The Slow-Motion Train Wreck (w/ Nouriel Roubini)
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.