Saturday, January 24, 2009


Morgan Stanley Asia Chairman Stephen Roach said that the worst of the current recession is still ahead for investors and consumers and the economy won't likely be made better by the deficit spending plan by the new U.S. President Barack Obama.

"There is no V-shaped recovery coming for us," Roach told CNBC. "The worst is ahead for the real economy in the United States. Past spending excess has pushed up the consumer portion of the GDP to 72 percent. It is down one point now by my calculations."

Roach said government spending will not help and that more layoffs and bank write-offs of toxic assets are forthcoming.

Further declines in consumer spending may well occur, with only 20 percent of the decline, felt at Christmastime by retailers, behind us now.

Unemployment also is likely to rise. "We are at 7.25 now," said Roach. "The odds are we will pierce 9 percent. What type of recovery are we going to have? A weak one. A subdued recovery. The growth rate will be so weak that the unemployment rate keeps climbing."

Roach said there may be a temporary tick up in economic confidence due to the inauguration of the new president of the United States.

"The switch in the president is important in getting confidence back," said Roach. "But beyond that, it's a crapshoot."

Roach said this current economic crisis is now a year-and-a-half old. Yet, the government keeps offering the same old solutions.

"The response has been one liquidity injection or one capital injection after another. But we just don't seem to be getting out of this hole. The toxic assets have a scope and breadth beyond what the authorities have conceded or contemplated," Roach said.

Not every economist agrees with this gloomy view. John P. Hussman of the Hussman Funds in a note to investors said that the markets are starting to show a return of cautious optimism.

"I do view stocks as relatively undervalued, but we have to be aware of the historical tendency for markets to overshoot on the downside in difficult conditions," said Hussman.