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Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
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.
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Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
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.
Well. its good to see I pegged the situation right in terms of cause and effect. The bad new is, my brother is one of those which just switched his financing to go from a relatively new house to a bigger relatively new house with a FLEXIBLE interest rate.
I can't believe anyone would be foolish enough to do so...The interest rates ain't going to go down, and even if the scenario was there to do it, the rates were so low already they amount they could go down were next to nill.
But we can't afford a higher fixed rate then the lower variable rate they give us.....then don't buy THAT house. If you can't afford it now, just wait.
This is why there is a housing bubble, because when it hits (if..but most likely when), renters will be able to pick up the steam, and raise prices.
Time to put some $ in currency (not ours) and gold. (well i've been thinking this the last couple of years, just I'm in college so I have none to do so) Just like the oil when it was $12 a barrel (dang I was born 10 years too late)
I feel saddened right now when I hear Bush (and previously Clinton..yet in a different climate) say we have record high home ownerships....well, no we don't.
We have record high numbers of mortgages, which if can be fulfilled would be great, but everyone has a loan....those locked in, great. Those that aren't, well lets just say I've got a phillips and your ....'ed
This won't turn around quickly, and watch how the when the dollar slides, the jobs we shipped out for china to get cheap goods, suddenly become more expensive negating their worth, which is why I HATE outsourcing. Our currency now will set the price of our goods bigtime. (Yes china has fixed their rates to ours, but if we go down, they'll change that rate)(don't let that be your saving grace) (they'll change it to where the market force takes it to the euro or to ours at a lower rate (yes by not putting a market dependant rate on it, they game the system))
Inflation and high interest rates....great...the funny thing is now that I think about it (and I have before briefly..but it now makes more sense)....the low interest rates are now going to be the causal factor for our potential bigger recession (than the last few years), why.
Well, if everyone got into debt, and are now DEPENDENT on low interest rates, and can barely make ends meet as they can now...right?
What happens when those rates go up...to those which have variable, to those living off credit cards, to those who wanna borrow for other things,; cars
Bad things. Or at least the potential. Except its amare 1st year potential, not wendall bryants.
With no money to spend right now, and costs going up with interest rates a crunch will ensue.
Yes I guess inflation can help that out, but its not a good way to go about it. Gosh this sucks.
I think the guy is right on with what he says, and the fact it has been said by many over the past few years in certain circles, and now is reaching the mainstream means it is closer to reality than further away. That in of itself it bad.
Well just keep plugging away, and hope for the best, but if you have the means I'd take precautions...currency, gold, and get rid of your debt. Take a higher fixed rate, then any variable will give you, because quite frankly you're dealing with the devil with variable interest rates at this point in time.
Economists predict strongest holiday season in 4 yearsMSNBCNov. 24 - Cecilia Tosh is the kind of well-organized person whom harried Christmas shoppers love to hate. A single mother in Nashville, Tenn., who holds down a full-time job while working on her college degree, Tosh said she generally finishes her Christmas shopping by early September.
“I’ve gotten in the habit of going all year round,” said Tosh, 40. “But I get really serious in July or August.” Looking for bargains at Wal-Mart during the off-season and shopping by mail help her avoid the “madness” of holiday shopping, especially now that she has an 11-month old son.
The only drawback? “I usually forget where I’ve hidden something, and then I have to go back out and buy something else,” she said. “I’m really good at hiding things.”
Tosh is an extreme case, but the holiday shopping season definitely is expanding. Sales that once were heavily concentrated in the five weeks between Thanksgiving and Christmas now are likely to occur anywhere from early November to mid-January.
“The whole season is polarizing,” said Carl Steidtmann, chief economist at Deloitte Research. “People are trying to get away from the insanity of it.”
The advent of pre-holiday sales and the rising popularity of gift cards are two factors that have been enticing people to the malls earlier in the season and after Christmas. Retailers join in by putting up their holiday decorations beginning in October, much to the annoyance of many consumers.
Still, there is little doubt that stores will be packed Friday for what is still the biggest event on the retail calendar — if not the absolute biggest day for sales. And as shoppers begin pounding on the doors early Friday morning, anticipation will be high among retailers, who are hoping for the best holiday season in at least four years.
After last year’s lackluster holiday season, many forecasters expect sales of general merchandise to grow 6 or 7 percent over last year’s level, which would make it the best season since 1999.
“Everything is coming into place to create a strong holiday season,” said Mark Vitner, senior economist at Wachovia Securities. “The economy is clearly gaining momentum. … Consumer confidence is rebounding. The stock market has been up.”
Even the weather has been cooperating across much of the nation, Vitner said, pointing to recent subfreezing temperatures, which he said is a prerequisite for sweaters to move off the shelves.
David Wyss, chief economist for Standard & Poor’s, agreed that consumers are likely to be in a much better mood than they were a year ago, when the Iraq war was looming, unemployment was rising and the stock market was suffering its worst losses in three decades.
“People have money,” Wyss said. “The jobs situation is getting better. I think they’re going to be out doing their best to keep retailers happy.”
While holiday season sales may be only modestly important to giant discount chains like Wal-Mart, the final two months of the year are critical to millions of retailers large and small, including traditional department stores, apparel stores, toy stores and jewelers. Conventional department stores do more than 26 percent of their business in the final two months of the year, while jewelers get nearly one-third of their revenues in the two-month period.
“A good holiday season can certainly make up for a bad year, and a bad holiday season can ruin what had been a good year,” Steidtmann said.
