{"id":22842,"date":"2008-04-15T22:19:00","date_gmt":"2008-04-15T22:19:00","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=522"},"modified":"2008-04-15T22:19:00","modified_gmt":"2008-04-15T22:19:00","slug":"la-recesion-de-doble-repliegue-o-el-armageddon-de-stephen-roach","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/la-recesion-de-doble-repliegue-o-el-armageddon-de-stephen-roach\/","title":{"rendered":"The double-dip recession, or Stephen Roach\u2019s Armageddon."},"content":{"rendered":"
According to what has been published<\/a> Recently, Goldman Sachs<\/a> warns of a second recessionary downturn in 2009. Assuming that the first must be the one we are currently experiencing, it warns that the S&P 500 may suffer significant falls as a result of poor results from major companies, given what we have seen at General Electric (GE<\/a>) for example. This is clearly reasonable, but the curious thing about this is that they are more than five and a half years behind what Stephen S. Roach had already warned about back when he was chief economist at Morgan Stanley<\/a>.<\/div>\n
\"\"<\/a>It is true that Stephen Roach is known as the \u00abperpetual bassist<\/span>\u00ab, and some of you will say that when someone consistently predicts catastrophic scenarios, unfortunately one day they\u2019re bound to get it right and take great credit for it as a financial guru. But what\u2019s extraordinary is that he came to this conclusion back in the middle of September 2002<\/span> and his pessimistic forecast for the economic outlook was as follows: He warned that if the US went to war with Iraq, there would be a very significant rise in the price of oil, which at that time stood at 28 $ per barrel. He also pointed out that the disparity between property rental income and sale prices was the widest in US history and could not be sustained for long. This decoupling was likely to trigger the the bursting of the property bubble<\/span>.<\/span> <\/span>He also warned of the risk of the the bursting of the consumer bubble<\/span>, as well as the deflation,<\/span> which, in his view, was already looming on the horizon of the world\u2019s largest economy. He therefore called on the newly appointed Fed Chairman, Greenspan, to cut the $ interest rate from 1.75 (the lowest in 40 years) to 1%. He also highlighted the need for the easing of monetary policy<\/span> would result in a weak dollar<\/span>. Finally, he pointed out that, given the enormous weight of the US economy in the global figures (21% of world GDP in 2002), the recession<\/span> I might be there again and to globalise.<\/span> <\/span>At this point, Roach perhaps failed to foresee the spectacular growth of the emerging economies, particularly China\u2019s. And for that reason, the discussion today focuses more on the ability of these rapidly expanding economies to counteract the recessionary effects of the developed world. However, they may not be strong enough and could end up succumbing to the global recession. Although I personally believe and hope that this will not be the case.<\/p>\n

Let\u2019s not forget that at that time the euro was trading at 0.9750 $ and the analysts<\/span> They were talking about the weakness of the $ caused by the fragility of its economy. Clearly, no one foresaw a future subprime crisis or the liquidity injections needed to keep a system running that we never thought could ever stop working. Let us recall the trend in interest rates set by Greenspan in the years that followed: a cut to 1% in June 2004, followed by a rise to 5.25% over the next two years. As we have all seen, since October last year the Fed has had to implement an emergency rate cut due to the cabin depressurisation<\/a>. But what is clear is that Stephen Roach made a prediction that was very, very close to how things have actually turned out to date.<\/p>\n

However, his predictions have not prevented Morgan Stanley from being drawn into the credit crisis. Perhaps the board of directors had become too accustomed to Roach\u2019s vision of impending doom and, as a result, banished him by promoting him to Chairman of Morgan Stanley\u2019s Asian operations. The extent to which this has actually affected the bank \u2013 as with almost all banks \u2013 remains unclear, and the market is pricing in the outcome by trial and error<\/a> what he is quite capable of or senses. Up to now, it seems that only JP Morgan<\/a> escapes the fire stock market<\/span>. But only up until today, and it only seems that way.<\/p>\n

\"\"<\/a>Perhaps Stephen Roach made many inflammatory statements throughout his career that came to nothing. It is possible that we are opportunistically praising someone who was consistently wrong during boom times. But if we focus on the timing of his prediction, it really is impressive. He warned of the highly likely war in Iraq months before the Resolution 1441<\/a> of the United Nations Security Council, adopted on 8 November 2002. This was well before the famous Azores summit of 16 March 2003. But the most important thing is that he was able to foresee the rise in the price of crude oil from 28$ per barrel and its recessionary effects. Had the rise in oil prices occurred without the invasion of Iraq, the situation in the US today, without that oil, would be far more precarious. But I shall not be the one to justify that war or any other.<\/p>\n

