Roach Enters the Temple of Doom

Uff, it is getting increasing more chilly amongst the economic commentators at the moment. I thus present you the recent note by chief economist at Morgan Stanley Stephen Roach on the Great Unravelling. As is the case with Roubini, Roach outlines a nasty scenario for the US and global economy and also throws in dose of hindsight on central banking taking a swing at the Maestro himself. Scary reading but it is funny how these kind of projections seem to be more and more acceptable as we move forward with the whole mess in the US housing markets, is it not? Here is an excerpt from Roach's piece.

From bubble to bubble – it’s a painfully familiar saga.  First equities, now housing.  First denial, then grudging acceptance.  It’s the pattern and its repetitive character that is so striking.  For the second time in seven years, asset-dependent America has gone to excess.  And once again, twin bubbles in a particular asset class and the real economy are in the process of bursting – most likely with greater-than-expected consequences for the US economy, a US-centric global economy, and world financial markets.

Sub-prime is today’s dot-com – the pin that pricks a much larger bubble.  Seven years ago, the optimists argued that equities as a broad asset class were in reasonably good shape – that any excesses were concentrated in about 350 of the so-called Internet pure-plays that collectively accounted for only about 6% of the total capitalization of the US equity market at year-end 1999.  That view turned out to be dead wrong.  The dot-com bubble burst, and over the next two and a half years, the much broader S&P 500 index fell by 49% while the asset-dependent US economy slipped into a mild recession, pulling the rest of the world down with it.  Fast-forward seven years, and the actors have changed but the plot is strikingly similar.  This time, it’s the US housing bubble that has burst, and the immediate repercussions have been concentrated in a relatively small segment of that market – sub-prime mortgage debt, which makes up around 10% of total securitized home debt outstanding.  As was the case seven years ago, I suspect that a powerful dynamic has now been set in motion by a small mispriced portion of a major asset class that will have surprisingly broad macro consequences for the US economy as a whole.

So am in there with the other bears feasting on the subprime carnage in the temple of doom? Not yet, but I am definitely in the neighbourhood.