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The world is set up for the unwinding of three mega-trends:
unconventional monetary policy, the real economy’s dependence on assets,
and a potentially destabilizing global saving arbitrage.
At risk are the very fundamentals that underpin current optimism.
One or more of these pillars of complacency will, I suspect, crumble in 2018.
Stephen S. Roach, Projet Syndicate 14 December 2017
From 2008 to 2017, the combined asset holdings of central banks in the major advanced economies expanded by $8.3 trillion, according to BIS.
$6.2 trillion of excess liquidity has distorted asset prices around the world.
Therein lies the crux of the problem. Real economies have been artificially propped up by these distorted asset prices
Lack of Chinese capital may well force the US to pay a steeper price for external financing,
through a weaker dollar, higher real interest rates, or both
Stephen S. Roach, Projet Syndicate 23 May 2016
USA - with a large saving deficit has been living beyond its means for decades
drawing freely on surplus saving from abroad to fund the greatest consumption binge in history.
The United Kingdom, Canada, Finland, France, Greece, and Portugal – all of which have large trade deficits – save much less than other developed countries. Conversely, high savers like Germany, Japan, the Netherlands, Norway, Denmark, South Korea, Sweden, and Switzerland all run trade surpluses.
US and China, together account for a disproportionate share of the world’s saving disparities.
Simply put, America needs to save more and consume less, while China needs to save less and consume more.
China has been leading the way, with a strategy of consumer-led rebalancing that it introduced five years ago.
The Stall-Speed Syndrome
Collectively, the annual growth rate in the major developed economies averaged a little less than 0.7% in the first half of 2014.
Stephen S. Roach, Project Syndicate, 27 August 2014
While experimental monetary policy is now widely accepted as standard operating procedure in today’s post-crisis era,
its efficacy is dubious
Stephen S. Roach, Project Syndicate 25 April 2013
Morgan Stanley’s former Asia chief Stephen Roach:
“Alan Greenspan kept the policy rate too low for too long, set us up for credit and property bubbles that led to an enormous crisis, [and] I think Ben Bernanke is just rerunning the Greenspan movie of seven or eight years ago.”
You’ll read much the same thing from Roach on this very first TMTGM post from about five-and-a-half years ago
July 9, 2010, by Tim Iacono
This crisis was, first and foremost, about the unsustainability of macro imbalances – imbalances within and between nations – as well as about the egregious flaws in policies, regulatory structures, and risk-management practices that allowed these imbalances to take the world to the brink.
Stephen Roach, FT October 6 2009
Western economies have woken up with a hangover from a drunken binge of
excess consumption and leverage that was reckless and irresponsible
Central banks “were empowered as the ultimate whistle-blowers in a financial system and they failed,
utterly failed to do their job in this period of excess”.
Stephen Roach, chairman of Morgan Stanley Asia,CNBC, 16 Sep 2009
By fixating on the anti-depression drill, authorities are failing to address
the root cause of the current crisis and recession
-- the lethal unwinding of unsustainable global imbalances.
"the willingness of consumers to live well beyond their means by extracting equity from over-valued homes"
Stephen Roach, April 13 (Bloomberg)2009
America's current account deficit is due more to bubbles in asset prices than to a misaligned dollar.
A resolution will require more of a correction in asset prices than a further depreciation of the dollar.
With goods imports still more than 70% larger than exports, America's trade imbalance remains very much an outgrowth of a serious excess consumption problem.
It all boils down to the consumption response to the bursting of the US housing bubble
Stephen S. Roach, April 23, 2007
Stephen Roach, Chief Economist at Morgan Stanley, writes a rather chilling description of his recent testimony before the Senate Finance committee. He noted that as he entered the room, he looked up and saw a picture of Senator Reed Smoot on the walls, as Smoot was a former chair of the committee and the co-sponsor of the Smoot-Hawley Tariff Act of 1930, largely responsible for the Great Depression.
John Mauldin march 2007
Jag reverserar nu min strukturellt optimistisk syn på världen som jag antog förra våren.
DI/Nyhetsbyrån Direkt 2007-02-27
Efter fyra goda år är övertygelsen stark om att inget kan stoppa den teflonliknande globalekonomin. Investerare, centralbanksföreträdare och politiker har nu fallit efter för en farlig liknöjdhet.
- Det är tiden då man ska vara som mest oroad.
