The Economic Trends That Will Shape 2023 and Beyond
Dr. Nouriel Rubini, Chairman of Rubini Macro Associates LLC, was hosted by Naji Nehme, CFA, Chief Investment Officer at Petiole Asset Management AG, for a discussion inspired by his latest book, Mega Threats. The webinar covered global markets and economics, artificial intelligence, Cold War 2.0 investing, and more. Below are the highlights of the discussion.
Nouriel believes that we live in a period of 4 Us: unexpected, unusual, unprecedented uncertainty; where many risks threaten the global economy. While his book “Mega Threats” describes what's going to happen to the world economy and the world at large in the next decade or two; many of these mega threats are materializing today: the return of inflation and negative supply shocks; the risk of stagflation, and the build-up of private and public debts.
Dr. Roubini detailed the threats the world is currently facing:
- Geopolitical threats given the division in the world;
- Environmental threats coming from global climate change;
- Health threats with the recurrence of severe global pandemics;
- Technology, artificial intelligence, machine learning, and robotic automation threats which could potentially lead to long-term permanent technological unemployment, a rise in income, and wealth inequality;
- A backlash against globalization and hyper globalization, the return to protectionism, to fragmentation and balkanization of the global economy and global supply chains;
- Political challenges with the rise of extremist authoritarian populist regimes of the extreme right and the extreme left coming to power both in advanced economies and in emerging markets.
Nouriel Roubini highlighted that the conventional wisdom, which believes the rise in inflation in advanced economies and many emerging markets was temporary and transitory, has been proven somehow wrong. Inflation went towards double digits in most advanced economies and is still very high. A series of negative aggregate supply shocks reduced economic growth, and increased the cost of production; in addition to the initial impact of COVID on the production of goods and services, on the supply of labor, and on disrupting global supply chains. Contributing factors include the implications of the brutal invasion of Ukraine by Russia on energy prices, both oil and natural gas, food and fertilizer prices, and the price of industrial metals. And finally, the continuation of the zero COVID policy of China, at least until recently, created other bottlenecks to production in China and to the global supply chain.
Dr. Roubini foresees a global recession, stressing that most people have moved away from the idea of a possible soft landing. The new conventional wisdom believes that instead of having a soft landing, there will be a softish landing; meaning a short and shallow recession: maybe a couple of quarters of negative economic growth followed by a very sharp drop in wage and price inflation that leads central bank to cut policy rates by the second half of next year. Nevertheless, Dr. Roubini believes the recession will be more severe.
In addition to inflation, stagflation, and severe debt; new risks that weren’t a concern for the last few decades; Nouriel believes there is a need to worry about climate change, geopolitical depression, AI, machine learning, robotics, and automation.
Amid what he called a geopolitical depression; there are a number of revisionist powers: China, Russia, Iran, and North Korea who are challenging the economic, social, political, trading, financial, but also geopolitical order that the US with Europe, the west and their allies created after World War II. Additionally, the evolution coming from artificial intelligence, machine learning, robotics, and automation could lead to permanent technological employment as not only traditional blue-collar routine jobs can be automated with robots and machines, but also cognitive jobs, which are mostly white-collar, could be divided and sliced into different tasks that can be automated. Finally, the dark side of technology is that unfortunately, many technological innovations occur because governments want to build bigger and more deadly weapons to fight wars against their own strategic rivals.
Insights for Investors
According to Dr. Roubini, historically, real estate has done better than equities whenever there is moderate and rising inflation; given that it’s an asset with a relatively fixed supply in the short run and has more market pricing power on rents. However, a good amount of residential and commercial real estate is going to be stranded even in North America because of global climate change-related developments, including floods, rise in sea levels, hurricanes, wildfires, droughts, etc. So, investors must choose wisely.
Over the medium to long term, and in a world of not just digitalization, but hyper-digitalization; the way we live, work, study, socialize, shop, and do business will all become increasingly digital. Roubini considers that firms operating in the hyper-digitalization field are going to do better over time. However, investors need to pick the right ones and the winners. Amid a rise in interest rates and a rise in inflation, Nouriel recommends investing in the industries and the firms of the future, many of which are not in public markets. They must be accessed through private markets. The winners include AI, machine learning and robotics, automation, biotech, quantum, and many other industries of the future.
Roubini stressed that nobody becomes richer overnight by gambling in Meme stocks, crypto, or highly speculative assets. The solution to long-term wealth is to study hard, work hard, save a meaningful fraction of one’s income, and invest in a diversified portfolio of a variety of risky and riskless assets. If done over the decades, investors will be able to have enough savings to live comfortably throughout their days.
Dr. Roubini’s word to the youth is to acquire knowledge in technology by majoring in STEM (Science, Technology, Engineering, Math, and Computer Science); in addition to a minor in Liberal Arts. Should they need to change jobs ten times in their lifetime, they need to read well and write well. Some combination of liberal arts major and minor in STEM or vice versa makes for a well-rounded person capable of surviving and thriving in spite of all these technological disruptions.
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