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foreign and my guest today is the renowned Dr Muriel rubini Dr rabini needs no introduction his present calls about the global financial crisis of 2008 and the more recent property crash in China are just two instances that come to the mind but in his latest book Mega threats he points to 10 threats starting from geopolitics and climate change and Wars to Soaring public and private debt and joblessness due to the rise of artificial intelligence that can lead to the world in the very least to a depression like in the 1930s well today we have the man himself to learn from and to hear about these Mega threats Dr robini thank you very much for joining us sir before we get to the book itself let me start with what is immediately planning out in the United States do you think the banking collapse is over for now or was that just a trailer and we may see more of that kind uh I don't think it's over I think there'll be more financial institution gonna be in trouble and recently the problems of the banks have come from what is referred to as Market or duration risk meaning having long-term Securities whose value is falling as interest rates are going higher but we're going to go from Market risk to credit risk because now there is a beginning of a credit conch in the banking system especially the regional Banks the land money to households to corporations to businesses to commercial real estate and once there's going to be a recession then there'll be more non-performing loans more defaults by household and businesses and therefore there'll be more stresses for parts of the U.S banking system but you feel pretty sure it is going to be hard landing and recession after all the latest jobs data uh is indicating that unemployment is not high the numbers are still not Rising so you think we may be able to escape without a recession at all well paradoxically the fact that the labor market is still tight the low unemployment rate aging of population restriction to migration falling labor force participation rate implies that the wage inflation is still too high and therefore the FED has to increase interest rates even more to achieve the two percent inflation targets but if they raise interest rate even more there'll be two problems one the likelihood of a recession becomes more likely and a Severe recession two they will have more financial stresses not just for banks but for other holders of assets and also for those who have too much debts then I face that missing difficulties and there'll be a doom Loop between the economic contraction and financial stresses so there is a contradiction between the achievements of price stability on one side maintaining economic growth and having Financial stability and there's recent prices in the banks makes this trade off even more harder to achieve but what if they wimp out what if they just learn to live with a four percent inflation uh would that still mean a stagflation or would it mean well you know some kind of growth uh not very good but uh you know we still amble along it's not that a possibility okay I think that the FED like most majors in club banks will wimp out gonna blink because the consequences of going back to two percent inflation will be economic and financial instability in the short run that may prevent a recession in the short term the stock market May rally but if you blink then there'll be a de-anchoring of inflation and inflation expectation there'll be a more severe wage price spiral and will have a repeat of what happened in the 1970s where the Fed was behind the curve inflation got out of control and then we still had stagflation because of negative Supply shocks and you can postpone it that prices Maybe by a couple of years by wiping out the real value of nominal longeration that with unexpected inflation but once influential expectation moved upwards then long rates are going to be higher shorter it's going to be higher normal and real these are going to be higher and there for those who have high that ratio are gonna still face eventually insolvency so you're gonna postpone the speculation and the debt crisis but you're not going to be able to avoid it over time okay yes sir you uh argue that very clearly in your latest project Syndicate to essay and to in the medium term in the mega threats book but before I come to that uh Dr Billy what would you advise investors then as you point out in your project Syndicate article the 60 40 debt Equity didn't work at all in 2022 investors lost on both counts is there a place to hide now uh there are options um absolutely 60 40 Works only when inflation is low and therefore the correlation between equity and bond prices is negative but when inflation is rising even more gradually you get that Equity due poorly because the discount factor for Equity long rates is higher the longer it's being higher means the price of bonds is more and therefore you lose money even on unquote the safe defensive asset is Bond what you need to do to protect yourself from inflation are several things one is a short-term safe bonds that reprise higher with higher yields without the price impact of long duration inflation index bonds gold and other precious metal they do well when there is inflation the basement of yet currency but also when there is the dollarization in the world and also you want to go in some of the green Metals the green transition is going to imply more demand for the green Metals but the supply is going to be limited that by a variety of constraint finally sustainable forms of real estate may also be part of that portfolio you need real assets that do well when inflation is moderately high and but you need to do real estate it's going to be sustainable because many real estate assets even in North America are going to be stranded because of global climate change flood hurricanes sea level rises heat waves and droughts you name it so you have to think about alternatives to traditional 60 40.
oh yes I think people are already listening to that advice we are seeing the way gold has been trending higher but Dr rubini what about Emerging Markets as an alternative asset class at least in India and I'm sure in several other Emerging Markets as well we are already into positive real rates uh interest rate is higher than inflation would that be a worthwhile asset loss uh it depends you have to distinguish between the better credits in emerging markets and those that have high inflation between fiscal and current account deficits and other forms of macroeconomic problem I would say that India among Emerging Market is a certainly a positive one uh it has a high real rates as a reasonably stable now monetary policy fighting inflation fiscal policy could be better but it's okay and the structural factors for India go in the favor of India potential growth runs seven percent maybe higher more economic reform a young and growing population a catch-up of per capita income because it's much lower than China so India is going to be a rising power in the next few years and decades with additional economic reforms so certainly India and a few other Emerging Markets might be a good place to invest both for fixed income and even in the equity markets okay uh well that's good to hear at least the viewership here who is listening to you right now but Dr Billy you spoke about the dollarization that's been a real talking point especially after the sanctions against China you think that can work a non-dollar medium of exchange between countries well it's clear that the Strategic Rivals of the United States China Russia Iran or Korea Pakistan and their own friends and allies want to build an alternative economic monetary and Global Reserve currency system because they're concerned about the sanctions that the US Europe and other can impose you know the Chinese of a trillion dollar of dollar reserves and therefore they're going to move interaction of proposing the RMB as being an alternative to the U.S dollar and gradually of course we're going to go from a unipolar to a bipolar Global Reserve currency system in that system however I see India being closer to the west and to the dollar rather being close to the RMB you know China and India are strategic Rivals uh their border issues it's true that India right now may need the oil energy food fertilizers from Russia but that dependency can change over time and I see the future of India geopolitically being member of the quarter being closer to U.S and the west and also it's going to benefit from a friend Shoring man is going to move weaving out of China because of the risk of China is going to move to places that are much more fine to the West one of them given the industrial and Tech base is going to be India so I assume that India is not going to be part of that the dollarization process ngs pecu uh reassue'll have structural rt thank you very much to rubini
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