LONDON – According to veteran investment strategist David Roche, the global economy is likely entering a “war recession” and markets are underestimating its duration.
It comes as markets try to negotiate a number of simultaneous economic hurdles, including Russia’s invasion of Ukraine, rising inflation, rising interest rates and supply disruptions from China’s efforts to contain a Covid-19 outbreak.
Speaking to CNBC’s Squawk Box Europe on Friday, Roche, president of Independent Strategy, indicated that evidence of atrocities committed by Russian forces against civilians in Ukraine is preventing any possibility of speedy peace talks with Russian President Vladimir Putin would.
Therefore, the West’s only option is to seek regime change in Russia, he said, since Putin cannot be seen domestically withdrawing from Ukraine without a “victory.”
“He’s not going to trade the withdrawal for an easing of sanctions, so the sanctions remain and I think the implications for Europe are that you’re going to have a recession because sanctions are actually going to increase and move towards a total energy lockdown .” Roche said.
In the face of reported cases of sexual violence and torture and executions of civilians, EU countries last week agreed to a series of new sanctions against Russia, including a total embargo on Russian coal imports. Europe is also considering additional measures, including a total import embargo on oil, coal, nuclear fuel and gas.
More than 30 people were killed and more than 100 injured in a rocket attack on a crowded train station in the eastern Ukrainian city of Kramatorsk on Friday. It comes after Russian forces shifted their attack to eastern Ukraine after withdrawing from towns around the capital Kyiv.
Ukrainian officials have warned more atrocities are likely to be uncovered in cities retaken by retreating Russian soldiers, and Roche argued investors will no longer be able to separate politics from markets.
“This is a huge supply side shock that will continue in food, energy and metals and I can move on. This is going to continue, while at the same time we’re dealing with global inflation, we’re dealing with an increase in interest rates – I think the 30-year-olds [Treasury yield] will be at least 3.5% in a year – and of course we’re looking at supply disruptions in China due to what’s happening around Covid, which people aren’t talking about but which is obviously another supply side to the world system,” he said.
‘war assignment’
Roche suggested that this is too much for stock markets to overcome to continue dragging higher, arguing that historically high inflation will not recede when economic growth slows, as it typically does in a normal recession the case would be.
“In a normal recession, production and demand fall and inflation falls. In that kind of recession, a ‘war recession’, you actually have output that is going down at the same time as costs and inflation go up,” he explained.
“You see that in the labor market mismatch, you see that in commodity prices, and I think that’s going to play out, so you’re facing a very strange situation where central banks have to choose between inflation targeting and growth.”
Investors have been watching central bank comments closely to gauge the likely pace of monetary tightening as policymakers seek to rein in inflation, but Roche suggested that any talk of interest rates being “over the hill” in the coming years ‘ go, be ‘premature’.
“Of course, if the pain on the output and performance growth side of the economy becomes extreme, they will fall behind, but I think it’s going to take a lot longer for that to happen than the stock market is assuming,” he said.