Yesterday, in a turnaround reminiscent of the 1960’s film “Cool Hand Luke, “the bosses at Morgan Stanley finally succeeded in getting poor old Stephen Roach’s mind right. For years Mr. Roach had caused headaches up and down Wall Street for his stubborn “failure to communicate” the upbeat messages so vital to the investment trade. Instead he was one of the most influential voices calling attention to the dangers of America’s lack of domestic savings and production, growing current account imbalances, and reliance on asset-based consumption. The more upbeat Stephen Roach now anticipates the rosy “soft-landing” scenario.
What happened to cause him to finally make lemonade from all those economic lemons? Why the G-7 and the IMF finally acknowledged that global imbalances represented a potential problem. So Stephen Roach does a complete 180 simply because a loose affiliation of government policy makers reluctantly admitted the obvious? Since when does acknowledging a problem imply its solution?
Lyndon Johnson declared war on poverty in the 1960’s and the last time I check poverty was still winning. I suppose the nail biting at Apollo 13 mission control should have ended once Jim Lovell declared “Houston we have a problem.” According to Roach, there is no need for Alcoholics Anonymous, as the meetings should all adjourn immediately following the standard introductions, “Hello my name is Uncle Sam and I’m an alcoholic (or more appropriately spendaholic.)” Sure admitting that one has a problem is the first step in a long journey, but admission in and of itself does not immediately imply its successful completion; especially if one celebrates his first AA meeting by toasting it.
The most interesting aspect of his fox-hole conversion is his timing. Never before has his doomsday scenario been so close to unfolding or his bearishness so close to vindication. With the dollar resuming its fall, foreign central banks raising rates and seeking to diversify their reserves, housing supply overwhelming demand, and gold and other commodity prices soaring out of control, one would think Mr. Roach would finally be in the enviable position of saying “I told you so.” Instead he has changed his tune, and now sings in near perfect harmony with Wall Street’s “All Bulls Choir.”
Not only are the economic imbalances to which Stephen Roach repeatedly referenced still present, they loom larger than ever. Rather than swallowing their medicine, Americans continue choking on it. Roach can see this as clearly as I can, making his new stance difficult to understand. For my money Wall Street’s most popular bear finally turning bullish is as bearish an indicator as I have ever seen, and may go down as the most ill-time capitulation in market history.