Overall, U.S. consumers are expected to spend about $217 billion this holiday season on merchandise excluding autos, gasoline and food, according to the National Retail Federation. That would be an increase of 5.7 percent and the best increase since the 8.2 percent surge in 1999.
“Americans appear to be ready to shop and ready to spend, just in time for the biggest shopping season of the year,” said Tracy Mullin, president and chief executive officer of the retail trade group.
Steidtmann, of Deloitte Research, is even more optimistic, expecting retail sales growth of 6.5 to 7 percent. Other analysts said they thought 4.5 percent sales growth was more likely.
Even 5 percent would be considered a strong result in an environment when prices of many consumer goods, including apparel and electronic items, have been heading lower. Retailers are hoping to fight against deflation by heading into the holiday season with the leanest inventories in years, analysts said.
“That is likely to mean fewer heavy discounts,” said Michael Niemira, senior economist at Bank of Tokyo Mitsubishi, which tracks chain-store sales closely.
That certainly is the hope of retailers, who every year try to strike the right a balance between tight inventories that create scarcity and promotional prices that keep shoppers coming through the doors.
“They want to be fairly well cleared out by Christmas,” said Wyss. “You don’t make any money on the stuff at the January sales.”
U.S. Dollar Drops to Another New Low Against Euro, Which Tops $1.32
Skeptical markets drove the U.S. dollar to another all-time low Thursday against the euro, with the European currency climbing above $1.32 for the first time.
The euro rose to a new high for a third consecutive day, breaking through Wednesday's record of $1.3178. It spiked up to $1.3237, then subsided slightly to trade at $1.3217 by late afternoon.
The current dollar slide, driven primarily by concerns over the U.S. trade and budget deficits, has taken the euro from $1.20 about two months ago. It rose above the $1.31 mark for the first time Tuesday.
While a weekend meeting of the finance officials from the Group of 20 industrial and developing countries failed to deliver any signal of concerted action to stem the tide, economists say no specific event is pushing the U.S. currency down this week.
"It's just anti-dollar sentiment," said Lee Ferridge, chief currency strategist at Rabobank in London. "The trend is continuing."
Well post election I find myself turning slightly more to the right.
I think it is now time to do some deep spending cuts...even stuff I support like social programs need to take a hit. It won't be popular but it needs to be done.
It is going to have to come down to less spending or higher taxes. I personally hope for less spending.
Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
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.
I work in the mortgage field and I can tell you first hand anyone buying a 800000 home on an interest only variable mortgage right now is in for a biblical type, old time arse kicking.
I personally haven't done many but I know a ton of so called professionals that have sold them with the justification being rates have been so low so long that it was stupid not to finance that way.
That logic was fine if you were say in the early to mid 80's as basically anyone on an adjustable rate loan would have tended to save much much more than a fixed rate obtained then.
The problem with that logic is that rate periods tend to last very long times. Rates are good for a long long long time then it goes the other way.
You have to find external forces of sufficient magnitude in general to be able to see one of these things comming.
The last dramatic high rate periods correlated pretty closely to the baby boomers hitting their stride in first time home purchases. The resulting graying of that population towards a much less consumer driven age group has meant the pressures are off to some extent as well as very large gains in productivity.
Now most of our consumer goods that we find low prices on are made somewhere else. Those other places are experiencing a hug increase in growth that in turn is starting to ignite those markets with new purchasing power drained from us.
Once worldwide demand starts straining the system the inflation we experience we will have almost no control over. It will be self perpetuating and almost impossible for the even the Fed to stop and could lead to a return of stagflation that was the most awful thing ever loosed upon the planet not made up in some Godzilla movie.
The last leg of the table will be the credit leg and once the gigantic banks are hit with sufficient losses on the huge credit card balances the whole thing will tip due to a sudden cutoff in credit.
Suddenly banks will shut the spigot off and if you time the market to just that point by watching delinquency rates and loss rates at major banks you can make money from this.
When you see delinquency rates ramp up dramatically it is the time to play the market for a fall for all it is worth.
It isn't for the faint of heart and timing is everything but if you leverage yourself to the hilt betting on the crumble and it crumbles during a short window that you hit right you will be a millionaire.
You could play gold call options or similar safe haven investments but I think I would prefer to play the put type options and although I haven't studied the whole thing for the best plays I'd think major mortgage company puts or bank stocks might work. Again it would take a thorough analysis of just what stocks are teetering the highest and will fall the farthest the fastest and again options are extremely risky but as such will reap huge rewards if timed right and if this scenario plays out.
Calling the exact or near exact moment when it all hits the edge of the cliff is the lottery and these type things don't come around often so if you have the nerve I'd start studying up now and make your own decsions.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
or...... get some cash together now, wait for the delinquency bomb to hit, foreclosures clog the system and property gets real cheap real quick. Moving on up... to the East side.
__________________
In politics, nothing happens by accident. If it happens, you can bet it was planned that way.
Franklin D. Roosevelt
"Those who can make you believe absurdities can make you commit atrocities." --Voltaire
....Suddenly banks will shut the spigot off and if you time the market to just that point by watching delinquency rates and loss rates at major banks you can make money from this.
When you see delinquency rates ramp up dramatically it is the time to play the market for a fall for all it is worth.
It isn't for the faint of heart and timing is everything but if you leverage yourself to the hilt betting on the crumble and it crumbles during a short window that you hit right you will be a millionaire......
