Economy to stay weak, but worst may be over
The Economic Times, March 30, 2009, Page 15
A temporary inventory-related bounce is likely, but don’t expect recession to cease so soon, says Morgan Stanley’s Asia ops chairman Stephen Roach
MOST economists think that a $1-trillion fund is not enough to buy America’s toxic banking assets. George Smith Alexander and Deeptha Rajkumar spoke to Stephen S Roach, one of the world’s leading bears. After holding the position of chief economist of Morgan Stanley for 16 years, Roach was promoted and named chairman of Morgan Stanley’s Asia operations in April 2007. He also served on the research staff of the Federal Reserve Board in Washington, DC.
What could be the impact of the $1-trillion fund, which is being set up to buy toxic assets?
The concept is good but there are some aspects that remain problematic, particularly the scale. It’s most likely that toxic assets in the system are somewhere around $2.5 trillion or $3 trillion. So it would require going back to the US Congress for further funding, and the politics of that are problematic. It remains to be seen how the actual implementation is planned, the price points that are offered by private investors, their attractiveness to banks. I give the plan a ‘B’ grade. It’s a noble effort, but it’s not big enough.
Is the recent rise in the market a bear rally?
I am suspicious that this rally is indicative of a bottoming in the global economy. The global economy is going to remain weak for some time. There have been terribly sharp declines in global growth in the fourth quarter of last year and the first quarter of this year. We cannot expect that to continue. Some of those declines are inventory related. There could be a temporary inventory-related bounce some point this year. But if the markets are rallying on hopes that the global recession is coming to an end, then those would be false hopes.
What are the signs to look for when the economy hits the bottom?
The most important sign would be the rebalancing of the American consumer. The biggest and the most important source of instability on the demand side of the global economy right now is the overly-extended, asset-dependant American consumer. And consumers have been hit by a massive wealth shock of around $12 trillion over the past year. It could not have come at a worst time for the 77-million baby boomers, who started to retire last year. There is a huge push for Americans to start saving again. The government is making a huge mistake by telling American consumers not to save. The consumers are, however, smarter than the government.
Where will US consumers invest their savings in?
This is not your normal modest bear market correction. This is a massive wealth shock. It comes at a time when the dreams of 77-million Americans, who are starting to retire, have been shattered. Behavioural finance argues that the pain of the loss has a more significant psychological imprint on investors than the joy of the gain. This points to a sea change in investor appetite towards risky assets, with strategies focused more towards fixed income and wealth preservation. It will be a much more conservative environment going forward.
Would they look at investing in emerging markets?
Investors have seen a massive correction in emerging market equities. It comes as a huge shock to many investors outside this region that were seduced by the so-called decoupling scenario — a belief that you were in the emerging market would get special dispensation from a global shock. That possibility — export-led developing economies could be an oasis in an otherwise weakening economic world — was snake oil. India has a smaller external sector than other emerging economies, but India is very heavily reliant on portfolio inflows to fund current account deficits. I think investors will be reluctant to make the same bets again.
What is the assessment of the effects of stimulus packages on China and India?
What worries me the most is the inclination of politicians to recreate the same type of boom that just went bust. That’s politically expedient, but it is reckless, irresponsible and dangerous. What the world needs here is not everybody to save. We need a shift in the mix of global saving. Those who don’t save need to save, and those who save in excess like the Chinese, need to draw down their savings and start consuming.
One of the dangerous things that has been allowed to occur in the world over the last decade is the imbalance between excess savers and those who didn’t save. I also worry about China because the Chinese are doing what they always do in a global downturn — they embrace what they call a proactive fiscal stimulus, which is driven by infrastructure and investment spending. They talk a lot about stimulating internal private consumption, but they never do. China perpetuates its export and investment-led growth model, hoping that their external demand will come back, led by US consumer. If that turns out to be the case — and I don’t think it will — China would be well positioned to capture this recovery in external demand.
Are we entering a phase of nasty asset price bubbles?
Not for a while. We have a lot of slack in the world right now and the inflationary implications of this slack on CPI inflation, or asset inflation, are not likely to be serious for a while. But as the slack gets absorbed in the global economy, and if the current monetary and fiscal stimulus remains in place, then you could have a renewed outbreak of asset inflation or CPI inflation or both.
