators were kept on saying, this is going to be just a market correction, maybe market down 5%, 10% percent, not the bear market, they're saying the economy is not going to go into a recession or if there's going to be a recession, it's going to be just a quarter, and then a very rapid V-shaped recovery. I was looking at the data and seeing how the pandemic would spread from China to the rest of the world, anybody scientifically could say that's got to go first China, then Taiwan, Korea, Hong Kong, Japan, and then it was spreading to Italy, it would get to the United States so the WHO predicted this will be a global pandemic only later on, but anybody looking at the data could tell it was coming. Given the sharp economic activity in China, you knew that if in China, you had a shutdown of economic activity, something similar, if not worse, would happen in the rest of the world. The idea there will be correction, or a V shaped recovery did not make any sense. That's why January into early February, and then with a long piece on the Financial Times and [indiscernible], I say that this is delusional to think this is going to be just a correction or a V-shaped recovery. This is going to be something like a bear market first of all, and there's going to be a severe recession, not just in China, but globally, and it's not going to be a V-shaped recovery. Guess what, at that time, pretty much every market commentator kept on talking of their books and their book was that hold your position. Don't go shorts, don't sell. It's going to be just a correction. It's going to be a mild economic slowdown. Now, guess what, a month later, literally the consensus now, we're not speaking about me, the consensus says this is going to be a recession greater than the Global Financial Crisis. You look at what Morgan Stanley, JP Morgan, Goldman Sachs are predicting, they are predicting that Q1 economic growth in US is going to be sharply negative between 5% to 10%. In the second quarter, the economic activity, GDP is going to fall in the second quarter at the annual rate of 25% to 30%. 25% to 30%. We have never seen anything like this, we've not seen it during the Global Financial Crisis, we've not seen it during the Great Depression. Those were slow motion train wrecks, this is just the front loaded, not financial shock, but the real medical, economic shock. Now, consensus and conventional wisdom speaks about the greater recession. That's baked in already in the market, the fact that the market went down 35% to 40%, as reverse itself, but only 10%. In my view, there were still to come for reasons I'm going to be discussing. Now, the consensus says this is not a correction, it's not a V-shaped recovery, and it's going to be as ugly or probably uglier than the Global financial Crisis. That's baked in in the prices, the question is whether instead of a great recession, greater than the Global Financial Crisis, we could end up into a greater depression, and in my view that our condition on the wage went up into a greater depression, not a greater recession at this point is guaranteed to happen. ASH BENNINGTON: You also mentioned in one of your pieces the speed at which this happened 15 days to go into a bear market meaning a 20% decline from peak in US equity prices. NOURIEL ROUBINI: Absolutely. If you look at the Global financial Crisis, or the Great Depression of the 1930s, we're at slow motion train wreck. They started with a financial shock, stock market crash in one case, bust of housing and mortgage in the other one, then the economy slows down, then you go into a recession, then you have distress in debt markets, then your rising unemployment rate, then it becomes acute in the case of the Global Financial Crisis around the collapse of Lehman. In the case of the Great Depression in '32 to '33, in which where we go into a great depression, so yeah, you had the collapse of stock markets of 50% plus in the previous episodes, you had credit spreads going through the roof. You had the debt crisis, you had massive bankruptcies, you had the economy tanking, and GDP growth becoming massively negative. Unemployment going to 10% or 20%. We took three years. This time around, it didn't take three years. It didn't take three months, it took three weeks. In three weeks, you had a drawdown of the market of 35%. The fastest bear market in history usually takes about three, four months. This time around though, two weeks, 15 days, and you got then the credit spreads that went from, for high yield, from 300 basis points of Treasury to over 1000 basis points. Last time around when those things happen, it took about a year. This time around, it took literally less than three weeks. Same thing for economic activity. We are going to negative growth in a matter of weeks and it's going to become much more severe. By the second quarter starting soon, we're going to have economic activity collapsing at the rate of 30% per year, and the unemployment rate is skyrocketing. The number came out recently about unemployment claims and the number before was 200,00, markets are expecting 2 million, it ended up being 3.3 million, 15 times higher than the average, not even 10 times, much worse than expected. All these things have happened in three weeks, not three months, not three years. This is like an asteroid, literally hitting planet "hurt" and stopping economic activity everywhere. Usually, in previous recessions, you might have a recession in Europe, but not in US and China. You're going to have a recession in US but not in the rest of the world, or vice versa. This is a case in which we have a synchronized global recession, literally happening all at the same time and going from economic growth to negative sharp growth in a matter of a month, we have not seen anything like these ever before. That's why this is worse than the great recession of 2007-2009. The risk is we're going to end up into a greater depression, even worse than the Depression of the 1930s. ASH BENNINGTON: That chart for new Unemployment Claims is unlike anything I've ever seen before. NOURIEL ROUBINI: Yeah, absolutely. Markets were talking about initially a correction, then a V-shaped recovery where you have one growth that is slow or negative, and then fast recovery, then people start to say, well, maybe it's not going to be a V, maybe it's going to be a U, like the Global Financial Crisis, a downturn and then a garage of recovery to potential, then some people start to say, wait, it's going to go down and then it's going to stagnate, or people start to talk about the double dip recession, a W. It's not a V, it's not a U, it's not an L, it's not a W. Currently, it's an I. It's a straight line, which are freefall of everything, GDP, consumption of goods, of services, CapEx, residential investment, import, exports. Pretty much every component of aggregate demand is collapsing, the only one that can actually use its balance sheet to support the economic activity in a free fall, of course, is the government. We're going to talk about it, but everything is happening at the speed we have never seen before. It's a freefall, number like these and the speed at which are occurring did not even occur during the Great Depression. It took three years between the stock market crash of '29 in 1932, when we got into a real collapse of economic activity and a spike in unemployment rate, not three weeks. This is totally unprecedented. ASH BENNINGTON: For those who may not have followed your work as closely as I do, the reality is over the last several years in fact in the recovery from the Great Recession, you've actually-- despite your nickname, you've been very constructive about US growth and about US equity. This is really a significant turn from the position that you've held for some time now. NOURIEL ROUBINI: Yeah, usually people refer to me as Dr. Doom. I prefer to be called Dr. Realist, and on many occasions before, like for example, in 2015, and '16, where people were worrying about hard landing of China and a global recession, I said, no, China's going to have a softer landing. It's going to be bumpy, but it's not going to trigger its own collapse and a collapse of the global economy, or in 2015, when people say that even Wall Street baseline and consensus was Grexit, that Greece is going to leave the Eurozone and that's going to be a nightmare for the Eurozone, I followed that carefully. Then that game of chicken in Greece and the rest of the [indiscernible] cut, Greece had the low, not the upper hand and therefore, they're going to stay in and therefore the contagion and the collapse of the Eurozone will not occur, or my signal that this BoomBust dot-com single, the BoomBust dot-com signal tells you when markets are overbought, and we got to write literally something like 8 out of the 10 correction that occurred in 2010 for