... today's comments from Stephen Roach are most interesting, especially the tone and attitude of revisiting his previous calls and his answers and responses to his many critics ... I had never thought of it before, but it must be difficult to maintain an 18 month bearish take on the world and U.S. economies and equity markets when you are the lead economist for a very large and visible brokerage house like Morgan Stanley ... it gives Stephen an even larger and more important image in my own mind ...
Ken Wilson
April 15, 2002 - Global: Confessions of a Dipper, Stephen Roach (New York)
It’s been an interesting couple of months on the rubber chicken circuit.
For me, the year started out with a flourish with my now infamous
double dip call. But then it was time for a rather sobering reality check.
Instead of the zig I was looking for, the data zagged -- and 99.9% of
the economics profession ran to the boom side of the ship. Limbs can
often be lonely, but from my perch, there’s no one even on the same
tree.
Yet when I speak with clients around the world, the interest level has
never been higher. Yes, there’s probably a bit of the "sympathy factor"
at work here. To some extent, it’s probably because no one else is
telling the bearish story these days. But this isn’t about contrarianism.
Many clients, especially those of my generation (post-40ish, if I can be
a bit generous), have a deep suspicion that the biggest boom of all can
be followed by only a mini-bust in the real economy. In the interest of
full disclosure, I must add that that even the most suspicious of the lot
are usually fully invested bears. My favorite line these days at the end
of the typical presentation: "I agree with your logic, but I can’t afford
not to be involved (sic)."
I guess I have never been a shrinking violet. I must confess, however,
that I have adopted an asymmetrical credo in facing up to those all too
frequent reality checks. When you’re wrong, it’s important to admit it up
front. But when you’re right, it never pays to take a victory lap. Sure, I
got the recession call right last year. But, by now, that’s ancient history
for an economy that has surged when I thought it would dip. Call it
superstition or humility -- or a little of both -- but it’s always a danger to
take yourself too seriously in the forecasting business. The Economist
put it best recently when giving us credit for having gotten the macro call
right in 2001: "…The overall winner with the smallest total error is
Morgan Stanley. The bad news is that Morgan Stanley is again gloomier
than the consensus for 2002. The good news is that experience
suggests that this year's forecasting star is often next year's duffer (14
March 2002)." It sure feels that way right now.
Ironically, while the numbers have broken the other way, I still feel very
confident about the analytics of the double dip. I continue to stress that
there are three legs to this stool. The first is a relapse of the
over-extended American consumer. The blowout of consumption in
4Q01 has spilled over into the early months of 2002 more than I had
expected. But with so much of this impetus coming from nonrecurring
outlays on durable goods (+39.4% annualized in 4Q01), the standard
"stock adjustment" model that has long guided my assessment of
big-ticket spending suggests this overshoot will be followed by a
payback. Weather-related distortions to construction activity -- hardly
surprising in light of the warmest winter in 106 years of recorded history
-- point to a similar fallback on the building front. Timing is always tricky
in making such relapse calls, but the more these distortions surge to
the upside, the more confident I feel about the downside. It’s just a
matter of when, not if, in my view.
The second leg of the stool is the vulnerability factor -- the likelihood
that the US economy will remain on exceedingly shaky ground for some
time to come and therefore be highly susceptible to the slightest of
shocks. There are two aspects to this argument: First, the traditional
sources of pent-up demand that normally drive a cyclical lift-off --
consumer durables and residential construction activity -- have been
spent. That would put the onus on either capital spending or exports to
fill the void, and I am highly dubious of either possibility. IBM and
General Electric are telling us something about the business-spending
outlook that the econometric models are missing (see my 12 April
dispatch, "Listening to Business"). And with a dollar that's still strong
and weak overseas demand, exports aren’t going anywhere either, in
my view. The second aspect of this argument is the legacy of the
structural excesses that built up during the boom -- sub-par saving,
record debt loads, lingering excess capacity, and a massive
current-account deficit. Normally, recessions purge these imbalances.
Not this time. The persistence of these excesses is the stuff of structural
headwinds -- ongoing restraints to economic growth that should keep
any recovery on exceedingly shaky ground.
The third leg of the double-dip stool is history -- or at least my
perception of it -- and the fact that most recessions are punctuated by
the ebb and flow of positive and negative quarters of GDP growth. US
Commerce Department data verify that five of the past six recessions
have, in fact, had at least two dips -- those of the mid-1970s and early
1980s actually had three. Most investors are confused on this count.
After all, they have hard evidence from Ed Hyman of ISI that suggests
there has never even been a double dip. My recitation of history is
frequently interrupted with the common retort of "How can you two guys
look at the same numbers and draw the opposite conclusions?" The
answer is we’re looking at different phases of the business cycle -- my
focus is on recession and Ed’s is on recovery. I’m saying it’s not over
until it’s over, and I guess Ed is saying, once it’s over, it’s over. But
from my perspective, the facts are the facts -- recessionary relapses
have been the rule, not the exception, for a US economy that has just
tumbled into recession. Far be it from me to predict the future based on
a mindless extrapolation of past. But sometimes I think it pays to heed
the lessons of history.
Analytics, of course, are one thing. The reality check is another. As the
US economy has blown off to the upside in early 2002 -- our latest
guesstimate has 1Q02 GDP growth tracking at 4.7% -- the chances of a
spillover into the spring quarter have risen. That suggests that the next
dip, if it does come, will occur later and off a higher base than I had
thought. But that does not undermine the basic analytical case that I
have outlined above. It merely suggests that the timing of this double
dip may not be conforming to those of the past. Obviously, if there’s
too long a stretch between the initial dip of last year and the next
downleg, the outcome will not qualify as a strict double dip -- it will be
more of a multi-recession scenario. Similarly, there’s always the
possibility that the relapse will not be as pronounced as I am expecting
and that the economy will simply find itself bucking the stiff headwinds
imparted by the lingering structural excesses of the late 1990s. This is
the so-called "Nike swoosh" alternative that I outlined some time ago --
a protracted period of decidedly sub-par growth (see my 15 February
dispatch, "The Nike Swoosh"). But whatever the outcome -- double dip,
second recession, or Nike swoosh -- I continue to feel that the analytics
support a much weaker growth outcome than the overwhelming
consensus of forecasters has embraced. Maybe it’s not exactly what I
had in mind at the start, but these outcomes are still miles away from
the vigor envisioned by the broad consensus of forecasters.
I'm often asked whether I would feel vindicated if the economy merely
slowed a lot. I have to be honest and say no. Purist that I am, I have to
insist that the strict double dip requires a quarter of negative GDP
growth. So unless there’s a sign reversal at some point in the next 3-6
months, this will not qualify as a classic double-dip recession. But that
doesn’t rule out the other permutations on this theme -- a second
recession or the Nike swoosh. I also get asked a lot if I have ever met
Dick Berner, our US economist par excellence who has been decidedly
on the other side of this call. I have known and respected the man for
nearly 30 years. Our offices share a common wall. And our analytics are
usually cut out of the same cloth. Unlike a year ago, when we stood
together on the recession call, this time we see the cyclical call quite
differently. Dick has made a compelling case in favor of a more
vigorous outcome, and, so far, he has been spot on. But that’s what
makes markets -- the willingness to take stands on both sides of an
issue, or an asset price. I have to confess that these are the moments I
cherish the most in our business -- the opportunity to engage a
respected colleague in a debate over the rigors of our shared discipline.
I know of no other way to seek the elusive truths of our collective macro
journey. I wouldn’t trade that for anything.
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