Renowned economist Nouriel Roubini, who accurately predicted the 2008 financial tsunami and is known as the "Dr. Doomsday," said in a recent article that the world economy is facing an "era of great threats," and stagflation will become the core driving factor for major market headwinds.
He pointed out that this will be reflected in the stock and fixed income markets, as the downturn experienced by investors in 2022 will become a long-term trend.
"This massacre may continue," Rubini wrote.
He explained that assuming an average inflation rate of 5% instead of the Federal Reserve's target of 2%, long-term bond yields would need to approach 7.5% to achieve a real return of 2.5%. However, if the yield of treasury bond rises from 4.5% to 7.5%, the bond price will plummet by 30% and the stock market will fall into a "serious bear market".
In light of this, Roubini warned, "On a global scale, losses for bondholders and stock investors may increase to trillions of dollars in the next decade."
As for why inflation remains high, he mentioned a lot of threats, from aging labor force to de globalization, as well as increased government spending in areas such as war and climate adaptation.
At the same time, the sharp increase in debt of private and government borrowers has triggered the central bank's "debt trap", which has made the situation worse. Efforts to lower inflation by raising interest rates may lead to a recession for highly leveraged borrowers, which governments around the world hope to avoid.
Rubini said that in the face of this situation, the central bank may raise its inflation target above the historical average, and many central banks have suspended interest rate hikes while core inflation remains too high, which indicates this.
Other analysts also warn that unless the debt ratio is reduced, the increase in public borrowing and spending will ultimately lead to defaults. In response to this situation, Roubini pointed out that some countries will only allow higher inflation to erode nominal debt.