the S&P 500, because there've been a number of correction, but we also got right at the bottom. Whenever the market was going down, then when would they recover based on the macro dynamics and the financial dynamics and the macro fundamentals? The markets have been going up and down, the economy had been slowing down and accelerating. I've been constructive. I've been warning, of course, about the number of downside risk in the global economy. Guys, this time around, people are totally delusional, thinking this will be a correction or a V-shaped recovery. This nonsense was repeated in January, and all of February into literally the middle of March. It was only recently when people have gotten finally a reality check and realizing this is more than the Global Financial Crisis. We've had a drawdown not of 10%, not of 20%, of 35%. Even now, people are saying we reached the bottom, and from here, there's going to be a rally and we're going to finish the year maybe higher than when we started. That's the view of many Wall Street commentator that now because of the stimulus, then the economy is going to recovery, the market's going to reach higher than the beginning of the year. I don't know whether they are smoking something strange, frankly speaking. ASH BENNINGTON: Nouriel, one of the interesting things that you've written about in terms of your frame for how to determine whether this becomes a greater recession or a greater depression, you have listed three broad categories that you're focusing on in terms of watching government response. The first is pandemic containment. The second is the monetary response. The third is the fiscal policy response. Could you talk a little bit about those points and what it is that you're watching specifically to determine what trajectory we're headed on next? NOURIEL ROUBINI: Well, the first one and the key element of it is really the health policy rescue because unless you're going to stop this pandemic, there's going to be millions of cases and millions of people are going to die, then there is no way you can restart economic activity. I think that the last one that came out of China, and also what happened in some of the Asian countries and also the last one out of Italy, that initially did not take it seriously and now is following a Chinese style of quarantine, is that really, you have to have the right policy response, that means from very beginning, massive testing, massive essentially tracing of people, you need to have social distancing and social isolations. You need quarantines, you need lock downs and the quarantines and lockdowns unfortunately, cannot be voluntary, because if they're voluntary, people don't take them seriously. I'm all in favor of democracy, but China literally, people getting out of their homes without a good reason, you're kicked back home, or you can be arrested, or you can be fined. Eventually, even Italy implement that one. What has happened in the US with people partying during spring break or taking it not seriously throughout the country is nonsense. The lesson is that either you accept the economic pain that the country is going to be shut down, and of course, GDP can fall 30%, 40% for a quarter or two, but you need to do it, you shut it down, and then you stop the spread of the pandemic. Like in China, now, you can restart gradually economic activity. You have pain by this front load that is short and then you have a recovery. If you don't do that response, then the thing is going to spread like wildfire, and it's going to be too late when you're doing the mitigations. Mitigation policies are not sufficient. You have to go from nothing to serious mitigation to serious suppression and then you can restart economic activity. If you start, you do mitigation or mitigation light and it's spreading like wildfire because it's not enough, then eventually, you'll have to do even more severe shutdown of economic activity. It's better to take the pain front load there for two or three months, and then jumpstart growth, rather than doing stop and go. You stop, then you go, then you have to stop again, and then you go again and so on. It's going to end up being a nightmare where everybody is going to get sick, and then millions of people are going to be dying. This past week, Dr. Fousey, now and even the US government says, we'd be lucky. Now, we'd be lucky if we have millions of cases and we'll be lucky if the number of dead people is only between 100,000 and 200,000. Trump on TV on Sunday night, said hey, if we have number of dead being between 100,000 and 200,000, we would have done a very good job. 200,000 people dead and that's a very good job? That's optimistic because at the rate at which this thing is going in the United States, you are having 20% increases of the cases literally per day, we're going to have 5 million cases at least by the end of April, could be 10 million, could be 20 million, could be 50 million. Then the numbers of death is going to be not 100,000 or 200,000, it could be half a million to 2 million. That's what we're facing. To have response is key, unfortunately, we're not doing the right thing on the outside. ASH BENNINGTON: To put some of those numbers into context that even at the low end of the estimate, 100,000 Americans dead is twice the level of the casualties we experienced in Vietnam, which is of course, one of the great national tragedies and traumas of the 20th century. Now, where do you think we are in terms of a letter grade based on where we are today? We've made some improvements. We've got a while to go. What's your view of that? NOURIEL ROUBINI: Well, some of the policy response on the health side, I think it's a near fail. It's certainly embarrassing because in China, the number topped at 80,000. Now, they may be lying, might be not 80,000, but maybe 200,000, 300,000. We don't know. The number of people might not be the few thousand that they announced, maybe 3000, might be 10,000. We don't know. We know that the number is not in the millions is in China, and people are going back to work. That's a risk, of course. In the US now, the government is telling us our baseline is going to be a few million people, and between 100,000 and 200,000 people dead. That's considered by the president a very good job. It's just unprecedented. The fact when I accept that, because now the genie's out of the bottle, they cannot deny anymore that we totally screwed up, that we were first doing nothing, then doing mitigation light, then more mitigation light, then the president wanted to essentially even go back to business as usual after April 1st or after Easter, and only once his advisor told them you're crazy, you're not. Now, he's saying while we're going to continue this mitigation light, because it's not even serious mitigation, because we're not doing testing and isolation and compulsory quarantines and lockdowns the way other countries are doing so we're still in mitigation light, let alone trying to do suppression. We're going to get millions of cases and hundreds of thousands of people dead. That's our baseline right now. It's scary compared to even other bad examples like Italy. Italy is getting it under control right now. They started too late but now, the rate of increase per day has gone down to less than 10%. Eventually, it's going to stop because they've done Draconian style, Chinese style of lockdowns. That's what we should have done one month ago, or two months ago. We totally blew it up. On the health response to me, that failed, accepting that 200,000 people are going to die is a fail, is an F by any standard. It's not even a D, it's a fail. Now, the better news are on the macro policy response, both monetary and fiscal policy with some caveats. On the monetary side, both the Fed, ECB and other central banks have massively front loaded every type of support of the financial system. Again, during the Global Financial Crisis, it took them maybe three years to do that entire kitchen sink of unconventional monetary policy. Now, it took them with a less than the amount and most of these decisions were not made at formal meetings of the Fed or ECB, but outside of that meeting, intermeetings. We've gone back to zero policy rates or more negative in some parts of the world, quantitative easing, forward guidance, credit easing. This purchase of private assets, backstopping of banks, of non-banks, of primary dealers, of investment banks, of other financial institution backstopping the money market fund, of the muni bond market, of commercial paper, of investment grade bonds issued by corporations, pretty much flooding the market with unlimited amount of liquidity, unlimited amount of QE. Literally, all the tools that were created over time during the Global Financial Crisis, they took them out of the toolbox and then brought them back in a