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Wednesday, November 24, 2004

Economic Armageddon

From the Boston Herald:
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."
(rest of article)

The dollar hit a new low against the euro overnight. Here's how many euros your buck has been worth for this decade so far:

The chart below shows that over the last six months, while the Dow Jones industrial average (red) has risen some 5%, the dollar has fallen about 8% against the euro. This means that the Dow has actually declined for European investors (and probably for Asian investors as well)--they would have been better off sticking their euros under their mattresses than investing them in the U.S. stock market. But a huge part of the rise of US financial markets since 1993 has come from foreign investment. It seems logical to assume that we're very close to a global run on the bank--the bank being all securities valued in dollars. If you could get 3/4 of a euro for your dollar today, but probably only 1/2 of a euro for it next month, wouldn't you want to make the deal now?

The U.S. economy may the largest house of cards in history, and the wind is picking up just as our "government" is busy removing cards from the foundation. I doubt if there's any way to stop the house from collapsing. We can, however, do our best to survive and see that a much better house gets built in its place.