Posted on 11/23/2004 5:07:35 PM PST by tmp02
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.
Dolphy, that is a great name. My mom's name was Dolphie. In answer to your question, I think the most important thing I have done is get completely debt free. I believe gold (double eagles) and bullion silver offers protection. I do believe the large energy companies like ExxonMobile will tolerate these disruptions better than most. Get out of the bond market even if you take a loss. It will get much worse. If the dollar breaks 80 it will free fall to 70. This is bordering on catastrophic.
I don't even blame the Indians - they are just offering a service. One that is inferior to the services of an experienced, in-house IT Department, but that isn't their fault. Senior executives at American companies who refused to understand the importance of their own IT Departments to the success of their companies becasue they saw a quick buck to saved (and a quick bonus check to be collected) are to blame.
Travis I know what you say. But I consider the people who write on Free Republic my friends and I want them to be as protected as they can. I have to sound the alarm, even if they scoff at me. If they are right only my feelings may be hurt, but if I am right they could loose a lot, not the least of which might be their family's security and future. I simply wish all of them well. Good luck to you. Hope you weather this storm.
Thanks to all of you for a great couple of hours. I have to get to work. Thanks again.
Energy, precious metals, and food are where you want to be. Avoid technology and financials.
Roach is no Democrat shill, and his words deserve careful attention. If his predictions have been wrong in recent years it is only because Greenspan has pulled rabbits out of hats no one even knew he owned. Roach may be wrong now, but if he is, he is not wrong in his assessment of the situation, only in his guess at when it will all play out.
Outside of wall street and a few "specialty" firms (eg. FedEx and the like) most fortune 500 companies gave up on in house IT development years ago, at least for the kind of work I am talking about. IT is almost al done by third parties.
I could be misjudging a shift, but it is note worthy. THe big dinancial houses are, of course, setting up their own offshore divisions. They are getting the cream and this is a whole other kettle of fish. I am not quite sure what is happening here. I am getting different stories. Time will tell.
We have been doing it for far too long. Neither you nor I can live on credit indefinitly. The country has a few more rabbits to pull out of its hat than you and I but in the end, all debt is paid. We need to understand that as the dollar slides, it does not do so in a vacuum. The yen rises or the Euro rises referenced to the dollar. The dollar and the U.S. economy is still the largest economy as of now, but if the slide of the dollar gets out of hand, the foreign holdings may be rapidly pulled out of our currency market and spawn other to do the same. At that time Greenspan will be impotent to do anything but watch and then take inventory on an economic battlefield that could, in the worst case scenario, make Manassas look like a park full of flowers. Other countries will flee to hard currencies (gold and silver and other commodities) to weather the storm. I won't "guess" further as it tends to incite some to anger. All I am saying is consider the possibility, ask some cogent questions to yourselves while you look at your children who are depending on you, and be reasoned in your deliberations. Mr. Roach is repeated referred to in this thread in a derrogatary way, but he did not come to his postion haphazardly. Some very informed people think he has something to add to the mix, and I don't believe it is wise to write it off as fear mongering. Guard you and yours. Sincerely Tesas Songwriter.
Yes you can.
There is a value chain for IT too, and it goes something like production support--> re-hosting existing applications --> upgrading existing packages --> package implementation --> custom development --> strategy. Maybe.
Production support may have long hours and too many systems to support.
Rehosting may mean re-writing a COBOL/C/dBASE system in Visual Basic.
And, of course, many of the off-shore companies want to climb this chain too.
There is an argument out there that IT is not strategic any more.
So what?! The poster has been here two years. Hardly a "troll".
Frankly I'm tired of people parroting "troll" accusations at every post they don't like. It's uncalled for.
My mother and dad were born in the early 20's and saw first hand what the Depression did. My dad's father owned a grocery store in Huntsville,Texas and as a kid my dad said he saw many men who traveled through with a wife and 2 or 3 kids who wanted to work just to feed his family. They carried these memories all their lives and taught us not to spend excessively. It wasn't until the mid 80's that my folks had a credit card. Once Sears called my mother and told her they were increasing her credit and would send her a card. She told them if she couldn't pay for something she had no buisness having it. They tried to inculcate that world view in me. It is one that has slipped away into the abyss of the sea of debtors. Graciously, Texas Songwriter.
Wow...nobody has accused you of being a DU troll yet?
