Stephen Roach is still bearish, no recovery until 2010

Recently, I have highlighted the comments of a number of investing gurus, most of whom are fairly positive on the market. This includes Jeremy Grantham, Marc Faber, Bill Fleckenstein, Fred Hickey, Marty Fridson and Steven Leuthold (Louise Yamada is a notable exception).  However, when it comes to the global economy, the situation is much murkier, the likes of David Rosenberg at Merrill Lynch/BofA have made the case for continued economic weakness in the United States.

The standard bearer of the global-economy-is-weak-and-needs-rebalancing theme is Morgan Stanley Asia head Stephen Roach. And he is not a tad bullish on the global economy.

The world is moving into the second wave of the financial crisis, which will be symbolized more by the deterioration in the global business cycle than the financial market itself, said Stephen Roach, chairman of the Hong Kong-based Morgan Stanley Asia.

“I think the second wave will be driven by the weakening of profitability of corporations around the world and that will have a negative impact on their ability to pay back loans to banks and other financial institutions,” said Roach in an exclusive interview with Xinhua at Morgan Stanley Asia’s headquarters.

The first wave came about through the so-called subprime crisis, sparking a broadly based and severe recession in the world economy, he said.

Out of the recession, now comes further weakness in loans outstandings by financial institutions, which will have further negative impact on the earnings of the financial institutions.

“So I think the second wave is just beginning, which reflects more the impact of global business cycle than the credit market contagion itself,” said the chairman.


Roach noted that the world economic recession is not bottoming. “I think there’s more to come in terms of the weakness of the world economy.”

“When the year is finished, I think 2009 will represent the first decline for an entire year in world GDP we have see since the end of World War II,” he said.

Roach said that the drops of the global economy in the last three quarters of the year may not be as severe as in the early months of 2009, but the global economy is going to keep declining.

“There is weakness across the world. Every major developed economy is in recession. We’ve never seen that before,” he said.

And most large developing countries, including China, are either slowing very sharply or they are too in recession.

“This is a synchronous downturn in the global economy. There is quite a great deal further to go in my opinion,” he said, adding that unemployment will keep increasing for the better part of the final three quarters of 2009.

The world economy may bounce up a while by the end of the year, as there had been very steep decline in most economies in the fourth quarter of 2008 and equally steep drop in first quarter of 2009, he said.

“So statistically, you can get a positive increase in some point in the remaining three quarters, but that will be short-lived,” he said.

In large part, the global economy will be in a contraction mode through the end of this year, possibly, in the early of next year, he said.

The article goes on to present Roach’s view on major risks for 2009, as well as the Chinese growth story. But, the long and short of Roach’s view is that a weak global recovery will not begin until 2010.

Details at the link below.

Stephen Roach: World moving into second wave of financial crisis – Xinhua

  1. Stevie b. says

    Ed – always grateful for updates on the views of Steve Roach. Also really appreciated your recent piece on NC on credit writedowns – thanks for both!

  2. Edward Harrison says

    Thanks Stevie,

    today I am just shocked out how the Fed has chosen to handle all this.

    It seems reckless. Mortgage rates are coming down, as are treasury yields but printing money and easing credit cannot possibly solve this, can it?

    These are seriously troubled times.

  3. Stevie b. says

    Ed – I’ve been seeking an answer to your question for hours a day for at least a year. I wish I could say I’ve found a eureka moment. The feeling seems to be that printing money will indeed solve things eventually, but by some undefined total amount for some undefined length of time and therefore at some undefined point in the future. I am becoming increasingly convinced that current problems are sufficiently severe that “they” will do absolutely anything to try and overcome them, meaning that reversing the process at some indeterminate future point will be nigh on impossible without creating what I’d call a new, severe “chaos bubble” of a trade-off between a basically stagnating economy, rising interest rates and a falling dollar. As “they” have no way of knowing when this is going to happen, it’s all tomorrow’s problem and today’s is bad enough that just getting through today means who the hell cares about tomorrow and “they” will worry about that as and when tomorrow actually comes.

  4. Stevie b says

    Ed – coincidentally, Tim Congdon seems to think printing is good:

    but he doesn’t even talk about the possibility of eventual meaningful inflation…which is some omission from a monetarist, unless of course he thinks there wont be any meaningful inflation..?

  5. hbl says

    “Ed – I’ve been seeking an answer to your question for hours a day for at least a year.”

