NEW YORK (HedgeWorld.com)-Stephen Roach, Morgan Stanley’s chief economist, warned that the out-of-whack world economy sooner or later will move into a correction, in part through the inability of U.S. consumers to maintain current spending levels with their heavy dependence on borrowing.
Speaking at a forum organized by Drake Management LLC, a fixed-income hedge fund and traditional portfolio manager, Mr. Roach presented a darkening picture of economic imbalance in line with arguments he has made for a couple of years. Also at the forum, former National Security Adviser Zbigniew Brzezinski described a potential geopolitical disaster due to American policy mistakes.
There was little to reassure the many investors in the audience, as Mr. Roach’s analysis suggested interest rates will rise uncontrollably when Asian creditors finally reduce their U.S. dollar-denominated assets, and equity markets will weaken as demand slumps.
In his scenario, even commodities offer no haven-their prices are likely to soften as Chinese growth slows. Only oil emerged as a possible good bet, due to severe energy shortages in China that may keep up demand despite the slowdown.
As Mr. Roach sees it, the American consumer and the Chinese producer have been the two pillars of global economic growth, but both have now reached their limits. China acted as an engine of growth in Asia, while the United States accounted for most of the world’s gross domestic product growth.
He depicted the Federal Reserve’s low interest-rate policy and the federal budget deficit as extraordinary stimuli that have kept the U.S. economy on “steroids.” But these nostrums already have been used to the maximum and consumers have taken on unprecedented levels of debt, he said.
Meanwhile, the economic recovery did not create anywhere near as many jobs as past recoveries had. Moreover, the growth of real wages and salaries during the recent surge fell far short in comparison to past business cycles, hampering consumer spending.
Drake Chief Investment Officer Anthony Faillace asked what triggers investors should look for that could throw the economy into recession. Mr. Roach said while macro forces create tensions, a variety of events such as oil shocks or an outbreak of protectionism could act as triggers.
Asked what he advised for asset allocation, Mr. Roach said he agreed with Morgan Stanley’s official recommendation to be overweight in Europe and Japan and underweight in U.S. securities, but that he favored a more defensive position with respect to the equity/bond allocation. “I am enamored of consumer staples” like flour, he added, presumably tongue-in-cheek.
For his part, Mr. Brzezinski suggested a comprehensive change in course for U.S. foreign policy. Otherwise, he warned, the country may be engaged in an expensive, prolonged and debilitating adventure in a large part of the world. It will do this by itself, having alienated its allies.
He said America should stop violating a fundamental principle: “Do not unite your enemies; unite your friends.”
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