Det skriver Morgan Stanleys globale chefekonom Stephen Roach i ett analysbrev daterat den 26 februari. Han konstaterar att såväl centralbanksföreträdare som politiker verkar ha "sänkt garden" samtidigt. IMF och G7- ministrarna har lämnat sitt tidigare åtagande om att komma tillrätta med de globala obalanserna, centralbankerna firar den hårfina segern i fråga om inflationsmålen och samtidigt fortsätter raden av bubblor på tillgångsmarknaderna att växa. Dessutom "flirtar" politiker i den utvecklade världen med protektionistiska "huskurer" för arbetare som förlorat jobben till följd av globaliseringsfaktorer. Därmed ignoreras några av historiens mest smärtsamma lektioner. Morgan Stanley-ekonomen påminner om att han blev mer optimistisk om de globala utsikterna våren 2006, något som till stor del följde av att världens ledare verkade ta ett samlat grepp mot de globala obalanserna.
"När nu kraften bakom det initiativet avtar samtidigt som centralbankerna häller mer bränsle på riskbrasan, och när politikerna flirtar med protektionism, har oddsen skiftat tillbaka till ett mer 'bearish" slutspel", skriver Stephen Roach.
Enough is enough - from where I sit, it no longer makes sense to maintain an optimistic prognosis of the world.
This is more of a structural call than a cyclical view.
I remain agnostic on the near-term outlook, and certainly concede that the Goldilocks-type mindset currently prevailing could put more froth into the markets. But complacency is building to dangerous levels — always one of the greatest pitfalls for financial markets. And yet that’s precisely the risk today, as investors, policymakers, and politicians all seem to have dropped their guard at the same point in time.
The odds have shifted back toward a more bearish endgame.
I have a gnawing feeling we’ll look back on the current period with great regret.
February 26, 2007 By Stephen S. Roach
Början på sidan - Top of page
The optimists will be right until they are wrong.
Wolfgang Munchau, FT 11/12 2006
Bengt Carlsson DI 2007-02-27:
En avmattning i USA är ett tungt argument för lägre kurser, så detta motiverar att kurserna faller på tisdagen. Men det är svårt att hitta skäl för en total panik.En dags börsfall efter en längre tids uppgång kallas alltid en sund rekyl. Så var det även på tisdagen. Det här visar också på att det finns en oro och nervositet. Dagar när allt tolkas till det värsta kommer alltid då och då. och det vore ett värre tecken på hybris om de inte kom.
Men det som hände på tisdagen är inget som förändrar grunden, det vill säga fantastiska vinster och stabilia finanser i företag i nästan alla branscher. Så det är svårt att hitta rationella skäl för en total panik.
Början på sidan - Top of page
In looking to 2007, my main message is to be wary of extrapolation.
When a booming sector goes bust - dot-com six years ago, housing today - there are no built-in firewalls that contain the ripple effects. The US soft-landing scenario does not adequately allow for these risks, in my view.
Stephen Roach, 11/12 2006
Under flera år har Stephen Roach pekat på de växande globala obalanserna och varnat för en kommande krasch i världsekonomin. Han har nått stor uppmärksamhet, men hittills inte fått rätt.
Problemen finns visserligen där, enligt många bedömare, men än så länge har de kunnat rullas framåt utan att någon kris har behövt bryta ut.
- Riskbubblan måste spricka, även om allt inte behöver komma samma gång.
Johan Schück, DN 1/6 2006
Over the past six years, monetary authorities have turned the liquidity spigot wide open. This has given rise to an endless string of asset bubbles — from equities to bonds to property to risky assets (emerging markets and high-yield credit) to commodities.
Central banks have ducked responsibility for this state of affairs.
That could end up being a policy blunder of monumental proportions.
Stephen S. Roach, Morgan Stanley, 22/5 2006
America's imports of tradable goods are currently 89% larger than US exports of manufactured products.
Investors are nearly unanimous in dismissing the mounting economic and political tensions of an unbalanced world -
the retort of increasingly smug US fund managers is typically something along the lines of,
"What else are the Chinese going to buy - euros?
Blue-collar workers in factories have long been on the front line in facing global pressures. White-collar workers in services-based enterprises have not. That was then. The rules of engagement on the battleground of globalization have changed.
Stephen Roach, March 2006
Japan emerges from deflation. The Bank of Japan responds by ending "quantitative easing", its policy of flooding the banking system with economy-buoying liquidity.
Everyone is delighted that Japan's economy has improved sharply, that growth seems entrenched and that deflation looks beaten. But ...
Chris Giles, Financial Times Economics Editor, FT 10/3 2006
Stephen Roach, chief economist of Morgan Stanley and a long-standing pessimist about the world economy, wrote this week that "the biggest news in close to a decade is that the BoJ now appears to be on the cusp of abandoning its policy of über-accommodation".
It could halt the "carry trade" in which international investors borrow for nothing in Japan and buy assets elsewhere. It could also encourage Japanese people to invest their money at home rather than abroad on the expectation of higher returns.