matter of a month, everybody's doing the right thing. Then measures like this, providing liquidity, preventing that illiquidity is going to become insolvency is unnecessary but not sufficient condition. Now, the third element of the policy response, it's a mixed bag. On this one, the US is ahead of Europe and other parts of the world, because in addition to their monetary bazooka, they're also doing the fiscal bazooka. Now the $2 trillion of the fiscal stimulus is not only two, 3 million of our stimulus, because a lot of it is just credit guarantees to small enterprises, to the corporate sector, the actual fiscal impulse of how much you spend directly, or you transfer to the private sector or households is less than that, is less than a trillion. The amount of its liquidity or lending support, you could say it's going to be closer to 2 trillion. We have the monetary bazooka, we have the fiscal bazooka. It's not optimized in terms of reaching those who need it the most. I think too much money is going to go to large corporations who don't need it, not as much money to households that are desperate in the United States. Think of it, in US, 40% of households have less than $400 of liquid cash to deal with an emergency. People are not going to have money even with these checks to buy food. If you're that household, and you have lost all of your income and half of the economy is not fully employed people, when unemployment insurance, healthcare and access to paid sick leave. You have all these gig economy, contractor, freelancers, part time workers, hourly workers, entrepreneurs that are business of one, self-employed people, literally half of the economy is like this. If you live like me, in New York, anybody works in a hotel, in restaurants, in bars in theater band, in music, they're not employed. They're just there as gig economy workers, they get paid by the project or by the day and so on. The income of these people has gone to zero, zero. These people don't have money to pay rent, and either there is a rent moratorium, or they're going to go and stop paying rent on their own. They don't have money to pay their utility bills like electricity, water, gas, internet, phone, and the amount of money they're going to get from the government is going to be barely enough to pay for food and essentials for a month or so. Literally, month or so because people have less than $400 of cash savings. Unless you're going to double down later on on that subsidy to the households, you'll have people who don't have enough food to eat, they're going to go and ride in the streets and get rides and people mopping the supermarkets. We're going to have civil violence down the line. That's the situation. We're doing the fiscal, but other countries are not doing it, but what I'm doing enough of the right target at fiscal stimulus. In summary, the health response is an F, the monetary response is an A-, and the fiscal response is a bad stop, a B- right now. Even with that, my fear is that we may end up not into a greater recession, but in a greater depression for a number reasons that are not related only to these points, but also to other ones. ASH BENNINGTON: You've been talking about the structural transformation of the labor market into a gig economy for a long time now, and now we're starting to see what some of those risks may look like. One of the things that you're hearing in, for example, on economics, Twitter is this phrase, "we're all modern monetary theorists now". Can you talk a little bit about what modern monetary theory is, how it relates to the union of fiscal policy and monetary policy, and whether it's an appropriate policy response to this particular crisis we're in right now? NOURIEL ROUBINI: Well, modern monetary theory was a leftist idea supported by a bunch of leftist academic, that essentially said that, if you're accounted as your own currency in your own central bank, you can run large budget deficits forever, you can monetize them, and then you're not going to even have an inflation. Now, that extreme view that you can run it forever under good times and bad times, even at full employment, and you can monetize fiscal deficit doesn't make sense but in a situation which you have a collapse of economic activity, you have a recession and deflation, and there is a collapse of velocity, we learned that lesson during the Global Financial Crisis, you can do a variant of modern monetary theory, budget deficits and the way you monetize them is through QE. It's not officially modern monetary theory, but essentially is a monetary theory, and you avoid the deflation and you avoid a deep recession. It used to be called MMT, modern monetary theory or used to be called helicopter drop of money meaning the government spends by issuing bonds, the central bank gives the government the cash and then you value drop it on people like transfer it like what they're going to do with the checks right now, used to be called so people's QE by UK labor, it was labeled as a leftist idea. Guess what, it has become mainstream. People like Ben Bernanke, former Fed Chairman, Stan Fischer, former Vice Fed Chair, together with that used Philipp Hildebrand that used to be running the Swiss National Bank, he's now at BlackRock, the biggest asset managers in the world, have come up with a proposal for an idea that's a variant of essentially a helicopter dropper, [indiscernible] Turner, William Mauter, pretty much mainstream economists. I wrote extensively about the idea of MMT for the next recession already literally a year ago and I said, when this stuff is going to hit the fan, and we're going to have the next recession, zero rate is not going to be enough, negative is not going to be enough. Forward guidance, quantitative easing is not going to be enough. We're going to go to MMT. Guess what? It happened in less than a month, literally, because the way they talk about it right now, Bernanke or Dalio, is not MMT, is not helicopter drop, they call it coordination of monetary and fiscal policy. What does coordination mean? The Treasury is going to issue $2 trillion of bonds, notes and bills to finance this budget deficit. Additional budget deficits on top of the initial trade on and the Fed is going to buy every single note, bill and bonds issued by the Treasury. That's what's called coordination. What is it? What's the difference between coordination, and then helicopter drop or between coordination and QE with a fiscal deficit is close to zero? Deficit then QE, you're buying the bonds in the secondary market, the government sells it to the market and then the Fed buys it from the market. When you do MMT or monetary financing, or helicopter drop, you're buying it directly in the primary market but the impact on long term interest rate is the same. Who cares whether the Fed buys it at issuance or a month later? Substantial doesn't make any difference, even large deficits and QE is effectively MMT. Whether you call it that way, or you call it something else, or euphemistically coordination of monetary fiscal policy, it walks and quacks like a duck, it's helicopter drop. That's what it is, and we're going to see my same helicopter drop. Now, the point that I made however, is the following one, in the short run, doing a helicopter drop makes sense. Makes sense because we have had a collapse not only of supply and disruption of supply chains, but also we had a collapse of demand. We've had recession and right now, deflationary pressures, and therefore doing a massive fiscal stimulus and monetizing it makes sense when you have staggered deflation, recession and deflation. That makes sense in the short run. As people say, you can fool some of the people all of the time and all of the people some of the time, but you cannot fool all of the people all of the time. Suppose that you are in a world in which these budget deficits of 10% of GDP fully monetized occur not only this year, but actually in the downside scenario, by that, the next year and the following year, in the short run, we have a demand shock more than a supply shock and that's the way you fight it. Think about this shock. Over time, this is a negative supply shock that reduces output and potential output and increases costs and essentially, the production costs and the prices of every type of goods and service. There is a rupture of global supply chain, soon enough, we're not going to have enough farm workers in California to pick up the fruits and the vegetables. Over time, what this shock is going to lead, it's going to lead to an exacerbation of the decoupling between US and China. Even before that, I wrote last year and before we had a cold war, we have to see the strap, we're going to have deglobalization, we'll have decoupling and fragmentation, all these trends are going to be emphasized. More [indiscernible], more