<<I believe that Steven Roach was one of those permabears and likely still is>>
... believe what you want, Lizzie ... but my macro analysis and conclusions are based purely on my own interpretations of what I read ... they may not be correct in the future, but they have been very much on target overall since October, 1999 to March, 2000 when I sold (I can't remember exactly how much anymore) over $600,000 of SUNW ... and then, gradually got bearish, so that by July, 2000, I was buying S&P puts to great advantage ... I have made some bad calls timing wise on my long term positions in ABMD, TNTX and VLNC, but I still hold them because I don't think the light at the end of the tunnel, for them, is a freight-train ... of course, I could be wrong ... and as twister/Rm222 (on All About SUNW) has pointed out, some/many of my short term stock trades have been losers ...
... my analysis and conclusions are personal and not professional, but they are from a full-time effort on my part and are what I see coming ... they may be completely wrong ... I articulate them because it helps me understand myself as well as learn from others ...
... as far as Stephen Roach is concerned, you are not correct ... and that is a fact, not an opinion (see below) ...
... Steven Roach, Chief Economist and Director of Global Economic Analysis for Morgan Stanley is one of the many sources I read regularly ... and have every day and every week, for over six years now (although some have been added along the way) ... I also read/study ContraryInvestor.com, The Financial Times, The Economist, The Wall Street Journal, Barron's, Business Week, The New York Times, John Hussman, John Murphy of MurphyMorris, and several threads on Silicon Investor ...
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December 22, 1998 (last column by Stephen Roach in 1998)
Global: A Year of Healing - Stephen Roach (New York)
What a year it's been! At the start of 1998, we warned of a world that was about to be turned "inside out" by unprecedented financial crisis. A year later, we find ourselves hopeful that that the worst may well be over by mid-1999. At the same time, we believe that the cure should be slow and gradual, a far cry from the more classic V-shaped cyclical rebounds of the past. Our 1999 global growth prognosis calls for just a 2% increase in world GDP, little different from the anemic (and near-recession) growth of 1.8% that we now estimate occurred in 1998. However, our first-cut glimpse into the new millennium calls for a meaningful acceleration to 3% global growth in 2000, a marked improvement for a world economy that has been in its worst crisis in 60 years.
Three macro forces lie behind the increasingly synchronous healing of the global economy we expect in 1999. First, there are the lagged impacts of recent and prospective G-7 monetary easings; largely in response to lower interest rates, we expect Euroland economic growth to accelerate to 3.2% in 2000 (from 2.1% in 1999) and US economic growth to accelerate to 3.0% in 2000 (from 2.6% in 1999). Second, we expect consumer and business purchasing power in the commodity-consuming industrial nations to benefit significantly from cheaper energy and other commodity prices. Third, the crisis economies of the world should draw support from IMF-led liquidity injections, which now total in excess of $160 billion, or 0.5% of world GDP. In our view, these three macro drivers -- a G-7 monetary easing in conjunction with cheaper commodity prices and IMF bailouts -- are the functional equivalent of a large global tax cut that should be more than sufficient to jump-start a sluggish world economy.
There are five key assumptions that underpin this upbeat conclusion, the first, and foremost, being our belief that the crisis in the developing world is now largely over. Key in this regard is the related presumption that recent legislative setbacks in the Brazilian Congress do not represent a fatal threat to the Brazilian austerity plan that is linked to a successful IMF-led adjustment program. Second, we are assuming that there will not be a global credit crunch in 1999. Courtesy of aggressive G-7 monetary easing, credit spreads had retraced approximately 50% of the widening that had occurred following Russia's debt default in mid-August; more recently, there has been a modest reversal of this improved trend, sparked by year-end funding pressures as well as by a renewed outbreak of Brazilian-related concerns. However, given our still constructive outlook for Brazil, we believe that any such setbacks are likely to be temporary.
A third assumption is that non-Japan Asia can recover without Japan. As Robert Feldman stresses, Japanese recession could temporarily abate in 1999, reflecting the impact of yet another fiscal stimulus. Unfortunately, we expect this respite to be short-lived. A still inefficient Japanese economy lacks the capacity to trigger the hiring and income-generating feedbacks (i.e., multiplier effects) that typically transform counter-cyclical policy initiatives into cumulative cyclical recoveries. As a result, we look for Japan to lapse back into renewed recession and contract by 1.5% in 2000. But we do not view this outcome as a threat to the global economy at large. In part, this reflects Tim Condon's view that recoveries in the crisis economies in Asia now seem likely to benefit increasingly from an improvement in domestic consumption. Moreover, with Japan having been essentially stagnant since 1992, the nation has long ceased playing the role as a regional locomotive.