The Economic Times, March 30, 2009, Page 15
A temporary inventory-related bounce is likely, but don’t expect recession to cease so soon, says Morgan Stanley’s Asia ops chairman Stephen Roach
MOST economists think that a $1-trillion fund is not enough to buy America’s toxic banking assets. George Smith Alexander and Deeptha Rajkumar spoke to Stephen S Roach, one of the world’s leading bears. After holding the position of chief economist of Morgan Stanley for 16 years, Roach was promoted and named chairman of Morgan Stanley’s Asia operations in April 2007. He also served on the research staff of the Federal Reserve Board in Washington, DC.
What could be the impact of the $1-trillion fund, which is being set up to buy toxic assets?
The concept is good but there are some aspects that remain problematic, particularly the scale. It’s most likely that toxic assets in the system are somewhere around $2.5 trillion or $3 trillion. So it would require going back to the US Congress for further funding, and the politics of that are problematic. It remains to be seen how the actual implementation is planned, the price points that are offered by private investors, their attractiveness to banks. I give the plan a ‘B’ grade. It’s a noble effort, but it’s not big enough.
Is the recent rise in the market a bear rally?
I am suspicious that this rally is indicative of a bottoming in the global economy. The global economy is going to remain weak for some time. There have been terribly sharp declines in global growth in the fourth quarter of last year and the first quarter of this year. We cannot expect that to continue. Some of those declines are inventory related. There could be a temporary inventory-related bounce some point this year. But if the markets are rallying on hopes that the global recession is coming to an end, then those would be false hopes.
What are the signs to look for when the economy hits the bottom?
The most important sign would be the rebalancing of the American consumer. The biggest and the most important source of instability on the demand side of the global economy right now is the overly-extended, asset-dependant American consumer. And consumers have been hit by a massive wealth shock of around $12 trillion over the past year. It could not have come at a worst time for the 77-million baby boomers, who started to retire last year. There is a huge push for Americans to start saving again. The government is making a huge mistake by telling American consumers not to save. The consumers are, however, smarter than the government.
Where will US consumers invest their savings in?
This is not your normal modest bear market correction. This is a massive wealth shock. It comes at a time when the dreams of 77-million Americans, who are starting to retire, have been shattered. Behavioural finance argues that the pain of the loss has a more significant psychological imprint on investors than the joy of the gain. This points to a sea change in investor appetite towards risky assets, with strategies focused more towards fixed income and wealth preservation. It will be a much more conservative environment going forward.
Would they look at investing in emerging markets?
Investors have seen a massive correction in emerging market equities. It comes as a huge shock to many investors outside this region that were seduced by the so-called decoupling scenario — a belief that you were in the emerging market would get special dispensation from a global shock. That possibility — export-led developing economies could be an oasis in an otherwise weakening economic world — was snake oil. India has a smaller external sector than other emerging economies, but India is very heavily reliant on portfolio inflows to fund current account deficits. I think investors will be reluctant to make the same bets again.
What is the assessment of the effects of stimulus packages on China and India?
What worries me the most is the inclination of politicians to recreate the same type of boom that just went bust. That’s politically expedient, but it is reckless, irresponsible and dangerous. What the world needs here is not everybody to save. We need a shift in the mix of global saving. Those who don’t save need to save, and those who save in excess like the Chinese, need to draw down their savings and start consuming.
One of the dangerous things that has been allowed to occur in the world over the last decade is the imbalance between excess savers and those who didn’t save. I also worry about China because the Chinese are doing what they always do in a global downturn — they embrace what they call a proactive fiscal stimulus, which is driven by infrastructure and investment spending. They talk a lot about stimulating internal private consumption, but they never do. China perpetuates its export and investment-led growth model, hoping that their external demand will come back, led by US consumer. If that turns out to be the case — and I don’t think it will — China would be well positioned to capture this recovery in external demand.
Are we entering a phase of nasty asset price bubbles?
Not for a while. We have a lot of slack in the world right now and the inflationary implications of this slack on CPI inflation, or asset inflation, are not likely to be serious for a while. But as the slack gets absorbed in the global economy, and if the current monetary and fiscal stimulus remains in place, then you could have a renewed outbreak of asset inflation or CPI inflation or both.
Posts
No comments:
Post a Comment