Mr. Roach is a sharp guy with a vast knowledge of Asia, one of the reasons MS kept him around as chairman of Morgan Stanley Asia. However....when the U.S. retaliated against China for China's trade practices Mr. Roach seemed to have lost a half-step, focusing on the next quarter rather than the next quarter-century (as the pension/insurance crowd is fond of saying, if not doing) and was too dovish in his estimation of the effects of U.S. tariffs on the Chinese economy.Via Project Syndicate, December 23:
Because of that we haven't linked to him since July 2017 after years of visiting him for his thoughts on possible futures.*
But now he's back to doing what he does so well, getting his audience to think about the picture on the horizon rather than the one immediately in front of one's nose....
It doesn't take much to spark corrections in
vulnerable economies and markets, and big shocks to highly vulnerable
systems are a recipe for crisis. That's why the vulnerability of today's
global economy – reflected in real economies, financial asset prices,
and misguided monetary policy – needs to be taken seriously.
NEW HAVEN – Predicting the next crisis – financial or economic – is a fool’s game. Yes, every crisis has its hero who correctly warned of what was about to come. And, by definition, the hero was ignored (hence the crisis). But the record of modern forecasting contains a note of caution: those who correctly predict a crisis rarely get it right again
The best that economists can do is to assess vulnerability. Looking at imbalances in the real economy or financial markets gives a sense of the potential consequences of a major shock. It doesn't take much to spark corrections in vulnerable economies and markets.
But a garden-variety correction is far different from a crisis. The severity of the shock and the degree of vulnerability matter: big shocks to highly vulnerable systems are a recipe for crisis.
In this vein, the source of vulnerability that I worry about the most is the overextended state of central-bank balance sheets. My concern stems from three reasons.
First, central banks’ balance sheets are undeniably stretched. Assets of major central banks – the US Federal Reserve, the European Central Bank, and the Bank of Japan – collectively stood at $14.5 trillion in November 2019, which is down only slightly from the peak of around $15 trillion in early 2018 and more than 3.5 times the pre-crisis level of $4 trillion. A similar conclusion comes from scaling assets by the size of their respective economies: Japan leads the way at 102% of nominal GDP, followed by the ECB at 39%, and the Fed at a mere 17%.
Second, central banks’ balance-sheet expansion is essentially a failed policy experiment. Yes, it was successful in putting a floor under collapsing markets over a decade ago, in the depths of the crisis in late 2008 and early 2009. But it failed to achieve traction in sparking vigorous economic recovery.Central banks believed that what worked during the crisis would work equally well during the recovery. That didn’t happen. The combined nominal GDP of the United States, eurozone, and Japan increased by $5.3 trillion from 2008 to 2018, or only about half their central banks’ combined balance-sheet expansion of $10 trillion in over the same period. The remaining $4.7 trillion is the functional equivalent of a massive liquidity injection that has been propping up asset markets over most of the post-crisis era.
Third, steeped in denial, central banks are once again upping the ante on balance-sheet expansion as a means to stimulate flagging economic recoveries. The Fed’s late 2018 pivot led the way, first reversing the planned normalization of its benchmark policy rate and then allowing its balance sheet to grow again (allegedly for reserve management purposes) following steady reductions from mid-2017 through August 2019. Asset purchases remain at elevated levels for the BOJ as a critical element of the “Abenomics” reflation campaign. And the recently installed ECB president, Christine Lagarde, the world’s newest central banker, was quick to go on the record stressing that European monetary authorities will “turn (over) each and every stone” – which presumably includes the balance sheet.
So why is all this problematic?.......MUCH MORE
*OTOH, here's an immediate-term call from Wednesday September 3, 2008:
Morgan Stanley's Roach Says Slump Has Only Just Begun
Very timely.
Perhaps not as insistent as Albert Edwards:
On September 5, 2008 we posted "Meltdown"-Société Générale" which linked to Albert's research note of a couple days earlier:
***Alert****Economic and equity market meltdown imminent****Alert***
but a good call:
On September 7, 2008 Fannie Mae and Freddie Mac were placed into conservatorship.
On September 14, 2008 Merrill Lynch agreed to be acquired by Bank of America to avoid a Reg. T shut-down when markets re-opened.
On September 15 Lehman filed their bankruptcy petition.
On September 16 AIG became a 79.9% subsidiary of the U.S. Treasury.
Within 10 more days the Nation's largest thrift, WaMu was seized and five days later Wachovia gobbled up.
Good times, good times.
