Whoa! Papa Bear Stephen Roach holds forth
We should call this heavy weight economist night on SD. 1st Paul Kasriel of Northern Trust and now Stephen Roach of Morgan Stanley.
After reading what's below, suspect that a Vulcan mind meld has occurred between Steve and my pal Big Bull(g).
So "fasten your seat belt Dorothy, cause Kansas is goin' bye bye!"
Isopatch
"Global: Confessions of a Bear
Stephen Roach (New York)
Maybe I’m just too bearish. As one of my long-time colleagues pointed out to me recently, "You do have a knack for overdoing it." My earlier fixation with inflation certainly comes to mind in that regard. Mindful of these biases, sometimes I lie awake at night wondering if I’ve gone too far in belaboring the downside perils. On those nights, fitful sleep usually comes only in the darkness just before the dawn. Why can’t the next upturn follow in the same indomitable fashion?
I guess I’m stuck on a very simple answer: I do not believe that this downturn is being dominated by a garden-variety inventory cycle. If it were, then standard counter-cyclical policy initiatives would eventually gain traction. And as day follows night, an upturn would follow the downturn -- and probably with a good deal of vigor, at that. However, in my opinion, such an outcome speaks of cycles of a now-antiquated era -- cycles that were dominated by inflation and the desire of central banks to fight it. This was the great saga of the past 50 years. That’s now over, at least for the time being. Inflation is not the story behind the current downturn.
Instead, I see the world -- and the US, in particular -- through a very different lens. The picture that emerges is a cycle from a more distant past, one that bears a far greater resemblance to the boom-bust cycles of the late 1800s and early 1900s. The operative force in those instances was the powerful confluence of over-investment in both the real and the financial sides of the economy. This was a breeding ground for asset bubbles and ultimate wealth destruction that set the stage for long recessions -- sometimes even depressions -- and shallow recoveries.
As I see it, the outcome over the next few years depends critically on which historical precedent is most relevant. Now that the Fed is on the case, the modern-day inventory cycle would virtually guarantee a vigorous V-shaped upturn. It would just be a question of when, not if. Conversely, the prewar cyclical model would point to a series of post-bubble aftershocks that would restrain economic recovery for years to come. The operative premise, in that instance, is that it would take a long time to purge the severe excesses that have built up in the boom phase of the boom-bust cycle.
Unfortunately, the rise and fall of the great American equity bubble of 1995-99 comes a lot closer to fitting the script of the ancient cycle than it does in matching the rhythm of the post-World War II business cycle. With Nasdaq now down 67% from its peak, the S&P 500 off 28%, and the broad Wilshire 5000 index down a cumulative total of 32% from its peak (all as of the close on 3 April), I would characterize the US economy as being firmly in a post-bubble era (see my 19 March dispatch, "A Post-Bubble World"). The $5.3 trillion of equity wealth destruction that has occurred over the past year could well trigger a purging of several bubble-related excesses in the real economy -- namely, America’s negative personal saving rate, the massive personal debt overhang, a record current-account deficit, and a sizable excess of business IT capacity. For that reason alone, US economic growth seems likely to be structurally constrained for some time. That puts me firmly in the camp of the multi-year U-shaped upturn, punctuated by periods of near-stagnation that would be painfully reminiscent of the Japanese-style L-shaped outcome of the past decade.
If I’m going to be wrong, this could be the stumbling block: The outcome for any economy can always be framed in the context of the balance between cyclical and structural pressures. Typically, while both sets of forces are at work, one predominates. For the forecaster, this is where judgement comes into play. In my view, it pays to assign the greatest weight to the structural headwinds that are about to be unleashed. But that statement is not to deny the presence of cyclical forces. Even in a structurally constrained world, there can be powerful cyclical forces at work. In the end, I just think they won’t be powerful enough to make a material difference to the outcome.
Nevertheless, there can be no mistaking the telltale signs of the inventory cycle now at work. Yet, while encouraging on the surface, there is good reason to believe that production adjustments still have a long way to go. The just-released manufacturers’ inventory report for February 2001 underscores that point. Factory stocks contracted by 0.1% during the month, a seemingly sharp reversal from the 0.5% rise in January and a hopeful sign that five months of production adjustments may finally be succeeding in eliminating the unwanted inventory back-up. Unfortunately, that conclusion is premature. With factory shipments declining by 0.5% in February, the ratio of inventories to sales -- a standard gauge of production balance -- actually continued to inch up for the fifth time in the past six months. Until the inventory-to-sales ratio begins to come down in earnest, there could well be much further to go in the production adjustments that are pushing the US manufacturing sector ever deeper into recession. All this is another way of saying that cyclical risks remain very much on the downside -- a conclusion that can only reinforce the structural restraints now falling into place.
I’ll be the first to admit that I’m getting sick and tired of all this pessimism. In my private life, I’ve become something of a social pariah -- conversations stop dead when I walk into rooms filled with idle chatter. My own insecurities urge me to challenge the bearishness that has driven a wedge into once-cherished friendships. Try as I might, I’m not there -- at least not yet. The interplay between cyclical and structural forces is a tough, but objective, discipline that takes the emotion out of the prediction business. In my view, the scales remain tipped decidedly in the structural camp, pointing toward a lengthy workout from the popping of the greatest financial bubble in modern history. To turn bullish, I would have to see this balance in a very different light. That day will eventually come. But for now, it looks like another night of fitful sleep." |