Fourth, we are assuming that G-7 monetary policies remain predisposed toward easing though the first half of 1999. In a low inflation climate, the Fed has more leeway to act, especially with short-term US interest rates still high in real terms; moreover, with Euroland growth surprises still tipping to the downside, we believe that the early December easing by European central banks signals the possibility of further accommodation by the nascent European Central Bank. Fifth, our upbeat assessment for the world in 2000 assumes that the Y2K computer problem turns out to be a non-event at the macro level. MSDW equity strategists Peter Canelo and Richard Davidson believe that Y2K compliance by US and European corporations is much further along and less costly than widely presumed. And I would add that the coming Y2K "meltdown" is the most widely advertised disaster in all of recorded history; as such, it hardly poses a serious threat to forward-looking financial markets.
As always, there are plenty of risks that we could be wrong. Latin America is at the top of our worry list, underscoring the ever-present possibility that currency contagion might finally threaten the heretofore resilient US economy. There is also a new strain of tension emerging in Asia -- a potential export battle between China and non-Japan Asia. Moreover, with an ever-widening balance-of-payments deficit, the United States continues to shoulder a disproportionate share of the burden of the requisite current-account adjustment in Asia. With the US unemployment rate at a 28-year low, this external imbalance does not seem threatening. But it's easy to imagine conditions under which this might change -- especially with a recession now emerging in the manufacturing sector and with the dollar sagging once again.
Nor is all calm on the Euro front heading into EMU. The tax harmonization issue is a big one, pitting the leading outsider (UK) against the leading insider (Germany). And the pro-labor focus of Germany's new "Red-Green" government puts matters of Euro competitiveness squarely on the front burner. With France and Germany seemingly intent on setting out "binding and verifiable goals" for EMU-based job creation, it will be exceedingly difficult for the world's high-labor-cost region to hit these goals without triggering trade and political frictions elsewhere in the global village.
All these risks notwithstanding, our baseline case for an increasingly cyclical growth outcome could have important implications for world financial markets. It could well mark the low point in the global inflation cycle, suggesting that the next major move in interest rates is up, not down. Moreover, it could reinforce the recent outbreak of heightened volatility in world currency markets; with interest rate support moving back toward the US, a renewed rise in the dollar seems possible later in 1999. The corollary to that development would be a renewed weakening in the yen, one of the global risk factors that concerns us most in 1999. Finally, as the cyclical clock starts ticking again, optimism on corporate earnings could be tested, especially in the cyclically advanced US economy where tight labor markets are already putting corporate profit margins under pressure.
All this underscores the potential for an important shift in financial market risk over the next year -- away from the contagion of foreign exchange markets and back toward the perils of an overinflated equity bubble. And that's what the next couple of years should continue to have in common with 1998 -- an outcome in the real economies that is unusually dependent on conditions in world financial markets. That may well be an enduring feature of the great global crisis of the late 1990s -- and one that affects the speed and quality of the healing that we look for over the next year.
morganstanley.com
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January 4, 1999 (first column by Stephen Roach in 1999)
Global: The Lessons of 1998 - Stephen Roach (New York)
Investors look to rear-view mirrors with great disdain. As forecasters, economists have a different sense of the role of history. But we are all probably in general agreement that the best that can be said of 1998 is that it is finally over. World financial markets went through their worst crisis in 60 years, and the forecasting community made what I believe was its largest ever one-year error in projecting world GDP growth -- an estimated 1.8% outcome for 1998 versus a consensus forecast of about 3.5% at the start of the year. Painful as it may be, I believe that it is entirely appropriate to take stock of what went wrong last year and attempt to assess how the lessons of 1998 might bear on the outcome for 1999.
Five key lessons come to mind -- the first, and most obvious, being the extraordinary shortfall of global output growth. Relative to our own forecast of a year ago -- in line with a consensus prognosis of 3.5% for world GDP growth in 1998 -- the bulk of the miss was in Asia. Our initial call in Japan for a year of relatively anemic +1.25% growth (which pre-dated the arrival of Robert Feldman) was supplanted by an outright collapse of -2.9% -- a miss that, in and of itself, was worth 0.4 percentage point off world GDP growth. And our hope that output losses could be contained in the once fast growing Tigers of non-Japan Asia proved to be wishful thinking; our forecast miss in non-Japan Asia took about another one percentage point off our 1998 world GDP growth prognosis. Reflecting this painful reality check, we have tempered any optimism in our Asian outlook for 1999. We look for a further, albeit smaller, contraction in Japan (-0.6%) and essentially no growth in non-Japan Asia, outside of the still rapidly growing economies of China (+7.0%) and India (+5.8%). The lesson of 1998 that seems most relevant to our view of Asia is that healing in the crisis economies takes time; while we are hopeful that the worst of the economic dislocations are now behind us, we still worry a good deal about mounting social and political risks in the region. As for Japan, the experience of 1998 tells us that the powerful deflationary forces of the feared liquidity trap are likely to endure, even in the face of seemingly powerful policy actions.