equalization, more reshoring, more fragmentation, more balkanization of the global economy. More tariffs, more protectionism, more defending your own firms and your own workers, more inward policies, more restriction to trade in goods, in services, in labor, in capital, in technology. This is a massive negative supply shock to the global economy. You monetize it and you fiscalize it for two or three years, eventually, you end up into not staggered deflation, but in stagflation, recession, and inflation like the 1970s. Look, what happened in the '70s. We have to oil shocks, '73 Yom Kippur, 79 Iranian Revolution, we reacted by trying to boost economic growth. We had deficits and monetization through easy money. We ended up with double digit inflation, and stagflation. By next year, we can be in stagflation. The worst of all worlds, high inflation and recession. That's what gets us to a depression, not just a recession. ASH BENNINGTON: Nouriel, one of the things that I found so interesting as someone who's followed your work very closely, you wrote in a project syndicate piece, and I think it's probably worth quoting here, moreover, the fiscal response could hit a wall if the monetization of massive deficits starts to produce high inflation, especially if a series of virus related negative supply side shocks reduces potential growth. One of the things that's very interesting for people who followed your work during the Great Recession, you talked about how there was a collapse and the response to the Great Recession, how there was a collapse in the velocity of money and that we didn't see these inflationary pressures building, this is a significant shift from that position. Perhaps you could talk a little bit more about what it would look like and how we would start to notice that risk case coming online. NOURIEL ROUBINI: Well, the Global Financial Crisis I analyzed, it was a credit shock, the latter collapse in aggregate demand, the big output gap, slacking goods and labor market, the wages going down, prices going down, deflation, and therefore if you did that, effectively MMT, that's what we did through the backdoor through QE and deficits. You're essentially avoiding that recession from becoming a depression with deflation. That was the right policy response because there was a collapse of aggregate demand and there was a huge output gap. Today is different. The type of shocks that are going to eat the global economy are all negative supply shock. As I pointed out, the coronavirus, the breakdown of global supply chain is going to get worse. I fear that we're not going to be able to produce food, that in many parts of the world as the price becomes worse, food workers and the food supply chain is going to be disrupted. If you cannot produce food, then you'll have a shock to food prices. Look at what's happening in China, you had a small shock that was last year, the swine flu, and the swine flu alone led to production of pigs to collapse by 50%, better kill all of them and price of pork went up 100%. This was just a little tiny swine flu in China. Think about how these pandemics can disrupt a global supply chains in and around the world, and especially food supply chains. That's a huge negative supply shock. After the crisis, decoupling between US and China is going to get worse. The US is blaming China for this, China's blaming the United States. It's for the Cold War before, it's for the [indiscernible] trap on technology, on trade, on services, on finance, on currency. It's going to get worse. Look at the rhetoric between the two sides. We'll have more balkanization, more decoupling, more deglobalization, more reshoring that's costly, because instead of producing in the lowest cost parts of the world, we're going to produce them expensively at home. That's a massive negative supply shock. Trade wars, in the turn, the Smoot-Hawley tariff led to the worsening of the financial shock and lead us to the Great Depression. Now, we're starting trade wars with China and the rest of the world. They're going to get worse. Everybody's going to say, I'm going to protect my workers, my firms, my tariffs, and so on. That's a recipe for a negative supply shock becomes global. We're not even sharing medical supplies. Every country wants to have their own ventilators, their own mask at home. We're not even letting export of these things across country. This is the beginning of restricting trade in goods and services, and [indiscernible] labor. Trump is going to say I was right bashing China, I was right to build the wall. Guess what? You can build any wall you want to, we have a Mexico or Canada, but the disease is going to be beyond the wall. It transmits regardless of whether you have a wall or not. This is the nature of global pandemics. These supply shocks become global. I'm not yet at the point where there are other supply shocks. I really worry there'll be a war between US and Iran this year in the Middle East. We'll have another supply shock on all prices like we saw in '73, '79 or 1990. That's still to come. That will be another huge supply shock. We're going to be going in a world where most of the shocks are not aggregate demand, but their nature is negative supply shock through essentially deglobalization, pandemic, oil shocks, protectionism, nationalism and inward policies. In that world, you have essentially the condition for stagflation, recession and inflation like the '70s because, as I said, because of the main struggle of the Global Financial Crisis, you monetize, you fiscalize it, you return the growth, but if it is a negative supply shock, you monetize it, you fiscalize it, and eventually, you end up with stagflation. Now, we're not bad enough to end up like Zimbabwe, or Venezuela, Argentina with hyperinflation. Even if advanced economies after World War I, like the Weimar Republic in Germany had hyperinflation or Hungary. Those things can happen if you have a total collapse. If we get a depression and in this depression, we're going to run budget deficits or print them, we may end up like Hungary, or Germany during the Weimar Republic after World War I, we could get hyperinflation. I don't expect that to happen now, but certainly, we could get stagflation with rising inflation and recession like the '70s if we keep on kicking the can down the road and stimulate the economy, if the persistent sets of negative supply shock keep coming and coming. That's not the risk this year but by next year, two years from now, that will be a meaningful rising risk. ASH BENNINGTON: Nouriel, that's a grim and sobering outlook. Let me shift gears a little bit here. I think we have a pretty good frame for what your view is and what your outlook is. Can you talk to us about some of the data that you're seeing, what's led you to these conclusions? Importantly, what could lead you to reverse your conclusions in that it could potentially be a shorter, shallower, less severe recession that you anticipate? What are you looking at that brought you to these conclusions, and what could lead you to reverse them? NOURIEL ROUBINI: Now, before I go to that one, let me finalize the point. The argument about a greater recession becoming greater depression is based essentially on three key columns. Column number one is the health response is wrong. We're doing mitigation, we're not doing suppression. Even if we're doing suppression, the virus is going to mutate and by next winter, we're supposed to go back to growth after recession of three quarters, we could have another spike in the pandemic, even under suppression. If we're not going to have suppression, but only mitigation, it's going to be a nightmare as any epidemiological model suggests. [Indiscernible] we're going to go back another recession. Yes? ASH BENNINGTON: I'm sorry. What's the difference between those two points, mitigation versus suppression? NOURIEL ROUBINI: Well, mitigation is this voluntary social distancing, isolation, stay at home. We're going to shut down maybe businesses in New York and California, but the rest of the country can all stay open, stores, business, economic activity, restaurant. We're doing mitigation is actually mitigation light. Suppression means sorry, guys. We shut down every economic activity apart from basic essentials. You stay at home compulsory, you cannot work unless you work from home, you cannot go out unless you go and buy food and medicines and take a walk for half an hour just to refresh a day and no more. I'm going to monitor you and we're going to punish you. If you do otherwise, fines, arrest, whatever. Like in China, they used drones and robots and literally an app that gives everybody a green, yellow, or red card. It's big brother in China, we don't want to go there, but the reality is they have to find an enforcement. If you don't enforce it and you're