Economic `Armageddon' predicted by Morgan Stanley chief economist

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Robert J. Berger" <rberger () ibd com>
Date: November 23, 2004 10:03:20 PM EST
To: Dewayne Hendricks <dewayne () warpspeed com>, Dave Farber 
<dave () farber net>
Subject: Economic `Armageddon' predicted by Morgan Stanley chief 
economist

Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
http://business.bostonherald.com/businessNews/view.bg?articleid=55356

Stephen Roach, the chief economist at investment banking giant
Morgan Stanley, has a public reputation for being bearish. But
you should hear what he's saying in private.

Roach met select groups of fund managers downtown last week,
including a group at Fidelity. His prediction: America has no
better than a 10 percent chance of avoiding economic
``armageddon.''

Press were not allowed into the meetings. But the Herald has
obtained a copy of Roach's presentation. A stunned source who
was at one meeting said, ``it struck me how extreme he was -
much more, it seemed to me, than in public.''

Roach sees a 30 percent chance of a slump soon and a 60 percent
chance that ``we'll muddle through for a while and delay the
eventual armageddon.'' The chance we'll get through OK: one in
10. Maybe.

In a nutshell, Roach's argument is that America's record trade
deficit means the dollar will keep falling. To keep foreigners
buying T-bills and prevent a resulting rise in inflation,
Federal Reserve Chairman Alan Greenspan will be forced to raise
interest rates further and faster than he wants.

The result: U.S. consumers, who are in debt up to their
eyeballs, will get pounded. Less a case of ``Armageddon,''
maybe, than of a ``Perfect Storm.''

Roach marshalled alarming facts to support his argument. To
finance its current account deficit with the rest of the world,
he said, America has to import $2.6 billion in cash. Every
working day. That is an amazing 80 percent of the entire world's
net savings. Sustainable? Hardly.

Meanwhile, he notes that household debt is at record
levels. Twenty years ago the total debt of U.S. households was
equal to half the size of the economy. Today the figure is 85
percent. Nearly half of new mortgage borrowing is at flexible
interest rates, leaving borrowers much more vulnerable to rate
hikes.

Americans are already spending a record share of disposable
income paying their interest bills. And interest rates haven't
even risen much yet. You don't have to ask a Wall Street
economist to know this, of course. Watch people wielding their
credit cards this Christmas.

Roach's analysis isn't entirely new. But recent events give it
extra force. The dollar is hitting fresh lows against currencies
from the yen to the euro. Its parachute failed to open over the
weekend, when a meeting of the world's top finance ministers
produced no promise of concerted intervention. It has farther to
fall, especially against Asian currencies, analysts agree. The
Fed chairman was drawn to warn on the dollar, and interest
rates, on Friday.

Roach could not be reached for comment yesterday. A source who
heard the presentation concluded that a ``spectacular wave of
bankruptcies'' is possible.

Smart people downtown agree with much of the analysis. It is
undeniable that America is living in a ``debt bubble'' of record
proportions. But they argue there may be an alternative scenario
to Roach's. Greenspan might instead deliberately allow the
dollar to slump and inflation to rise, whittling away at the
value of today's consumer debts in real terms.

Inflation of 7 percent a year halves ``real'' values in a
decade. It may be the only way out of the trap. Higher interest
rates, or higher inflation: Either way, the biggest losers will
be long-term lenders at fixed interest rates.

You wouldn't want to hold 30-year Treasuries, which today yield
just 4.83 percent.
--
Robert J. Berger - Internet Bandwidth Development, LLC.
Voice: 408-882-4755 eFax: +1-408-490-2868
http://www.ibd.com


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