I happen to agree with you that this is possible.
With the rise in the national debt, the trade deficit and the lose of confidence in the dollar I am thinking seriously about how to best prepare for the future. Suggestions?
I pray God you are right and I am wrong. I just cannot afford the risk of thinking all is well with the world while I have 3 kids to provide for. I must move cautiously. Some were saying the dollar was invincible when it sat at 110 and at 95. I was trying to warn then. Now it sits at 83 and change and I fear on its way to 70. If Greenspans grip does not hold, if people and countries invested in dollars say the return of the dollar is too low and the inflationary pressures too great, things could rapidly spin out of control. This is dangerous buisness. There are some factors out there which may yet raise their head. Terrorism, Iran, North Korea, impediments to the free flow of oil at any of the 6 chokepoints of world commerce transportation. I hope you are right.
I'd like to see the data behind these assertions. As I recall mortgage rates were around 10% in 1984 and today they're about 5.5%. So if total consumer debt has gone from 50% of GDP to 85% of GDP, then total interest payments have probably declined in the last twenty years. This is assuming that 90% or more of consumer debt is mortgage debt, which I would expect it to be after all the refinancing of mortgages in the last few years.
You can find the aggregate household debt numbers from the Federal Reserve. The current total debt of households is $9.7398 trillion dollars, which is indeed getting pretty close to our GDP of $11.8035 trillion (from BEA) at 82.5%. According to the Fed numbers, only about 73% of household debt is mortgage debt.
As to interest-related information, I don't believe that Mr. Roach is correct when he asserts that nearly half of new mortgages are flexible rate mortgages; the government figures referenced at Freddie Mac shows that it has recently been closer to 1/3 of new mortgages.
My mom's name was Dolphie Jane Walker (given name). Glad to know you are debt free. You will be fine. Stay in touch.
Massive debt at all levels. People are taking out second and third mortages (or getting adjustable rate mortgages) to buy more toys. The feds just raised the debt ceiling over $8 trillion dollars, or $80,000 for every working American. And there is no end in sight. The "future liability" debt is nearly $400,000 for every working American.
Transformation from a manufacturing/technology ecomony to a service economy. America has been transformed from a people that create things to a people that consume things. The two biggest private-sector employers are now Walmart and McDonalds.
Failed educational system. Kids aren't being taught how to think for themselves, but rather to follow instructions. Show any signs of individuality, and they put you on drugs. Shop class and the sciences have been replaced with revisionist history and self-esteem classes.
Massive welfare state (related to the debt problem). Things are going to get really bad once the boomers start retiring. They are going to start taking out of the stock market. Who is going to put money in to replace it? The Walmart greeter? (Don't expect foreigners to either-- China just surpassed the US in foreign investment money received).
An permanent increase in energy prices brought about by increased demand (China and India), with little increase in supply.
A corporate America that is fundamentally greedy, dishonest, and short-sighted. No good can come from "business leaders" who would send their neighbors jobs to China, so they can save a few bucks and get a bigger bonus.
Crumbling infrastructure. Americans paid little in taxes 50 years ago, yet most of the highway system was build then. Now, EVERY major city has major traffic problems, and politicians are looking for even more ways to steal money from working folks to "fix" the problem.
Illegal immigration which brings crime, illiteracy, drugs, moral terpitude, and a drain on internal resources.
Failed health care system. It worked fine, before the gov't got involved. Now that they run about 50% of it (directly or indirectly), they'll eventually run all of it. And costs will continue to increase.
Corrupt money system based on paper. Fiat currencies have no intrinsic value (unlike gold), and are worth only what people are willing to pay for them. Fortunately, there are still a lot of suckers people that accept our fiat dollars. That won't last much longer.
A culture that values money, power, deceit, and vanity above truth, honor, hard work, and thrift. DeTocqueville said that America was great because she was good. Those days are long gone.
The underlying culture, along with the diminishing Freedoms in this country, is the real culprit. The rest are merely symptoms of this problem.
I hope I'm wrong, but I think the Republic is finished. The foundation is gone.
Just popped in for a second on a coffee break...my story is nearly identical, except in the Northeast. I've always been cautious with money, but oddly, I've chosen a life that is one of the most risky, career-wise. Go figure. People who have grown up in the shadow of the depression know how bad things can get.
A pleasure meeting you.
I'd like to be wrong.
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