basing yourself on people doing it voluntarily, it's going to be mitigation, mitigation light. We're not doing even mitigation or doing mitigation light in the US, let alone suppression. Suppression was what China did for three months and what Italy is doing right now. We're not doing it. That situation is going to go like wildfire this year. Then once we control it, and summer comes, the winter is going to come, the virus is going to mutate. We're not going to have a vaccine for 18 months. These antiviral therapeutics are in limited supply. We don't even know whether they work, guaranteed by next winter, we'll have another spike in the pandemic. That's why people say it'd be a three quarter recession, Q1, Q2, Q3, but then by the fall, we're going to start growing again. What if by default, we have another round of this pandemic, then we're going to go into a depression. Two, by next year, if we're going in and out of the recession is continuing, then we'll have to do another 10% of GDP fiscal stimulus and monetize it. Then we end up into the inflationary situation that I warned about that leads us to stagflation. Then you have a nightmare of stagflation. Three, as I pointed out in a number of pieces recently, there's a wide range of geopolitical risk, literally, a global rivalry between US, China, Russia, Iran and North Korea and this camp, they're going to try to disrupt the US economy, the US political system, we'll have the first global cyber war in this country this year, and it's going to create geopolitical chaos or politically, even violence after the US election, let alone the risk of a war between US and Iran in the Middle East. There's this trifecta or Bermuda triangle of the wrong health response, and the fact that the virus is going to come back next winter, of running out of policy bullets, once we monetize fiscal deficit forever, and then geopolitical shocks that are negative supply, and they lead us to a geopolitical depression. That's a recipe for a greater depression. ASH BENNINGTON: How do you quantify some of those risks in order when you look at-- when you talk about things like, example, cyber war or the potential for a hot war in the Gulf, how do you quantify what those risks look like? NOURIEL ROUBINI: Well, right now, markets are completely disregarded. In the case of a war between US and Iran, they're saying, we killed Soleimani. They sent a bunch of rockets, we restrain ourselves. Now, Iran is contained and they're not going to do anything. I think that is the wrong analogy of what's happening in Iran, and I happen to be a Persian Jew, I understand how the Iranian think, and I told you simply and I could discuss it for hours. If Trump is reelected, the regime in Iran is dead because four more years of sanctions and other pressure means they collapse, and their regime wants to stay in power. The only one goal there is to stay in power. That's a fair amount. It's not going to be an external shock that leads to regime change, but an internal revolution. Suppose that Iran escalates a situation in Middle East to proxies, initially attacking Israel and Saudi Arabia, creating chaos with his own proxies, and then [indiscernible] US in a conflict, what's going to happen? Oil now is at below 20, it's going to spike 250. The stock is going to crash, and the recession is going to become more severe, like '73, like '79, like '99. Once that happens, there's not going to be a regime change in Iran. Why? Even if we bombed the hell out of Iran in that war with an aerial campaign, the regime stays in power. You need to have 1 million boots on the ground in order to have regime change in Iran. We're not going to have 1 million people, American soldiers going and invading Iran, it's going to be air campaign. Once you bomb Iran, even half of the country is against the regime is going to support the regime, because they're nationalist. If you attack them, even those who hate Khomeini are going to support in the same way they went and rallied by the millions when we killed Soleimani. We're not going to have regime change in Iran, Iran can cause a spike in oil prices, a collapse of the stock market bigger than this one and a more severe recession. Once that happens, regime change is going to occur not in Iran, but it's going to occur in the United States. Look at the three previous geopolitical shocks in the Middle East, '73, '79 in 1990. After these shocks were the recession, stock market crash and inflation. Guess what? Carter beat Ford in '76, Reagan beat Carter, and Clinton beat the Bush. Three times you had a geopolitical shock in the Middle East with an oil price spike, and you had regime change not in Iran, in two of those three cases, you had the regime change in the United States. That's what happened. If we're going to have that shock, Trump is dead, literally, politically. The Iranians know it, and even if they're weaker right now, in my view, not now but by the early summer, they're going to escalate the tension in the Middle East, and mark my word, there'll be a war between US and Iran. ASH BENNINGTON: That's also a very sobering assessment. You've covered your view of the potential impacts of the oil markets. Another question that I had for you is, when you look at the potential for credit shock, when you think about bond yields, what's your outlook on that front? NOURIEL ROUBINI: Well, as I pointed out, even before, for the last two years, we've had the debt bubble in the United States. That debt bubble was mostly in the corporate sector. The last debt crisis was households, mortgages and leveraged banks. This time around, we've been saying it's the corporate sector and shadow banks that finance them. CLOs, leveraged loans, fallen angels in high grade, there are trillions of dollars of high yield junk bond issued in the way that we kept covenants, covenant light, we have a loosening of our lending and credit standards, it was just toxic, it was a crisis waiting to happen. Guess what? When a similar shock occurred in 2016, spread went from 300 to 900 for high yield, but it took about three months, and then they went down back to normal once we realized we're not going to have a global recession. This time around, they've spiked in less than a month from 300 to 1100, and the entire market for high yield, leveraged loans, CLOs as completely shut down. Even firms that had high grade issuing commercial paper, and corporate bonds could not issue them. That's why the Fed and the Treasury have come to the rescue of the high grade. There are two problems. Even if you have a plan to essentially backstop commercial paper and high grade their debt, you're not going to take care of all the firms that are issuing junk bonds, because of course, the Fed cannot take that credit risk. You can backstop high grade, but not high yield. You cannot backstop the mediums or those medium and small firms that don't issue bonds, like small and medium sized enterprises have no access to the capital markets, it's only larger firms, high yield and high grade. You're taking a huge credit risk even for the high grade, because within the high grade, you have a trillion dollar of bonds that are BBB minus, they are on the verge of being downgraded to junk. Ford was just downgraded to junk. A big firm like Ford has been downgraded from BBB to junk. The Fed now is telling us we're going to take and we're going to buy high grade bonds, including BBB minus. To me, it's a mistake. Because most of these guys, even if you backstop them, the fundamental's going to lead to a downgrade, and once they're downgraded, you're taking a market risk, because then there is a spike in the spread and you do a mark to market loss on your portfolio as a Fed, you take a huge credit risk. I would have said if you want to backstop corporate bonds, do it for high grade and exclude fallen angels. Instead, they decided to save the fallen angels. Even by doing that, you still have all their high yield that is essentially not backstopped, you have leveraged loans and you have CLOs and you have every firm that is not even issued debt, that is the majority of firms in the country who are not issuing bonds. They have to use either banks or other forms of lending. We have already a debt crisis, let's speak about it. With oil at 20, most of shale gas and oil producer in a matter of months are going to be bankrupt, completely bankrupt. There's not only them, anybody, hotel, cruise lines, hospitality bars, restaurants and big chains, retail, they were highly leveraged before that segment of the market also is effectively bankrupt. These are not illiquid but solvent firms, we should not bail them out. These are illiquid, at that current economic conditions, they are solvent and if we're going to bail them out, there'll be a massive loss for the Treasury and for the US taxpayer. The whole point