A second lesson comes from the impressive performance of the non-Japanese industrial world in 1998. In contrast to crisis-induced reductions in consensus expectations over the course of last year, estimated growth outcomes in the United States (+3.7%), Europe (+2.8%), and Canada (+2.8%) were all generally in line with our relatively optimistic forecasts. This underscores the complex nature of the linkage between Asia (some 31% of the global economy, including Japan) and the rest of the industrial world (about 42% of world GDP). Yes, the "external linkages" through trade balances acted as a clear constraint on activity in the West. But this factor was largely offset by the impacts of lower long-term interest rates and reduced inflation, both of which boosted domestic purchasing power in the non-Asian industrial world. This macro case for resilience was tested by the credit-crunch-scare that broke out in the aftermath of Russia's debt default last August, but the subsequent aggressive easing by G-7 monetary authorities has largely neutralized this risk. The lesson from 1998 that guides our thinking for 1999 is that the residue of negative foreign trade effects should actually diminish over the course of the coming year, enabling this reduced headwind to be reinforced by the lagged effects of more recent reductions in interest rates and inflation.
A third lesson is evident on the inflation front. While we did a good job in forecasting the resilience of industrial world growth in the face of an ever-deepening Asian crisis, we were wrong to presume that inflation would be largely unaffected by this outcome. Industrial world inflation appears to have slowed to just 1.3% in 1998, about 0.8 percentage point below the pace of 1997 and fully one percentage point below our prognosis of a year ago. This reduction in inflationary pressures reflects an important dichotomy between a "zero inflation" outcome in the tradable goods sector and a 2% to 3% rate of increase in service sector pricing. We expect this dichotomy to persist in the year ahead. In the goods producing arena, world trade volumes are expected to expand by only about 4% in 1999, little different from the 3.5% increase estimated for 1998 and well below the 6.5% average annual rate of the 1990s. This leads us to conclude that there should be little change in the underlying forces shaping tradable goods inflation in 1999; at the same time, we believe that ongoing labor cost pressures will limit any further compression in service sector pricing. Nevertheless, largely reflecting recent sharp declines in energy and other commodity prices, we have pared our forecast of industrial world inflation to just 1.1% in 1999, down fractionally from the 1.3% outcome of 1998. Consequently, a key lesson from 1998 is that we are tempering the high-inflation bias that has long plagued our macro forecasts.
Mounting global tensions associated with balance-of-payments disequilibria qualify as a fourth important lesson from 1998 that could bear critically on the 1999 global outlook. No where is the contrast more stark than the juxtaposition of Japan's estimated 1999 current-account surplus of 4.3% and a likely 3.5% deficit in the United States. At the same time, balance of payments positions in the crisis economies of Asia have transitioned dramatically from deficit to surplus, and the Euroland current account seems to be holding in surplus at around 1% of the region's GDP. In this context, the United States looms increasingly prominent as the world's growth locomotive, an outcome which has led to a massive overhang of dollars in non-US financial markets; moreover, this imbalance has been exacerbated by numerous cross-border arbitrage plays (e.g., the "yen-carry" trade) that have been put in place in recent years. This is a recipe for dollar vulnerability, an outcome that emerged with a surprising vengeance in late 1998 and one that we now believe will linger into the first half of 1999.
All this underscores the fifth lesson of 1998 -- the likelihood that financial market volatility will continue to present the global economy with great challenges in 1999. The mirror image of a weak dollar is, of course, a strengthening of the yen and the Euro, outcomes that would have negative implications for already weakened growth prospects in both regions. Moreover, there can be no mistaking the potential vulnerability of the saving-short American consumer to the long overdue possibility of an equity shock, an outcome that would deny the increasingly wealth-dependent household sector its greatest source of incremental sustenance. Finally, there is always the possibility of yet another flare-up on the global crisis front -- Latin America certainly comes to mind these days -- that could trigger another outbreak of deleveraging and a renewed widening of credit spreads that might yet spark that oft-feared global credit crunch. Perhaps the most profound lesson from 1998 is that financial market vulnerability remains the key risk to the global economy in the year ahead.
morganstanley.com
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November 13, 2000 (Stephen Roach really starts to get bearish on the economy)
Global: Bracing for the Downside - Stephen Roach (New York)
Our baseline prognosis for the global economy still has soft landing written all over it -- a 3.8% increase in world GDP in 2001. While that’s a sharp slowing from the 4.9% gain we are now estimating for 2000, the vigor of this year’s global growth surge -- a 17-year high -- is simply not sustainable. Instead, we remain hopeful that the world economy is about to enter a gentle glide path toward its 30-year trend growth rate of 3.6%. That paints a picture of a more sustainable expansion -- the classic stuff of a soft landing.