    Stevie b. – Personally the answer I’m most confident in is that offered by economist Steve Keen. He doesn’t believe printing will solve this crisis, but nor does he believe that printing will be big enough to cause inflation in at least the next few years. If you (or Ed) disagree with him I’ve love to hear why.

    1. Edward Harrison says

      hbl, I just answered a comment on another post with my thoughts:

      The long and short of my thinking is this: no one knows what will happen because these are historic times with few precedents. However, it is clear that the Fed is being very aggressive with its money printing campaign. So, they just may get things to work. In November-December, I tended to think deflationary forces were too large to overcome, but the Fed has really gone to town here. In my view, if the economy does turn, inflation will be a huge problem – so massive is the stimulus and so massive is the deterioration in the Fed’s balance sheet. Of course, this is just my opinion because no one really knows what is going to happen here.

  6. Stevie b. says

    hbl – I’m afraid you’ve found me out. I find Steve Keen a bit heavy-going. I start reading him with the best of intentions and then I get “glazed eyes” syndrome – after all, I was only a discretionary portfolio manager, not an economist!

    Anyway, hopefully Ed might chip-in here, but meanwhile I found this article interesting:

    where he says among other things “A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.” which seems to tie-in well with Ed’s question?

  7. hbl says

    Stevie b, thanks for the Galbraith link — I think he’s right on with most (possibly all) of what he says. My understanding is that Keen would agree with this also. Keen’s key point from his article on credit creation is that the markets, not the government, are really in control of leading the credit creation process. With debt now at completely saturated and unsustainable levels and consumers in shock and undergoing a generational shift in mindset, the market will lead to a lower debt level, not higher, despite the government’s desperate efforts to prevent deleveraging and expand borrowing further.

    Ed, what do you mean by “few precedents”? There have been credit booms and busts throughout history (with The Great Depression and Japan 1990 as two good examples). The biggest difference this time IMO is the terrifying magnitude of the global debt bubble (measured by debt-to-GDP ratios, etc).

    Also, what do you mean by “get things to work” and “if the economy does turn”. Turn how? Back to expanding lending?

    No matter whether we get inflation or deflation (and I think the former unlikely), growth in debt has contributed substantially to GDP over the last decade or two, so in a scenario of either debt reduction or debt stagnation at current debt levels, real GDP must fall. So to echo Galbraith, I don’t see how there can be any return to “normal” in the next decade at least.

  8. Stevie b. says

    hbl – thanks and why couldn’t Steve Keen have put it like that! Completely agree with his take as you interpret it. But….when you say inflation is unlikely, would you care to put some sort of a time-scale on it? Maybe it’s a silly question because of the imponderables, but I must say I’m increasingly leaning to Mish’s view that getting inflation going aint going to happen “soon”, but sooner or later they’ll print one dollar too many and all hell will break loose.

  9. hbl says

    I think inflation is unlikely before deleveraging has run its course — i.e., we need a lower and more sustainable level of debt to GDP (historically this maybe a third of what we have now, if I recall). I would guess this could take anywhere from two years to several decades — that is impossible to predict.

    When it comes, I don’t expect the fast flip to inflation or hyperinflation that many fear, but rather a gradual increase. My reasoning for this is I agree with Keen that the money multiplier theory is misleading and we won’t suddenly regain confidence and magically restore a historically traditional multiplier to base money in a short period of time… it will take years for people to want to borrow again in sufficient quantity to spur growing inflation and to be credit-worthy enough to do so. And any fear-of-inflation-driven flight to hard assets likely won’t feed through into wage inflation with huge current global labor and manufacturing overcapacity, so I would expect it to be self-limiting as it further chokes off spending power (higher commodity prices).

    Of course there are always some wildcards that could change everything… global wars, dramatic accelerations in global climate change, currently unimaginable political actions such as printing tens of trillions of dollars in a short time targeted to those most likely to spend (i.e., not banks), etc. Governments we are used to tend to limit themselves at least a little due to political constraints (witness the democrat/republican standoffs so far in 2009) but as Keen and others point out, dramatically new governments have come to power in economic crises in history. Not to dwell on the gloomy though — I hope these are all low probability outcomes.

  10. Stevie b. says

    hbl – I said earlier I hadn’t found a eureka moment…….but hey….eureka!! Brilliantly put – thanks!

  11. happy-clappy says

    Grateful for this discussion – helped me adjust my view of things.

Comments are closed.

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