During the early stages of the
housing bubble Morgan Stanley's Stephen Roach was one of the few sane voices
on Wall Street. His warnings about the global economy were clear and
obviously true, and his willingness to bite the hand that fed him was
admirable. The guy had guts. In early 2006 I had the following article all
ready to post:
The Bravest Man on
Wall Street
People tend to lump the big-name
critics of the U.S. economy together, and assume that they're all coming from
the same place and somehow benefiting, one way or another, from their points
of view. But that's not true. It's relatively easy for a Bob Prechter or Doug Noland or Marc Faber to hold to their
positions for years while their truth gradually dawns on the rest of us,
because they more-or-less run their own shows. The might lose a few
investors, but they don't face institutional resistance from above and below.
That's why Morgan Stanley's Stephen
Roach deserves our admiration. He doesn't work for a short seller and he's
not the author of best selling gloom-and-doom books. He works for a big,
mainstream investment bank, where optimism is golden and pessimism scares
clients, lowers trading volumes and eventually gets you fired. To grasp the
truth of this you have to understand the internal structure of an investment
bank. It's made up of bankers who do deals, traders who trade, and
salespeople who convince money managers and other traders to buy the firm's
securities. None of these guys likes the idea of a global economic meltdown.
In fact they hate sell recommendations in general.
For a salesman, getting a client to
buy a given stock or bond builds a relationship and creates an ongoing income
stream. At the very least, knowing a customer likes a given security allows
the salesman to sharpen the pitch for the next call. On the other hand, if a
customer sells everything and goes to cash, that's it. They don't need
updates and you have no way of knowing what to offer them by looking at their
holdings. Your income goes down, maybe you get fired, and you blame the
senior strategist who terrified the money manger into doing this.
It's the same with investment
bankers. If investors are selling rather than buying and the overall market
is falling, there's no demand for new IPOs. So investment bank economists who
predict trouble and aren't immediately proven right tend to be escorted to
the door by security.
And yet here's Stephen Roach, coming
out every week with some new take on the chaos sure to result from growing
global financial imbalances. A couple of years ago he is said to have told a
group of Boston money managers that a global meltdown was a near-certainty...
Then, in May of 2006, Roach threw in
the towel:
Former
bear turns bullish on global economy
The world economy may be able to
unwind its current imbalances without serious disruption, Stephen Roach,
Morgan Stanley's famously bearish chief economist, predicted on Monday, in a
remarkable revision to several years of gloomy prognosis.
Mr. Roach had long warned that the US
current account deficit and Asian central banks' ballooning currency reserves
risked destabilizing the global financial system.
But on Monday, in a note to clients, he said: "I must confess
that I am now feeling better about the prognosis for the world economy for
the first time in ages." His comments came as the dollar hit a one-year
low against the euro and seven-month low against the yen, as investors
remained confident the US Federal Reserve was nearing the end of its
interest-rate-tightening cycle.
I sadly filed the blog post away,
glad that I hadn't published it just before Roach's apostasy. And over the
next couple of years it became clear that this was a sign of a market top. By
2008 the global economy was melting down and Roach was no doubt haunted by
visions of the superstar he would have become if he'd only held on a little
longer. You don't see that much of him these days.
Now fast-forward to April 2011. The
markets are rocking, the risk trade is back on with a vengeance, and bears
are suffering through the same death-by-a-thousand-cuts as in 2006. Stephen
Roach has been replaced by David Rosenberg, former Merrill Lynch economist
and now senior strategist and economist at Gluskin Sheff in Toronto, as the most prominent institutional
bear. In clear, well-reasoned reports, he's been predicting doom for the
economy and the stock market, only to see everything just keep on rising.
And now he's switched sides:
David Rosenberg
Turns Bullish
After trying to call the top in
equities every other week for the last two years, David Rosenberg has finally
thrown in the towel on the bearish calls. In his Wednesday research report he
detailed why he believes equities have achieved a "holy grail" and
should continue to move higher:
"On a very near-term basis, and
despite my long-standing macro concern list, which has not gone away, it does
look like the market is set to rise further. The technicals
are suggesting as much, though I do await what Walter Murphy may have to say
on the matter. I had said before that a breakout to new highs led by higher
volume would be an important technical signpost. Well, we achieved that Holy
Grail yesterday - both in level terms and with respect to the change. This is
not throwing in the towel, it is an acknowledgment of what the market
internals are flashing at the current time from a purely tactical and
technical standpoint....
...All that said, we had a breakout
to new highs yesterday and this time, the volume rose on the major exchanges,
not to mention rising above the 50 DMA on the Nasdaq,
which is a clear sign that the big boys are putting money to work. This
market continues to impressively climb a wall of worry. Market internals are
too strong to ignore right now - the NYSE advancers beat decliners by a 3 to 1
ratio yesterday; the Dow transports soared 1.9%; and the small caps beat
their major benchmarks. My overall macro concerns have not gone away, but
these market facts on the ground are tough to ignore."
Okay, not exactly an exuberant call
for Dow 36,000, but still remarkable after all the gloom and doom Rosenberg
has published in the recent past. So is this one of those capitulations at
the top that we'll look back on as a signal to mortgage the house and short
everything in sight? Who knows? But it sure is interesting...
John Rubino
DollarCollapse.com
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