Posted on 11/23/2004 5:07:35 PM PST by tmp02
Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.
But you should hear what he's saying in private.
Roach met select groups of fund managers downtown last week, including a group at Fidelity.
His prediction: America has no better than a 10 percent chance of avoiding economic ``armageddon.''
Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, ``it struck me how extreme he was - much more, it seemed to me, than in public.''
Roach sees a 30 percent chance of a slump soon and a 60 percent chance that ``we'll muddle through for a while and delay the eventual armageddon.''
The chance we'll get through OK: one in 10. Maybe.
In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.
The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.
Less a case of ``Armageddon,'' maybe, than of a ``Perfect Storm.''
Roach marshalled alarming facts to support his argument.
To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day.
That is an amazing 80 percent of the entire world's net savings.
Sustainable? Hardly.
Meanwhile, he notes that household debt is at record levels.
Twenty years ago the total debt of U.S. households was equal to half the size of the economy.
Today the figure is 85 percent.
Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.
Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet.
You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.
Roach's analysis isn't entirely new. But recent events give it extra force.
The dollar is hitting fresh lows against currencies from the yen to the euro.
Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention.
It has farther to fall, especially against Asian currencies, analysts agree.
The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.
Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a ``spectacular wave of bankruptcies'' is possible.
Smart people downtown agree with much of the analysis. It is undeniable that America is living in a ``debt bubble'' of record proportions.
But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms.
Inflation of 7 percent a year halves ``real'' values in a decade.
It may be the only way out of the trap.
Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.
You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.
I'll save this one in my collection of Dumbassed Predictions That Never Came True.
These predictions are invariably made by Democrats and other Leftists and terrorist sympathizers.
The DU guys had this article posted earlier today and as predictable, they were giddy about this guys prognostics.
You wouldn't be trolling would ya?
Not unless he's a sleeper troll (which I doubt). The guy's been here for over a year.
Roach has never been right, about anything. He even missed the Clinton recession.
This is very bad stuff. Nothing to be "giddy" about. And he's only repeating what others, like Paul Volcker(SP?)have been saying for a year or more.
I fully agree, this one goes in with the ice age tree huggers were predicting back in the 70's.
Crap. Just like all the rest of these nutty predictions we have heard for the past 30 years. Yeah, sell your stocks. I'll be buying when the prices go down.
Stupid.
Many at the bottom or near the bottom feel that a crash will level the playing field. It won't. What it will do is grind them to dust.
So, since I have no debt that means I'll prosper?
He was right about the dot com bust and he was right about the gutting of America's smoke stake industries, when he switched position on the topic back in the early to mid-90s.
This article borders on hysteria. Nearly every sentence is saturated with excessive anxiety.
"Armageddon" is a relative word. For some "armageddon" will be the loss of their savings. For others it means additional opportunity. The free market always picks and chooses its losers.
Nyaa, these "Doom is Just Around the Corner" threads have been a staple on FR for as long as I've been here.
Here's one thing that has decreased in price: You can get a copy of Bankruptcy 1995: The Coming Collapse of America and How to Stop It for a mere 49 cents.
To give Stephen Roach credit, he's not saying this for political reasons. As the lead-in suggests, he's bearish.
The current account deficit really is horrific, and puts us at a disadvantage with countries like China, which certainly would love to damage the United States.
Of course he may be completely wrong, but his predictions are based on economics, not politics. There are plenty of political minded, Bush-bashing economists, but I don't think he's one of them.
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