Holy cow! Stephen Roach has suddenly gone bullish! - 2-May-06 - Generational Dynamics

Generational Dynamics Web Log for 2-May-06

Holy cow! Stephen Roach has suddenly gone bullish!

Let's take a look at his reasons for changing his mind.

Stephen Roach, the Chief Economist at international investment firm Morgan Stanley, has been the iconic "bear" for several years, predicting a severe downturn in the economy. And in November 2004, he was privately telling clients that America has no better than a 10 percent chance of avoiding "economic Armageddon," according to a Boston Herald news report.

But now he's changed his mind. In Monday's edition of his regular commentary, `Roach begins by saying,

"It seems like eternity since I was last optimistic on the world economy. It was back in 1999 when I argued that "Global Healing" would allow the world to make a stunning comeback from the ravages of the worst financial crisis in 60 years. My enthusiasm was short-lived, however, as the cure led to the mother of all liquidity cycles, multiple asset bubbles, and an unprecedented build-up of global imbalances. While an unbalanced world has yet to shake its hangover from global healing, I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages."

So he starts by telling us that the last time he felt optimistic about the economy was just before the Nasdaq crash of 2000. I'm not sure why he felt the need to share that with us as his first thought. Maybe he's trying to tell us indirectly that he secretly thinks we're about to have a new stock market crash, now that he's suddenly optimistic about the economy again.

"The reason: The world is finally taking its medicine -- or at least considering the possibility of doing so. Central banks are carefully adjusting the liquidity spigot -- taking advantage of the luxury of low inflation to move very slowly in doing so. This delicate normalization procedure is necessary to prevent wrenching financial market crashes that would spell curtains for an asset-dependent world. Meanwhile, the stewards of globalization -- especially the G-7 and the IMF -- have finally come to grips with the imperatives of facing up to the perils of global imbalances. They are now hard at work in developing a multilateral solution to a multi-economy problem. At the same time, orderly currency adjustments appear to have resumed -- and this time, in the right direction. Ever so slowly, the dollar is being managed lower -- in keeping with the relative price shift that a long-overdue US current account adjustment needs. As always, there are still plenty of serious risks -- especially oil, geopolitics, fiscal paralysis, and protectionism. But the world now appears to be getting its act together, and that encourages me."

This is what's really mind-boggling. He's changed his mind not because anything fundamental has changed, but because people are talking about change, and it appears that things might change.

Just because people are talking about things doesn't mean anything is going to happen, and I've given plenty of examples of that on this web site:

Last June, the leaders of the G-8 countries, the "richest" countries of the world, vowed to cure poverty in Africa during the next decade. But the sheer size of Africa makes that mathematically impossible, as I explained at length at the time, and the politicians know it. But they all patted themselves on the back for making promises that they knew could not be fulfilled.

In March, the China's People's National Congress was paralyzed by ideology trying to institute land reforms.

In America, personal savings have plummeted to Great Depression levels, and public debt is growing exponentially, but all that the Washington politicians can do is call each other names. In fact, the Congressional calendar this year is just 97 days long, because the Boomers and GenXers in Congress are unable to get anything done.

For four years, China's central government has been trying to slow down the country's 10% bubble-level rate of growth to a "soft landing" of around 7%, and they've failed completely.

And there are many other examples as well. The point I'm making is that talk means nothing. Roach should know that. So I'm glad that Roach "feels" good, but the public debt level is still growing exponentially.

At the end, he agrees that there are still many dangers:

"Lest I be accused of succumbing to the ravages of terminal jet leg, I assure you that I am still mindful of the ever-present risks that beset a very fragile world."

He then mentions the growing price of oil, the housing bubble, consumer debt, public debt, and a blowup of the "Iran problem." In other words, nothing much has changed.

I'm very disappointed in Roach.

I thought he was one of the few people who actually had some sense and had the ability to analyze long-term economic trends without simply going with the financial statistic du jour. Instead, he's caught up in the same general level of giddiness and credulity that we're seeing everywhere else. The reasons he gives for changing his mind are nonsense. The most charitable thing I can say is that he's selling out because he wants to keep getting big consulting fees from the Chinese. And that's not very charitable, is it.

I guess Morgan Stanley's chief economist has been beaten down by all the people calling him crazy. But you're lucky, dear reader, because I don't get beaten down no matter how many people call me crazy. (2-May-06) Permanent Link
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Generational Dynamics Web Log for 2-May-06 Holy cow! Stephen Roach has suddenly gone bullish!

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Generational Dynamics Web Log for 2-May-06
Holy cow! Stephen Roach has suddenly gone bullish!