Tags: Roach | US | safe | investing

Yale’s Roach: US Isn’t the Oasis That Investors Think It Is

Thursday, 28 June 2012 10:16 AM

The U.S. economy and markets are not the safe harbors they appear to be despite a raging European debt crisis and cooling Asian economies, says Stephen S. Roach, former chairman of Morgan Stanley Asia and current Yale economist.

Yields on U.S. Treasury notes have plunged as investors sought refuge from global volatility in U.S. debt, briefly dipping below 1.5 percent in recent trading.

Meanwhile in Europe, yields in Spanish government auctions topped 7 percent recently, a level often deemed unsustainable by markets and suggesting a need for a bailout of some type.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

That doesn't mean the U.S. can brand itself as an oasis in a turbulent world, as in reality, the U.S. is part of one global market and one global economy.

"Since the first quarter of 2009, when the U.S. economy was bottoming out after its worst postwar recession, exports have accounted for fully 41 percent of the subsequent rebound. That’s right: with the American consumer on ice in the aftermath of the biggest consumption binge in history, the U.S. economy has drawn its sustenance disproportionately from foreign markets. With those markets now in trouble, the U.S. could be quick to follow," Roach writes in a Project Syndicate column.

"Not surprisingly, Asia led the way, accounting for 33 percent of the total U.S. export surge over the past three years. The biggest source of this increase came from the 15-percentage-point contribution of Greater China (the People’s Republic, Taiwan, and Hong Kong)," Roach says.

"Needless to say, China’s unfolding slowdown – even under the soft-landing scenario that I still believe is most credible – is taking a major toll on the largest source of America’s export revival."

Since the second quarter of 2009, U.S. annualized real gross domestic product growth has averaged 2.4 percent, with exports accounting for 40 percent of that increase.

Discount exports, and the economy has grown at a sluggish 1.4 percent pace, Roach says.

Further drops in overseas demand for U.S. goods and services could slow the U.S. economy to stall speed, in which like a plane that moves too slowly, the economy sputters and tanks.

"In an era of globalization, there are no innocent bystanders," Roach concludes.

"There are certainly no oases of prosperity in the face of yet another major shock in the global economy. America’s growth mirage is an important case in point."

One high-profile investor warns the U.S. can't keep boasting to be the cleanest of the dirty shirts in the pile.

High debt burdens can wipe out the country's status as an oasis market, says Bill Gross, founder of Pimco, manager of the world's largest bond fund.

"There are very few clean dirty shirts in this world. Timing in investment markets is critical and at the moment the U.S. is considered to be the cleanest. That’s why Pimco owns them. But things change," Gross writes in a monthly investment outlook.

"A blossoming rose wilts over time. A good name can be slandered, a great opportunity to change fiscal direction squandered within a few short years. This debt crisis should be considered global as opposed to regional, and investors should recognize that clean dirty shirts are not forever thus. Over time, they may have to change their name, their rating, or at least their reputation as a clothes horse."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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