is you want to save those are illiquid but solvent, but in the high yield, and in the junk area, there's tons of stuffs that is illiquid and it's insolvent, and you should not backstop them. Otherwise, you're literally privatizing the gains again, socializing the losses again, for equity holders and for other bull holders and a creditors, that would be unfair. We're not going to do it hopefully. ASH BENNINGTON: One of the things that comes up in this context is the risk of moral hazard for backstopping debt and for companies that have effectively been engaging in massive share buyback programs that's generated an incredible amount of angst and blowback against corporate America. NOURIEL ROUBINI: Absolutely. For the last decade, the amount of share buybacks has been huge, has been artificially increasing earnings per share and the growth of earnings per share, boosted valuation. Since compensation of many CEOs, and senior managers are based on valuation, they literally pocketed those gains for themselves, and that's something reckless, because if you do share buyback, you're changing your capital structure. You're reducing the amount of equity in your firm, and you're increasing the amount of debt, because most of these share buybacks were financed for those who are not profitable by essentially issuing debt. You have essentially leveraged up your capital structure with more debt, less equity. You made yourself vulnerable, and now, the shock occurs, and they go bankrupt. There's a huge moral hazard because even if the law says you cannot use this money for a share buyback, that's the minimum, of course that you need to do. The share buybacks were done in the past. You've made yourself financially fragile. You've made yourself near insolvent. Now, you're asking for a government bailout because you screwed up and you've privatized the gains, you socialized the losses for a decade. Now, I'm supposed to backstop the equity holders and the existing creditors by giving you a bailout? It is still bailing out people and socializing the losses even if you say that you get an increased compensation of CEOs, and you got to do more of share buybacks. The damage in the moral hazard occurred for the last decades. ASH BENNINGTON: Let's shift gears here a little bit. I think most people think of you in your background in acting in the academic world, but you've also spent a long time in government and in supranational organizations. I think I can get these right, you're at the IMF, the World Bank, the Fed, Bank of Israel, at the White House, the Council of Economic Advisers during the Clinton administration, at Treasury is a senior advisor Tim Geithner, help us understand, especially on the monetary policy side, I think that a lot of people have been going up to the, for example, the Fed website, they see this alphabet soup of liquidity facilities, in addition to the low interest rate policy that we're at, the reserve policy. Help us understand how some of these liquidity facilities actually function and how they transmit into the real economy some of that liquidity. NOURIEL ROUBINI: Well, these liquidity facilities have the falling feature, there are many parts of the financial system that are stressed, that suddenly everybody wants cash, even government bonds and let alone things like corporate bonds or equities becomes too risky. When there is this scramble and everybody's going from equity to government bonds, and from government bonds into cash, then there is a demand for liquidity. If you don't find that liquidity of this crisis in what's called funding market with very exotic markers like repo having interest rates not close to zero, but close to 5%, 10% like it happened even last year. Some of it is highly technical, but essentially, think of it this way to think of how the market got distress in March. Usually, when there is risk off, stock market goes down, but then bond yields go lower because people move money from equity into safe US Treasuries, so bond yields go lower. While you're losing money in your equity portfolio, you make money in your bond portfolio. Suppose you're a typical investor that they recommend you 60/40. 60 equity and 40 bonds. Whenever there is a negative shock, you lose money on equity, and you make money in your bonds because the yield goes down, the price goes up, and that's a mark to market game. That's the way you are insuring yourself. Most of modern portfolio theory, most of institutional investors, even the hedge funds, what is the risk parity that Ray Dalio and Bridgewater was doing is a variant of 60//40. Instead of being 60/40, you're enhancing your bond side of the portfolio by leveraging it because you know that when there is a shock to equity, you want to be even more than 40 into bonds. Between this year, between March 9 th, and March 21st, for almost two, three weeks, something crazy occurred, and the crazy thing occurred was the stock market was in freefall going down 10%, 20% and then 30%, and bond yields that initially went down because initially, in February, they went from about 1%, down to 0.3. Initially, the market reaction was the normal one. Stock market's down, bond yields are down, you lose money on the equities, you make money on bonds, but after March 9 th , and until March 23rd , something crazy happens. The crazy thing that happened was that bond yields in the Treasury market, instead of going lower towards zero, they went from 30 basis points in a matter of two weeks to 125. You had an increase of almost 100 basis points in bond yields that made you made losses of 10% on your own bigger bonds. On this portfolio, 60/40, even Ray Dalio's risk parity, why did they lost so much money in March? Because they were losing money on equities. They were losing money on bonds. This was not supposed to happen, because the risky asset go down in price, but safe asset goes up in price. During that three-week period, government bonds were going down in price, not just credit, government bonds, safe, treasuries were going down in price, gold was going down in price, the Swiss franc was losing, the yen, so every risky asset, whether it was treasury bonds, or bunds or JGBs or Swiss franc, or yen or gold was going down in price so there was nowhere to hide. The only place where you could hide was literally cash, was the only thing that gives you zero return but doesn't fall in price. We have not seen this thing ever before. There were periods of stress during the Global Financial Crisis where we have three weeks in which every asset, risky asset then safe assets were collapsing in price so you're losing money. That's why the genius of Ray Dalio lost a fortune on his risk parity portfolio. It was supposed to be the portfolio does well in good times or bad times. Even the smartest people in the world lost money. All the quant funds lost money. Why? Because the normal correlation between equities and bonds broke down. Instead of one going up and the other going down, both of them were going down and you were losing money. That was the liquidity shock. What happened was that when the Fed decided then unlimited QE, support money market, support commercial paper, support high grade, support that give liquidity to the banks, to non-banks, primary dealers, everybody in the financial system. The investment banks did not have access to the liquidity of the Fed, that's why they were leveraged to sell everything. As they were selling everything, even Treasury were collapsing. Once the Fed realized we have a problem of liquidity and we need to provide liquidity and they did everything, then things normalized. Stock prices were going down still after March 19th, they were going down at least for another week, but bond yields that went to 125 went back to 75 basis points. The normal correlation became normal because the shock to the market was one of illiquidity. Once you've got the market liquidity, at least you had safety. You had safety in gold, you're safe in Treasury and you are safe in other things. There was a massive liquidity shock that was destroying every historical correlation. There was no to hide, but cash and there was not enough, of course, cash out there until the Fed started to print. They printed stuff of the order of 70 billion every day. Think about the printing machine, everyday buying 70 billion of treasuries. Within a matter of 10 days, you have almost a trillion dollar. That's what the Fed did, they became a huge, the biggest printing machine in the world. There was a liquidity problem over a lack of dollar, not only in US, but also in the rest of the world, in Asia, in Europe. What did they do? They restarted the swap lines, that means that if you are the ECB or Bank of Japan, you can borrow dollars from the Fed, hundreds of billions, lend it to your banks, and your bank can lend it to your