A famous economist known as “Dr Doom” has warned that the United States will either experience runaway inflation or a significant market downturn unless the Federal Reserve doubles its current funding rate.
Nouriel Roubini, a 64-year-old economics professor and founder of an influential consulting firm, served as a senior economist for the Council of Economic Advisers under Bill Clinton and worked for the Treasury under Barack Obama.
His nickname comes from his pessimistic views on the economy, including an accurate prediction of an impending real estate crash before the Great Recession.
On Monday, Roubini told Bloomberg that the Federal Reserve needed to make significant financial adjustments to avoid serious consequences.
He suggested that to stave off inflation, a doubling of the Fed’s current interest rate was needed – but admitted taking the step would lead to a ‘hard-landing’ recession as the US economy shrinks.
Nouriel Roubini, the famed economist, is seen speaking on Bloomberg Business on Monday
He said the federal funds rate – their guidelines for lending to banks – needed to double from its current range of 2.25 to 2.50% in order to cope with a “highly inflationary environment”.
He warned, however, that a sharp increase in the federal funds rate would also create a “hard landing” for the economy – a dramatic slowdown.
“The fed funds rate would have to go well above 4% – 4.5% to 5% in my view – to really push inflation towards 2%,” he said.
“If that doesn’t happen, inflation expectations will go haywire.
“Or if that happens, we’re going to have a hard landing.”
He said neither maintaining the status quo nor raising the federal funds rate was a panacea.
“In any case, you either get a hard landing or you get inflation out of control,” he said.
His remarks came as Michael Burry, the 51-year-old hedge fund manager, revealed he had sold almost all of the shares he owned.
Burry’s antics were portrayed in the 2015 film starring Christian Bale as the financier who profited from the housing market crash.
Michael Burry, the hedge fund manager who runs Scion Capital Management, sold almost his entire portfolio in the second quarter
Christian Bale played Burry in the 2015 film, directed by Adam McKay
On Monday, filings by Burry’s Scion Capital Management showed that during the second quarter he had dumped his entire stock portfolio.
The holdings were cumulatively worth $165 million at the end of the first quarter.
Scion sold its long positions in 11 companies during the second quarter, including bullish bets in Google parent Alphabet, Facebook parent Meta, Bristol-Meyers Squibb and Nexstar Media Group, according to the company’s latest 13-F filing. .
At the end of the second quarter, Scion had only one stock left: Geo Group, a Florida-based company that operates private prisons.
Burry’s shares were worth $3.3 million.
Large hedge funds are required to disclose their holdings in publicly traded companies quarterly through 13-F filings.
The filings do not include short position information and are accurate as of the end of each quarter, which means Scion’s positions may have changed since the form was submitted in late June.
A week ago, in a now-deleted tweet, Burry said he was deeply concerned about economic headwinds.
“I can’t get rid of this silly pre-Enron, pre-9/11, pre-WorldCom feeling,” he said.
He frequently deletes his tweets soon after they are posted.
Last week, Burry warned of the onset of winter for the US economy due to rising consumer debt.
“Consumer net credit balances are growing at record rates as consumers choose violence over cutting spending in the face of inflation,” he tweeted.
‘Remember the savings glut problem? No more. The COVID helicopter cash has taught people to spend again, and it’s addictive. Winter is coming.’
Roubini and Burry’s concerns came after a top Morgan Stanley economist warned it was too early to see the slight interest rate cut as a sign the economy has taken a turn, insisting on the fact that it was “far premature” to celebrate.
On Wednesday, the government released the latest consumer price index report, which showed inflation hit 8.5% for the month of July, down from 9.1% in June.
On a monthly basis, prices remained unchanged from June to July – the smallest such increase in more than two years.
Falling gasoline prices were credited for last month’s relative decline from June, but that was partly due to fewer Americans heading to the pumps or filling up gas less often.
Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, said it was “misleading” to believe the worst was over.
“The idea that inflation may have peaked, in our humble opinion, may be correct in the sense, but may also be a little wrong in regard to this idea that, hey, game over, problem solved, the The Fed has conquered the day, and the Fed’s credibility is back and all that,’ she said, speaking on Bloomberg on Friday. What goes up podcast.
Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, spoke to the hosts of Bloomberg’s What Goes Up podcast on Thursday
She said “a lot has gone well” with slowing global energy demand and easing supply chain issues, which helped bring down soaring food prices.
“But for the markets to celebrate like they have since mid-June, we think we are way premature for that.”
She said she expected Jerome Powell, the Fed Chairman, to be happy with Wednesday’s data, and said inflation of 9.1% in June appeared to be a spike. But, she warned, inflation was still excessively high.
“If I’m Jerome Powell, I’m probably smiling and glad energy prices went my way,” she said.
“But let’s be real here, people.
“I mean, 8.5% on your headline and a core that was really flat at nearly 6% is far from a sustainable level. That’s three times your 2% goal.
Federal Reserve Board Chairman Jerome Powell is seen July 27 in Washington DC
Falling petrol prices (pictured) gave Americans a slight break from the pain of soaring inflation last month, although the spike in overall prices has slowed only slightly from its peak in June in four decades.
Lack of affordable options is driving down US home sales. The fastest declines in newly pending sales from May to June occurred in San Jose (-24.3%), Seattle (-23.9%) and Salt Lake City (-20.8%).
Shalett described the first six months of this year as a “very, very classic bear market”, noting that some of the steepest declines were felt in the technology sector.
“People think the data is going to get more constructive, and we get people to think they’re going to find good deals, and they go in and they find good deals where things have sold the most,” a- she declared.
“And some of the biggest damage, as we know, has been in the unprofitable tech space, part of the meme stock space, and some of the most essential coins in Nasdaq and Faang. And that’s what fueled this hope that the worst is over.
She added that there was more bad news to come.
“People who are real students of the market know that in every bear market we have these retracement rallies. These are false gatherings.
U.S. Treasury yields fell on Friday after a volatile week as investors weighed whether an apparent slowing in inflation’s rise could dampen the speed of the Federal Reserve’s interest rate hikes.
Thursday’s data showed U.S. producer prices fell unexpectedly in July. It came a day after the CPI news for July.
The data raised some hopes that the worst of inflation increases may be in the rearview mirror. Still, many analysts and investors say more evidence will be needed before they can determine how Fed policy might be affected.
“The theme here is that if the monthly inflation prints are a bit more stable, we’ll need fewer rate hikes and long-term inflation is unlikely to go that far down,” Guy LeBas said. , chief fixed income strategist at Janney. Montgomery Scott in Philadelphia.
However, LeBas echoed Shalett in pointing out that it was too early to celebrate.
“I would maintain skepticism until we see at least one or two more inflation prints that signal rate hikes are ready to slow,” LeBas said.
Low liquidity has also added to market volatility, with many traders heading off for summer vacation, and some investors reluctant to take positions until the outlook is clearer.