Amusing commentary by Stephan Roach, Chairman, Morgan Stanley (NYSE:MS) Asia. It appears that Mr. Roach is less than sanguine about the global economy.
In a recent piece titled "A Subprime Outlook for the Global Economy," Roach notes a number of factors impacting both U.S. and Global consumers. Roach sees real trouble ahead as "asset-dependent U.S. consumers struggle to negotiate a post-bubble adjustment that's bound to stifle their insatiable yen to consume."
As to question of decoupling -- whether the rest of the world can grow while the U.S. slows -- he has grave reservations.
Via Barron's Alan Abelson:
[Roach] notes that the bursting of the dot-com bubble seven years ago caused a mild recession but, more importantly, a collapse in business capital spending both in the U.S. and abroad. The subprime-mortgage fiasco, he warns, is only the tip of a much larger iceberg.
The consumer, who has indulged in the greatest spending binge in modern history, now accounts for 72% of our GDP. Steve reckons that's five times the share of capital spending seven years ago. Reason enough to suspect the impact of a sharp contraction in consumer spending could be considerably more pronounced than the damage wrought by the end of the capital- investment boom at the turn of the century.
Of the two forces that spark consumer demand, wealth and income, it's no contest which has provided the impetus for the mighty surge in Jane and John Q.'s spending. Since the mid-1990s, Steve points out, income has taken a back seat: In the past 69 months, Steve reports, private-sector compensation has edged up a mere 17%, after inflation, which "falls nearly $480 billion short of the 28% average increase of the past four business cycle expansions."
More than taking up the slack, however, has been the appreciation in housing assets. But with this source of wealth dramatically running dry with the bursting of the housing bubble, he sees no way that "saving-short, overly-indebted American consumers" can continue to spend with wild abandon. And for an economy like ours, so lopsidedly dependent on such spending, "consumer capitulation spells high and rising recession risk.''
The next issue strikes directly to where we are in the present cycle: At an Earnings peak, which is now subsiding:
Even a moderate slump in growth could prove strictly bad news for "the earnings optimism still embedded in global equity markets," and obviously for the markets themselves. Recent action of our own juiced-up stock markets, we might interject, strongly hints that such optimism is beginning to wear a tad thin.
No mystery how we got into this bind. Following the end of the equity bubble, scared stiff of deflation, central bankers opened the monetary floodgates and liquidity poured into the global asset markets.
What's to blame? Derivatives:
As Steve relates, "Aided and abetted by the explosion of new financial instruments -- especially what is now over $440 trillion of derivatives -- the world embraced a new culture of debt and leverage. Yield-hungry investors, fixated on the retirement imperatives of aging households, acted as if they had nothing to fear. Risk was not a concern in an era of open-ended monetary accommodation..."
Steve plainly has doubts whether Fed chief Ben Bernanke's recent rate cuts can stem "the current rout in still-overvalued credit markets." He worries that the actions were strategically flawed in failing to address the "moral-hazard dilemma that continues to underpin asset-dependent economies."
And he asks, "Is this any way to run a modern-day world economy?" All those who think it is, please raise your hand, and then lie down and wait for the fever to pass.
Barron's October 22, 2007
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