corporates. That's why the dollar was skyrocketing in that period, there was a scramble for liquidity. There was a dollar illiquidity and the dollar was going through the roof. You get this weird phenomenon of dollar in spite of the Fed easing money going up rather down in value. It was again the same illiquidity, the shortage of dollar liquidity was becoming lost. This was just something we've never seen before. ASH BENNINGTON: Do you think there's still systemic risk there? There was a lot of worry initially about the breakdown of those correlations, about the unwind of the risk parity trade, has that trillion dollars in liquidity backstopped it sufficiently or is there still potential systemic risk in the future if that correlation breaks down again? NOURIEL ROUBINI: Well, the systemic risk doesn't come only from that correlation breaking down and what the Fed right now has done for the time being stabilizing that correlation. The systemic risk comes from the amount of debt and leverage in the system. It's not just that debt and leverage that finance stock market position, most importantly, the structure around of debt markets. We have essentially, corporate debt within CLO, leveraged loans, high yield and high grade that is at historic highs, and the debt crisis was going to happen regardless of. In the household sector, is that who's going to pay your student loans, your auto loans, your mortgages, your credit cards if this is going to become a great depression? Currently, the bank look like safe. Why? I like the non-banks and the shadow banks, they have liquidity and they have capital, but that capital buffer is for a regular recession. It's not the capital buffer for a greater recession or for a greater depression. People say shadow banks that financed the corporate sector are going to go bust, but many of these shadow banks by the way, PE firms and capital markets and prime brokers and insurance, where do they find themselves? They find themselves from banks. At the end of the day, the money comes from the banks. If they go bust eventually, banks are going to lose money. You have the massive exposure of the banking system to both commercial and residential real estate and to consumer credit, and also to small businesses. The current guarantee says that you do a credit alone guaranteed by the SBA, you're going to be essentially guaranteed 100% up to 10 million for each one of these loans for a maximum of about 350 billion. Now, 350 billion is spare change. If many small business are going to go bust and we're speaking about trillions of dollars of bank loans, then those MPS are going to sharply rise if you have a greater depression and the banks could be in trouble. The systemic risks come from the credit markets, and the debt funds and the credit funds, they can go bust and cause that fire sales, it can go through a seizure, and then the default and the crises in the corporate debt market and only the high grade is being backstopped by the Fed, and it could then spread into the banking system. That's a fundamental source of that systemic risk. It's not just risk parity, risk parity investors in Ray Dalio's fund can lose money. That's not the key thing. There are bigger things happening. ASH BENNINGTON: One of those bigger things that you mentioned, you talked about the massive dollar liquidity shortage that's being supported now with cross border central bank swap lines. How does that liquidity shortage develop? What's the underlying risk there? NOURIEL ROUBINI: Well, around the world, lots of people, governments, corporations, even households. In some companies, your mortgages are priced in dollars twice for various types of risk. There is a huge amount of dollar debt of the public sector, probably they issued dollar debt in euro bond markets and private sector, corporation banks and then even some households. What happens is that now, given the shock that occurred, risk off, the dollar was strengthening and the value of currencies around the world was falling. Now, in local currency, if you bought it in dollar and your currency depreciates, the real value in peso, in real, in krone, or whatever not, of your dollar that goes higher because you have a devaluation of your currency. That's called the balance sheet, the fact of having foreign currency debt when your currency depreciates and therefore, you have a risk of illiquidity and insolvency. As the currency of all these countries were going down in value, the real value of your dollar debt was going higher, everybody was essentially long dollar debt, borrowed in dollar and everybody was trying to buy dollar to hedge essentially their dollar liabilities. As people were trying to sell pesos and liras and buy dollar, their currency were depreciating, and the value of the dollar was skyrocketing, and yet this massive dollar illiquidity, not just in the US, but in Europe, in Asia, in advanced economies and emerging markets. Now, there are two solution to that. One, the swap lines within the Fed and major central banks in the world. That helps Europe and Japan, doesn't help emerging markets because most of the swap lines initially were only with ECB, BOJ, SMB and advanced economies. They complicate the rules of lending money to emerging markets directly from the Fed, and certainly US doesn't want to lend money to China. In addition to the Fed providing global liquidity and being an international lender of last resort for advanced economies, somebody has to provide liquidity to backstop emerging markets when you have a huge amount of dollar debt. The international lender of last resort is the IMF and the World Bank. If you are the Central Bank of Mexico, you can print pesos, but if you have dollar debt, you cannot backstop your firms or your government by issuing dollar by definition. The IMF and the World Bank can help emerging markets, their governments and then indirectly their firms and their banks but the current amount of capital of the IMF and the World Bank allows them to lend only $1 trillion globally. Now $1 trillion looks like a lot of money. In normal times, it is, because you have one little Argentina, or one little Turkey needs your money, so you have lots of funding and lending capacity. When you have now 50, 60 countries' government bank, the IMF and World Bank lending money, you're going to run over a trillion dollar very fast. That's why in emerging market, they need to hedge your dollar risk is in the order of $3 to $4 trillion. The Fed cannot help you, the IMF can help you only to the tune of a trillion dollar, therefore, the downside risks for many emerging markets are still severe. You need a bigger lender of last resort at the global level, you need to fund the IMF, you have to use their capital so they can lend more. ASH BENNINGTON: This is all happening against a backdrop of a collapse in global cross border trade, much of which is denominated in dollars. NOURIEL ROUBINI: Yes, it is denominated in dollars. When the dollar falls, the cost of imports for these countries go higher. Many of these economy in emerging markets also are one, commodity exporters and the price of commodities is collapsing because there is a recession, not just oil. Copper, industrial metal, and so on. These economies are also export led growth. If you have any collapse of your export because there is a recession in US, Europe and the rest of the world, you have another turn of trade shock on commodities and on exports of goods and services. You have a recession that just transmitted through commodity financial and trade channels, you have huge amount of dollar debt of these emerging markets, of the government and/or of the private sector. You don't have an international lender of last resort who is willing and able to print enough dollars or lend enough dollar to deal with this shock. That's why whenever there is a risk off in advanced economies, things go south, and we had that 30% fall in US and other advanced economies' equities. The shock in the emerging market is bigger than a shock not just to their stock market but to their debt markets. EM spreads for sovereigns go sharply up, EM spreads for corporates, not just in a foreign currency, but even local currency, they go higher. The stresses for emerging markets are much more severe. If you're in advanced economies, you can print your money, you can run a budget deficit, your market is going to strengthen. If you're an emerging market, you print money, and you're on a budget deficit, you're going to have inflation and collapse of your currency. Then you'll have balance sheet problems, and you have inflation. That's because these emerging markets don't have the same policy credibility as advanced economies. In Europe, US and Japan, we can run 10% budget deficit and print money, and everything is going to slightly improve over time. In