I continue to believe that the risks lie very much on the downside of our baseline prognosis. I would currently place those risks in the 3.0% to 3.5% range, an outcome that would leave the global economy in that ever-precarious twilight zone between a soft landing and a hard one. The possibility of significant downward revisions to our 2001 growth forecasts of non-Japan Asia (+6.5%) and Latin America (+4.3%) are especially worrisome in that regard. Moreover, I would continue to place a 40% probability on a hard-landing alternative, with world GDP growth falling through the 2.5% threshold that has been associated with global recessions of the past.
To a large extent, this is all educated guesswork. Our basic macro framework for the global economy lays out the case for a meaningful slowdown in the pace of world GDP growth over the next year. As the transition from the vigor of 2000 to trend growth in 2001 unfolds, the risk of several soft quarters is very real. During that transition, the world economy could well be hovering at close to its "stall speed." Should an exogenous shock occur during that transition, it would be very difficult to avoid a hard landing. In looking out over the next 6-9 months, I worry most about the possibility of three such shocks -- a full-blown energy shock, a US earnings and wealth shock, and a sharp correction in the dollar.
Predicting an outright shock can often be a fool’s game. But this is a business of probabilities. With early warning signs of global deceleration increasingly evident, hard-landing risk should be at its maximum in the first half of 2001. If the world can make it safely through that window of vulnerability, many self-correcting cyclical forces -- especially lower oil prices and reduced interest rates -- could then tip growth risks back to the upside. But that’s getting ahead of a story that has yet to unfold.
As a check on this qualitative assessment, we often attempt to scope out global growth risks by putting our numbers through what we call a world trade matrix. This exercise works as follows: Each of our economists is asked to provide an estimate of import growth for the countries that he or she has under coverage. We then aggregate the total of the some 45 countries we follow -- which collectively account for more than 90% of world GDP -- in an effort to derive an approximation of the growth in global trade. The theory, of course, is that the sum of everyone’s imports equals everyone’s exports. Our collective tally of world import growth points to a 7.7% increase in 2001, a dramatic downshift from the 13% surge we estimate for 2000. This 40% deceleration in the growth of global trade is about double the 22% deceleration we are currently forecasting for global GDP growth. This is yet another reason to be wary of the downside risks to our baseline forecast of the world economy in 2001.
To be sure, volatility in global trade is typically in excess of that for world GDP. But over time, the fluctuations in these two aggregates are highly correlated. At the start of this year, our baseline case called for a 4% increase in world GDP in 2000. However, our global trade matrix was pointing to a double-digit increase in world trade, prompting me to stress the upside risks to our global growth forecast into the 4.5% to 5% zone. Our latest estimate of 4.9% growth in world GDP in 2000 bears that risk assessment out and underscores the usefulness of such a tool to gauge risks to the global economy.
In looking at our current estimates of global trade growth in 2001, I believe that there is a good chance that we may be lowering these numbers as well in the months ahead. About 45% of the expected gain is concentrated in the United States and non-Japan Asia. As Dick Berner stresses in today’s Forum, US export risks are already tipping to the downside. And as America goes, so, too, would go our NAFTA partners, Mexico and Canada. Moreover, once the global IT cycle begins to turn in earnest, I fear that non-Japan Asia will feel the brunt of this development. Accordingly, I would place the risks to our current baseline estimate of world trade in 2001 in the 5% to 6% zone, not all that far from the 4% to 5% range that was associated with the crisis-induced hard landing of 1998.
Everyone wants a soft landing -- investors, policy makers and forecasters, alike. Yet, the soft landing remains the most elusive of all macro outcomes. That’s because it always entails a delicate transition that exposes a weakened global economy to ever-present exogenous shocks. It’s hard to know with any precision if such a shock will hit in the first half of 2001, a period when our baseline forecast suggests the world economy will be nearing its stall speed. But as the coming downshift in global trade suggests, the odds are not exactly comforting in this regard. We remain on maximum alert for a global hard landing in the first half of 2001.
morganstanley.com; |