Perhaps not even in his worst-case scenario did Roach envisage oil at 110 $. But it is true that the forced depreciation of the $\/\u20ac, which has fallen from 0.9759 at that time to 1.5850 today, and the seizure of Iraq\u2019s oil have allowed the American patient<\/a> that he is not already dead, like so many other civilians and military personnel.<\/p>\n

Below is an extract from his prediction of Armageddon<\/span> economic situation that he outlined off the record<\/span> among a select group of fund managers, with no journalists present, but the details of which were leaked to the Boston Herald. Note the date: 24 November 2004.<\/div>\n

\n
<\/div>\n
\"\"<\/a>America has no more than a 10 per cent chance of avoiding an economic \u00abArmageddon\u00bb.\u00bb<\/div>\n

Roach reckons there is a 30 per cent chance of a downturn soon and a 60 per cent chance that \u00abwe\u2019ll muddle through for a while and delay the inevitable Armageddon.\u00bb<\/p>\n

<\/div>\n

The chance we\u2019ll come through this unscathed: one in ten. Perhaps.<\/p>\n

<\/div>\n

In a nutshell, Roach\u2019s argument is that America\u2019s record trade deficit means the dollar will continue to fall. To ensure that foreign investors continue to buy T-bills and to prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he would like.<\/p>\n

<\/div>\n

The result: US consumers, who are up to their eyeballs in debt, will be hit hard.<\/p>\n

<\/div>\n

Perhaps less a case of \u00abArmageddon\u00bb than of a \u00abPerfect Storm\u00bb.\u00bb<\/p>\n

<\/div>\n

Roach cited alarming facts to support his argument.<\/p>\n

<\/div>\n

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.<\/p>\n

<\/div>\n

That is a staggering 80 per cent of the world\u2019s total net savings.<\/p>\n

<\/div>\n

Sustainable? Hardly.<\/p>\n

<\/div>\n

Meanwhile, he points out that household debt is at record levels.<\/p>\n

<\/div>\n

Twenty years ago, the total debt of US households was equal to half the size of the economy.<\/p>\n

<\/div>\n

Today, the figure stands at 85 per cent.<\/p>\n

<\/div>\n

Almost half of new mortgage borrowing is at variable interest rates, leaving borrowers much more vulnerable to interest rate rises.<\/p>\n

<\/div>\n

Americans are already spending a record proportion of their disposable income on interest payments. And interest rates haven\u2019t even risen much yet.<\/p>\n

<\/div>\n

You don\u2019t need to ask a Wall Street economist to know this, of course. Just watch people using their credit cards this Christmas.<\/p>\n

<\/div>\n

Roach\u2019s analysis is not entirely new. But recent events lend it added weight.<\/p>\n

<\/div>\n

The dollar is hitting new lows against currencies ranging from the yen to the euro.<\/p>\n

<\/div>\n

Its safety net failed to materialise at the weekend, when a meeting of the world\u2019s leading finance ministers failed to produce any commitment to concerted action.<\/p>\n

<\/div>\n

Analysts agree that it has further to fall, particularly against Asian currencies.<\/p>\n

<\/div>\n

The Fed chairman was prompted to issue a warning about the dollar and interest rates on Friday.<\/p>\n

<\/div>\n

Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a \u00abspectacular wave of bankruptcies\u00bb is possible.<\/p>\n

<\/div>\n

Smart people in the city centre agree with much of the analysis. It is undeniable that America is living in a \u00abdebt bubble\u00bb of record proportions.<\/p>\n

<\/div>\n

But they argue that there may be an alternative scenario to Roach\u2019s. Greenspan might instead deliberately allow the dollar to fall and inflation to rise, thereby eroding the real value of today\u2019s consumer debts.<\/p>\n

<\/div>\n

Inflation of 7 per cent a year halves \u00abreal\u00bb values in a decade.<\/p>\n

<\/div>\n

It may be the only way out of this predicament.<\/p>\n

<\/div>\n

Higher interest rates, or higher inflation: whichever it is, the biggest losers will be lenders offering long-term loans at fixed interest rates.<\/p>\n

<\/div>\n

You wouldn\u2019t want to hold 30-year Treasuries, which currently yield just 4.83 per cent.<\/p>\n<\/blockquote>\n

That\u2019s a bit of a shocker<\/span>s.<\/p>","protected":false},"excerpt":{"rendered":"

Seg\u00fan lo publicado recientemente, Goldman Sachs advierte de un segundo repliegue recesionista en el 2009. Suponiendo que el primero debe ser el que se est\u00e1 viviendo en el presente, alerta de que el S&P; 500 puede sufrir ca\u00eddas importantes a consecuencia de los malos resultados de las grandes empresas, visto lo visto en General Electric […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[],"class_list":["post-22842","post","type-post","status-publish","format-standard","hentry","category-sin-categorizar"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22842","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=22842"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22842\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=22842"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=22842"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=22842"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}