Famed economist David Rosenberg called the housing bubble. Now he tells us why the oil-price war will be more damaging than coronavirus - and outlines a scenario where stocks plunge another 13%.

Screenshot via Bloomberg TV

• Economist David Rosenberg says the plunge in oil prices will cause severe harm and could trigger a wave of defaults as energy companies - and then firms in other industries - fail to pay down their debt.
• Rosenberg, famed for being among the first to identify the housing bubble of the 2000s and to forecast the looming Great Recession, says history shows it will take the economy several years to recover.
• He says that based on typical market performance during recessions, the S&P 500 index could drop to 2,200, eliminating more than four years of gains.
• Visit Business Insider's homepage for more stories.

In David Rosenberg's telling, the global economy just absorbed a devastating one-two punch - and that second hit could put it down for a long time.

While the public is focusing on the spread of the coronavirus and its effects on public health and employment, Rosenberg says a newer development - a price war between major oil producers Saudi Arabia and Russia - will be more harmful for the business around the world.

Rosenberg is the chief economist and strategist at Rosenberg Research & Associates, a firm he started in January after a decade at Gluskin Sheff & Associates. He's famed for his 2005 call that a bubble had formed in the housing market, and for saying a recession was coming before the Great Recession hit in 2008.

In recent years he's warned about the big debts US companies have accumulated over the past decade of ultra-low interest rates. Rosenberg explains that the combination of surging oil production and falling demand could be especially brutal because many of the companies with the weakest credit and the most debt are in the energy sector.

"The coronavirus wasn't necessarily going to generate a credit market impact on its own. Surely it would have had an impact on leisure, hospitality, travel, retail, but this energy shock is as a much bigger deal," he told Business Insider in an exclusive interview. "It's the sort of shock that is going to have a big impact on the credit markets, with spillover impacts in other parts of the economy."

In other words, Rosenberg is saying energy company debt could be the market's Achilles' heel, and chaos in the oil market is a point aimed directly at it.

"The implications that's going to have on the credit markets, the implications it's going to have on the banking system, the implications it's going to have on deteriorating loan quality, and the impact it's going to have on capital investment, are going to be rather significant," he said.

Based on the way price-to-earnings ratios generally shrink and stock prices fall in recessions, Rosenberg says the S&P 500 could fall to 2,200 in a recession. That's 13% below levels as of mid-day Thursday.

The benchmark has already sunk 19% from its record high last month, and would have to fall about 20% more to reach 2,200. It hasn't traded that low since November 2016.

Because these crises struck so quickly, there's optimism in some corners that when they pass, it won't take long for things to get back to normal. Rosenberg is doubtful, noting that after past downturns like the 2001-2 recession and the Great Recession, it took two or three years for the US economy to get back its former pace of growth.

"There's been a semi-permanent rupture to a critical part of the economy that is not going to come back in full," he said. "The outlook for the economy globally and in the United States for the next several months and perhaps quarters is pretty bleak."

He adds that those piles of corporate debt, the result of years of ultra-low interest rates, will make the recession worse and delay the recovery.

"When you get a recession with this amount of debt, it generates the conditions for a second run impact on the economy from the downgrades, delinquencies, and defaults," he said. "It's the recession that causes the bubble to burst, not the other way around. And there is a gigantic bubble on corporate balance sheets today, and not just in the United States, but globally."

With so many companies staring at potential bankruptcy and other financial pain, he thinks Congress will have to allow the Federal Reserve to lend to non-financial companies. That might keep some of them alive, but Rosenberg cites the reaction of banks in 2008-09 in suggesting they might not ask for help until they've already suffered a lot of pain.

Ultimately he says a government bailout or stimulus package won't do much good for markets and the economy. The only thing that will make a major difference, he says, is proof that the epidemic is finished.

"I'm not really convinced that there is a fiscal or a monetary policy antidote to this," he said. "You can provide assistance to a hard-hit families, but it's really a palliative, it is a stimulus that will help cushion the blow."

NOW WATCH: How running shoes can be recycled into ski boots