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Roach's private forecast scares Boston money guys, who root for inflation

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  • GATAComm@aol.com
    On State Street: Economic Armageddon predicted By Brett Arends Boston Herald Tuesday, November 23, 2004
    Message 1 of 1 , Nov 23, 2004
      On State Street: Economic 'Armageddon' predicted

      By Brett Arends
      Boston Herald
      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.

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