emerging markets, you run a 10% budget deficit, you monetize it, you're going to end up like Zimbabwe, or Venezuela or Argentina. You don't have those options. Your policy options are also restricted in emerging markets. ASH BENNINGTON: The final question before we wrap up here, a place where we've seen a lot of activity has been in the FX markets, what's your outlook for the dollar, and what are you looking for in that context? NOURIEL ROUBINI: Well, usually whenever there is a risk of episode, people tend to dump other risky assets and currencies and go to the safety of a few assets. They tend to be US Treasuries, and the dollar because the dollar is considered as a safe haven currency. However, during this financial crisis and risk off episode, the dollar becomes the safe haven for say, Europe and for Latin America but the Swiss franc becomes the safe haven currency for the Eurozone, or the Japanese yen becomes the safe haven currency for Asia. During that episode between March 9th and March 20th, when everything was really, the correlation were going berserk, the dollar is going through the roof, but other safe haven currencies like Swiss franc and yen were falling sharply in value, because you had these lack of dollar liquidity. Now that the dollar liquidity problem is being normalized by the Fed, at least the Fed does it, the IMF can do it partly for emerging markets, EM currencies are going to weaken further out of the US dollar, because there is no funding, but maybe the relation between US dollar and Euro and yen is going to relatively stabilize. We are printing money like crazy, but they're printing money like crazy also in Europe and Japan. Among major currencies, probably that you'd have a currency stability. Now, over time, of course, whether the dollar goes up relative to Euro and yen depends on what happens to the economy and the markets in Europe and US relative to each other. That's harder to say. If we have another episode of severe risk off, even with the flooding by the Fed of liquidity, then if markets are going to go south and people seek the safety of US Treasuries, then they have to sell yen and Euro to buy US Treasuries, that strengthens the US dollar. The US dollar for now is still the only true safe haven, and therefore other episodes in my view, the current market has not bottomed out. People say when we fell 35%, that was the beginning of a rally. Guess what? Last week, market went up 15%, they're still 25% below the peak. They say this is the bottom. It's not the case. In any of these bear markets, and in many of these recessions, you have a fake head rally in a bear market. You have a dead cat bounce. I interpret what happened last week as a dead cat bounce or a fake head rally. Why do I say that? The entire set of policy news now is priced in. People know huge monetary bazooka, huge fiscal bazooka, that's already known and it's priced in. The two things that are not priced in is the spread of the epidemic and how bad the economic news are going to be. All the good policy news are already out and out in the market, they're fully priced. What, everyday, we're reading the contagion is spreading, US and globally worse than expected. The economic news surprise on the downside, as I said, instead of 2 million Unemployment Claims, 3.3 million. If you think about the flows of news in the next two months, the bad news on the economy and the macro and on the health situation and the contagion are going to be worse than expected. While the good economic news that central banks and governments are using their bazooka is already known. Now, there is a case in which we'll have more fiscal stimulus as a surprise. What will be that case? If the economy becomes so bad and if the pandemic becomes so worse, then we need a fort fiscal package to give money to households that are starving. If that fiscal policy surprise were to occur, it would occur only because the health news are becoming so bad and the macro news are becoming so bad that we need another fiscal stimulus. Even that surprise that we'll have a fall package is not going to be good news for the market because the trigger for that surprise on that policy is going to be terrible negative surprises on the macro and on the health situation. It's going to be awash or [indiscernible] actually the bad news are going to dominate the positive one. I fear that until we have positive news on the macro, and we have positive news on the health situation, the market can go only south. Of course, they're not going to go south in a mean that there'd be no way. Someday, they can go up, someday, the come down, but his is not the bottom of the bargain. This is not the beginning of the rally. We need to reach a point in which we've done enough testing and we've done enough suppression that we know that we're going to stop this virus, maybe two months from now, maybe three months from now. The market need to be able to price risk. They can price risk when you have distribution is known, they cannot price uncertainty when you have a distribution with fat tails. Right now, we have huge fat tails on what the health situation is going to be. Are there going to be 100,000, 200,000, 1 million, 2 million people dying of these things? We have no idea, and unless we do testing, tracing suppression, we don't know what's the end point where the second derivative becomes negative and eventually, asymptotically the number of new cases goes to zero. Once we know that the market can price in things from thereon. Once we know that the economy has really bottomed out, and we're going to see light at the end of the tunnel, the market can go up. This is a dead cat bounce. This is a head fake rally. This is not the bottom because of the reasons I discussed, and if the geopolitics, if the health pandemics and the policy response runs out the battle and instead of a greater recession, we end into a greater depression, that's not priced in. The market right now are fully pricing in a greater recession, they believe that by second or third quarter, we bought them out. Then by the third or fourth quarter, we started to grow positively. If this recession is going to continue in Q4 into 2021, because we have a greater depression, there's a 30% probability, my view, is not the baseline, the baseline is 60% greater recession, that is the probability of a greater depression occurs. In a great depression, market go down, not by 35%, they go down by 50% to 60%. Then they don't rally back. They stay down there for a while. That's a tail risk that's not priced by the market, and it's a rising thing in Greece. ASH BENNINGTON: It's all the same meta themes. It's unpredictable tail risk, asymmetric downside risks, unknowns, and unknowables breakdowns of historical correlations, and really, an uncertain outlook. Nouriel, thank you so much for joining us. In conclusion, we've gotten a lot of information, what should people be looking for very specifically, key data points going forward that might influence the chain of events that may unfold. NOURIEL ROUBINI: First of all, as I said, you have to be defensive. This is not the bottom, it could be a fake head rally. It's not the time to plunge into risky assets. You have to look, especially at the contagion, at the health situation. Is there light at the end of the tunnel? Is the second derivative of the contagion becoming negative? Is that asymptotically at time, May, June or July, when the number of new cases are going to go to zero? That's going to be key. What's the healthcare response? Are we going from mitigation light into true mitigation? Are we going from mitigation to suppression? We're not going to go into full suppression, we're going to do these mitigation, things are going to get worse. That's a key. Secondly, the market economic data in my view, for now, are going to surprise on the downside, growth, unemployment, defaults and you name it. Until we start to see things are priced in fully, and the economic news on the micro becomes surprised on the upside, rather than the downside, we're not going to see it through bottom. You have to look at the macroeconomic news and you have to look at the health news. Those are the two key things to understand when we're going to bottom out whether this is going to be a greater recession or greater depression, and when there is light at the end of the tunnel. It's not yet at the moment, but you have to monitor all of these factors, the health ones and the macro ones and of course, the policy, but for now, the policy is priced in ASH BENNINGTON: Nouriel, thank you for joining us. NOURIEL ROUBINI: Good being with you today. Thank you. JUSTINE: If you're ready to go beyond the interview make sure you visit realvision.com where you can try real vision plus for 30 days for just $1. We'll see you next time right here on real vision.