In the world there are many zombie institutions, zombie homes, zombie companies, shadow banks and also zombie countries.
With the escalation of interest rates in industrialized nations, all of the above are going to fall because as rates rise, raise the cost of debt and it will be impossible for the zombie economy to support it.
These predictions are not new, but on a day in which the Federal Reserve Bank of the United States (Fed) will make a crucial decision for the coming months, they take on relevance, even more so if we consider that they are made again, in an interview with the media international, by the economist Nouriel Roubini, known as “Disaster Doctor,” who had the “distinction” of predicting the 2008 financial crisis.
The economist had pointed out a few months ago that a recession in the world was almost inevitable. Today he not only considers it a fact, but also specifically points out the period it will cover and the great impact it will have.
According to Roubini, much of the economy is held up by pins and the rise in interest rates, which is far from over, will eventually take them away.
It will “undress” all those who do not have the solidity to withstand the “brutal” increase in inflation, and as a consequence, in interest rates.
“It will be a long and ugly recession, starting at the end of 2022 and lasting all of 2023“, he told international media.
But he did not only refer to the recession, but to what he considers will be one of the biggest blows in the history of the stock markets.
From his point of view, the collapse of the “zombie economy”, as he calls it, will cause a collapse of up to 40 percent in the influential S&P500 index on Wall Streetnothing more and nothing less than the largest capitalization on the planet.
“Even in a mild recession scenario, the S&P500 could drop as much as 30 percent, due to the zombie crash.” He said.
Soft landing and shallow recession, a naivete
The economist was very harsh in his words and especially in his predictions; he sharply criticized all those who expect to see a soft landing for the economy, especially the US economy, and a shallow recession, saying they don’t see the evidence.
“They should all be looking at the huge corporate and government debt ratios. As interest rates rise we will see who is swimming naked,” Roubini said.
The economist completely rules out, once again, a soft landing for the economy, pointing out that the time for the Fed to get the inflation rate back to 2 percent without causing a recession it is over, achieving this goal will be impossible from their point of view.
“The short-term outlook is recession, the medium-term outlook is recession, and the long-term outlook (one year) is recession, there will be a recession yes or yes. The question is not that, but how big will it be?” Roubini said.
Fed has a date with history
This Wednesday ends the two-day meeting of the United States Federal Reserve Bank (Fed), it will happen with the announcement of the monetary policy decisionmarkets take the increase in the federal funds rate for grantedwhich currently stands at a margin of 2.25 to 2.50 percent.
The other thing that markets take for granted is an increase of at least 75 basis points, which would take the reference to a maximum level of 3.25 percent. Nevertheless, some expectations in the markets expect an increase of up to 100 basis pointsWhat is not known is how the markets would react to the evidence that inflation has not subsided, or has already taken root, and that the Fed will have no choice but to implement a much higher rate hike.
Whatever it is, today the Fed has one more appointment with history, it will surely ratify its commitment to fight inflation, and there is no longer any doubt that rates can raise anything, as long as they bring down inflation.
Maybe what happens today, could be the basis for the scenario that draws the “disaster doctor”: a long and deep recession throughout 2023, with a strong corporate impact.
Everything indicates that a turbulent end of the year awaits us.
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