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Sunday, 13 January 2008

Stephen Roach is forecasting a recession

The Financial Times this week ran a column by Stephen Roach of Morgan Stanley, who spelled out why assumptions of "easy asset appreciation" are the root folly of the stock market and real estate bubbles. He also offered a forecast of sorts, best summed up by this sentence:

"It is going to be a very painful process to break the addiction to asset-led behavior."

By way of contrast, there's no "painful process" ahead that I can infer from Fed Chairman Bernanke's latest remarks, which included: "The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth."

As for why Stephen Roach is forecasting a recession, he can speak for himself:

As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies. Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.

Mind you, the key word in the quote above is "protracted" -- home prices already declined some six percent in the 20 major metropolitan areas of the U.S. in 2007. In other words, millions of people are not simply failing to see the appreciation they expected; in fact, their asset prices are in decline.

Successful investing is hard, and good investment opportunities are hard to come by. Walk away quickly from anyone who says otherwise.

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