Stephen Roach

Updated for Krugman's sociopathological response

Niall Ferguson "In my view Paul Krugman has done fundamental damage to the quality of public discourse on economics. He can be forgiven for being wrong, as he frequently is--though he never admits it. He can be forgiven for relentlessly and monotonously politicizing every issue. What is unforgivable is the total absence of civility that characterizes his writing. His inability to debate a question without insulting his opponent suggests some kind of deep insecurity perhaps the result of a childhood trauma. It is a pity that a once talented scholar should demean himself in this way."

The politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. But will it work? Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

Following David Einhorn's take-down of the great and glorious Oz Larry Meyer eighteen months ago, the latter has been in training - readying his counterfactual counter-punches and controlling his ire. The king of Keynesianism just had his bell rung once again by a market realist and pragmatist as Stephen Roach destroyed the "if-we-don't-have-models-we-are-making-it-all-up" maestro and his constant diatribe of counterfactual crap. "Where's the beef, Larry?" Roach asked on CNBC this morning, which was followed up with a rabbit punch from Kiernan, "and what about Christina Romer's stimulus-employment model?" The visibly shaken (seriously watch the clip) Meyer falls back once again to a defensive pose - and while practically admitting that the Fed is impotent - as he pulls out the ultimate "but without our models we would not be able to tell you how much worse it would be without the Fed interventions". Roach takes this weak cross to the chin and comes over the top with a devastating "mark your models to market in light of what the economy has done over the four and a half years, the traction from monetary policy has been the major disappointment of this so-called post-crisis recovery." TKO.

Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"

In the last year, consensus EPS for 2012 among those oh-so-smart equity analysts has been crushed from over $113 to under $104 but multiple expansion has held the index together on the back of the hopes and dreams of a hockey stick recovery in Q4 thanks to a 'this-time-is-different' response to NEW QE at some point. Goldman has a different perspective. The Earnings Revision Leading Indicator points to a dramatic drop in ISM as micro data not just comfirms macro data but notably points to further weakness. Of course this will be eaten up by all asunder as bad-is-good but worse-is-better, but we worry that the scope of the drop is extreme and given a far more 'aware' market (as Stephen Roach alluded to) that this hole might just be too large this time.

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today's brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt - which all the monetray stimulus in the world is not going to change - that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ's Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is "dangling QE in front of the markets like raw meat - but it has not worked and it will not work!" But critically, he believes, the euphoric response of markets will be tempered since they have become "used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be."

"Bernanke is betting the ranch on open-ended QE and zero interest rates and it worries me" is how Stephen Roach of Morgan Stanley starts this must-see reality-check interview with Bloomberg TV's Tom Keene. The reason for his concern is simple, the current Fed modus operandi is a framework for rescuing economies in crisis but does little to sustain economic recovery. Roach agrees with Cal's Eichengreen that the European and US central banks are indeed in a policy trap, committed to a path of action that has to be perpetually ante'd up to maintain the dream. With Europe in recession already in his view, Roach does not expect the tough structural action until we see greater social unrest or overwhelming unemployment and reminds us of how close we got when Greece threatened the referendum in the late summer. He goes on to discuss China (positive on their efforts and 'solid strategy') and it's relative success as a regime which he contrasts with our "central bankers who pull the wool over our eyes with ZIRP and magical QE". Taking on the mistakes of Greenspan, letting capitalism go unchecked, and his incredulity at the 'glide-path' charts we were treated to yesterday by the Fed's bankers ('accountability'), Roach sees the painful process of deleveraging from excess debt, insufficient savings, and over-consumption as likely to take a long time as we should not assume investment will be the driver as Obama goes 'protectionist' (in the SOTU) on our 3rd largest export partner - yes, China.

All you need to read.

All you need to read.

All you need to read

Relevant news

In a surprising turn of events, today's biggest piece of news received a mere two paragraph blurb on Reuters, and was thoroughly ignored by the broader media. An announcement appeared shortly after midnight on the website of the People's Bank of China. Reuters provides a simple translation and summary of the announcement: "China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency's international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily." To all those who claim that China is perfectly happy with the status quo, in which it is willing to peg the Renmibni to the Dollar in perpetuity, this may come as a rather unpleasant surprise, as it indicates that suddenly China is far more vocal about its intention to convert its currency to reserve status, and in the process make the dollar even more insignificant.

On December 7, 2009, I sent out a warning from our Managing Director, JS Kim, to thousands of people via email about the deterioration of the global economy that he had discussed for years that the great majority of people were ignoring. Here is my latest interview with Mr. Kim that updates his views on his central thesis about a burgeoning economic disaster in the US.

Timmy took a big doo doo on the rest of the World as he pressed fellow Finance Ministers into (in theory) setting mechanisms to address trade balances (which means export countries need to strengthen their currencies against the dollar) while importing countries (like US) should not try to manipulate their own currency. Well, that sounds reasonable EXCEPT, before the ink is even dry on the G20 release, Timmy flies off to China to get them to commit to revalue the Yuan...