Through a series of steps - the end of the carry trade, less investment in US assets, higher yields on Treasury bonds, more expensive US mortgages and falling US house prices - Mr Roach sees the end of quantitative easing as a potential catalyst for the bursting of a US housing bubble and a halt to consumer-led growth. This view, however, is far from mainstream.
Read more here
We set out today wanting to talk about last Friday's commentary by Stephen Roach regarding two speeches made by Alan Greenspan earlier in the week. Normally we would pick out a few passages and excerpt them here, then add a few thoughts of our own in an attempt to enhance the overall experience of deriding the Fed Chairman for his many sins.
Like Cropping the Mona Lisa
Today, we experienced unexpected difficulty in taking this tack.
Tim Iacono 3/10 2005
It's nice to see that Stephen Roach is back from his summer vacation. In the first paragraph of his first missive since returning to his duties at Morgan Stanley, he reminds us once again, why he is our favorite economis
"On the surface, the global economy seems to be doing just fine. Yet just beneath that seemingly tranquil surface, the imbalances and tensions are only getting worse."
Tim Iacono 16/8 2005
The debate has an eerie sense of déjà vu. Today, there are those who dispute the very existence of a US property bubble. Similarly, five years ago, there were many who argued that US equities were not over-valued
Five years ago, it was the equity bubble. Today, it’s the property bubble. These are not isolated events.
As night follows day, one bubble has spawned the next. And we have the Federal Reserve to thank for this grand continuum and the cumulative toll it is taking on the US economy. Sadly, as America lurches from bubble to bubble, the endgame is looking all the more treacherous.
Stephen Roach, June 24, 2005
The interest rate conundrum is challenging enough. But now the dollar is springing back to life in the face of America’s record current account deficit.
In my view, this defies both the history and the analytics of the classic current account adjustment.
Stephen Roach 3/6 2005
Stephen Roach turns 180 degrees
I now suspect bond yields will stay low for the foreseeable future
I continue to believe this is ultimately a recipe for disaster.
Stephen Roach May 31, 2005
"Risk för global kris"
Morgan Stanleys chefsekonom (Stephen Roach) varnar för sammanbrott i världsekonomin
DN 9/9 2004 Reporter Johan Schück
I am not a believer in conspiracy theories. But
In all my years in this business, never before have I seen a central bank attempt to spin the debate as America's Federal Reserve has over the past six or seven years.
From the New Paradigm mantra of the late 1990s to today's new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics
and in making an effort to convince market participants of the wisdom of its revisionist theories
It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.
Stephen Roach - Morgan Stanley Global Economic Team - April 25, 2005
Let me be clear about what I think Roach is saying but cannot say directly.
He is referring to the "R" word - Recession.
Rates that would be high enough to slow (compress) consumer demand must be high enough to raise borrowing costs. They must be high enough to significantly slow down home equity loans for new consumption.
John Mauldin March 4, 2005
The economic crisis 2004, predicted by many, has not materialised.
Not so fast, say the economic experts at the World Economic Forum in Davos.
"The good news of 2004, the past performance is not indicative of future returns," quips Stephen Roach, chief economist at investment bank Morgan Stanley. Fair enough, Mr Roach is a notorious "Davos bear", well-known for his economic pessimism. Trouble is, many people here are happy to agree with him, even his old sparring partner, the perennial optimist Jacob Frenkel, vice-chairman of insurance giant AIG.
BBC 27/1 2005
If a weaker dollar can’t do the trick, what can?
The answer, in my view, is real interest rates
The only way America can ever get a handle on its trade and current account conundrum is on the import side of the equation. After all, imports are currently 52% larger than exports (in real terms), making it almost mathematically impossible for the US to export its way out of its trade deficit.
In looking at real US interest rates over the broad sweep of history, there’s nothing but upside from current levels. The real federal funds rate remains around “zero” and the real rate on a 10-year Treasury note is down to its post-1986 low of 0.7%.
Stephen Roach 14/1 2005
The Asset Economy
The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset economy turns many of the old macro rules inside out
Stephen Roach Morgan Stanley 21/6 2004
Höj omedelbart styrräntan drastiskt - från 1,0 till 3,0 procent!
Annars är risken överhängande för att nya spekulationsbubblor blåses upp i den amerikanska ekonomin.
Den varningen utfärdar Stephen Roach, global chefsekonom vid en av världens största investmentbank, Morgan Stanley
Lars-Georg Bergkvist, SvD Näringsliv 2/3 2004
The day could come when foreign investors demand better terms for financing America's spending spree (and savings shortfall).
That is the day the dollar will collapse, interest rates will soar and the stock market will plunge.
Stephen S. Roach, The New York Times/IHT 27/11 2004
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