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1. [verwijderd] 18 november 2003 13:11

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   Macro Passion by Stephen Roach (Morgan Stanley)
   
   Our annual global investment conference in Lyford Cay has become an
   important milestone in my own macro journey. Client sentiment at this
   gathering provides those of us at Morgan Stanley with invaluable insights
   into the markets and offers a unique sounding board for our own views. But
   this isn't just any conference. After 19 years, it has taken on a special
   character. Most of the attendees are repeat participants. And with that
   repetition comes familiarity -- almost like family. The feedback is fair and
   direct -- and often intense. Over the years, the dialog at Lyford Cay has
   become the marker by which I have learned to set my personal macro compass
   for the year ahead.
   
   The mood this year was cautious, risk-averse, and introspective. Largely an
   equity crowd, you would have thought that the surge in global stock markets
   over the past eight months would have put the group in a giddy mood. That
   was not the case. Yes, by a margin of two to one, the group thought 2004
   would be an up year in equity markets. But it was largely envisioned as a
   dull year of single-digit returns. I'll leave it to our market strategists
   to comment on the specifics of the recommendations that came out of the
   round-table at the end of this event. But from my perch, there was nothing
   "early-cycle" about the collective insights of this seasoned crowd; in
   particular, there was little interest in consumer durables and capital
   equipment. More focused on pharmaceuticals and healthcare, this was a group
   that was enamored of defensive, late-cycle ideas. It was almost as if it was
   time to play the downside of an economic recovery -- a recovery, of course,
   which has barely begun.
   
   Don't get me wrong. This was not a group that was willing to endorse my
   bleak view of the world. There wasn't an investor in the crowd who thought
   the US economy would grow by less than 3% next year. The case for deflation,
   which had blindsided this group just a few months ago, never even came up in
   the macro discussions. At the same time, few looked for a meaningful
   acceleration in inflation; instead they favored a scenario that depicted
   more of a gradual and relatively benign updrift in pricing (see Dick
   Berner's dispatch in today's Forum, "The Inflation Conundrum at Lyford
   Cay"). Reflecting that view, the group was on the fence insofar as Fed
   policy was concerned; however, of the 50% that were looking for a tightening
   next year, three-fourths thought any such action would be deferred to the
   second half. Nevertheless, the bond market was viewed as largely a one-way
   bet: By a margin of four to one, the consensus looked for yields on 10-year
   Treasuries to exceed 5% by the end of 2004. None of these are extreme views
   that threaten to derail financial markets. That didn't surprise me. This is
   a group that is paid to be fully invested. As such, it invariably favors
   soft landings in downturns and soft takeoffs in an upswing.
   
   As the house skeptic, with a seemingly chronic case of jetlag, maybe I'm
   guilty of selective recall. But as I attempted to back out the risks to the
   macro overlay from three days of discussions, I sensed far more concern than
   optimism. In the interest of full disclosure, I'll be the first to admit
   that I'm reading between the lines in drawing that conclusion. But over the
   years, my experience has taught me that that's exactly what you have to do
   to get the real message of Lyford Cay. The best economic scenario that
   emerged for the United States was a last-gasp surge in early 2004 driven by
   the second installment of the recently enacted fiscal stimulus. After then,
   even the growth bulls on the economy feared a sharp deceleration. At the
   same time, there was nearly unanimous sentiment that the dollar was headed
   lower. Byron Wien made an impassioned presentation of the bull case for the
   US currency, but there were no takers. The general sense of the group was
   that America's gaping current-account deficit had left the dollar in the
   early stages of a multi-year downtrend. Against that backdrop and in the
   context of the potential perils of competitive devaluation that a weak
   dollar might trigger, there was considerable interest in gold -- more so
   than I have seen at any year in this conference.
   
   Perhaps the most surprising commentary came from one of the perma-bulls. As
   a long-time attendee at the conference, he has repeatedly stressed the
   inherent resilience of the US economy and its financial markets. He was one
   of the first to grasp the powerful implications of 20 years of disinflation
   and the extraordinary ability of Corporate America to take advantage of that
   trend -- initially by lowering its cost of capital and eventually by riding
   the wave of accelerated productivity growth. His optimism is now gone. He is
   deeply concerned about an America that has lost its way. The excesses of
   debt and the shortfall of saving are at the top of his list. But he also
   waxed eloquently on the perils of massive trade deficits and the job losses
   they spawned. He found the erosion of America's manufacturing base
   especially disturbing. He was also convinced that Washington had gone past
   the point of no return in creating a fiscal train wreck. This was a minority
   view, to be sure. But it came from one of the savviest investors I know. And
   he swears he doesn't read my research.
   
   Those troubling views were expressed in the very first session of the
   conference. But they didn't really resonate with the group at large as the
   debate unfolded over the next few days. That was certainly the message from
   the macro conclusions described above. But the bearish view resurfaced with
   a vengeance in the final session of the conference -- our Saturday night
   rump-session at Lyford Cay. With the roundtable completed at midday, we had
   set aside some time before the final dinner to reflect on our collective
   discussions. About half the group remained at that point. The converted
   perma-bull had left for home. But the group picked up where he left off.
   With an emotional intensity that I have rarely seen at this conference,
   there was a deep sense of concern expressed about America's future.
   
   The elephant that had been in the conference room the whole time finally
   stomped out into the open. There was widespread fear that many of the most
   important icons of the American system were at risk of crumbling in this
   post-bubble climate of vindictiveness. It wasn't just the Wall Street
   scandals. It was also the Enron-led accounting scandals and the damaged
   credibility of the New York Stock Exchange. The litany of a seemingly
   open-ended crisis in corporate governance and the political backlash it has
   spawned deeply troubled these investors. So, too, did America's
   mis-adventures in Iraq, the latent fear of another terrorist attack, and the
   ominous rumblings of protectionism -- especially America's
   politically-inspired imposition of steel tariffs and the more recent
   outbreak of China bashing. I will confess to playing the role as something
   of a provocateur in that part of the discussion. But it didn't take much to
   open the floodgates of angst. There was also a philosophical discussion of
   the deep flaws of America's debt-driven culture. Related concerns were
   expressed over the post-bubble response of the Fed -- interest rates that
   are far too low to inhibit the appetite for excess leverage. Another
   
2. [verwijderd] 18 november 2003 13:12

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   Related concerns were
   expressed over the post-bubble response of the Fed -- interest rates that
   are far too low to inhibit the appetite for excess leverage. Another
   investor stressed that the American consumer -- long the mainstay of a
   US-centric global economy -- was literally living on borrowed time. With the
   last of America's five home mortgage refinancing cycles behind us, he
   suggested there's good reason to worry about the staying power of
   increasingly wealth-driven American consumers.
   
   That unleashed a torrent of counter-attacks in defense of the American way.
   The most passionate case seemed to borrow a page right out of "The End of
   History and the Last Man" by Francis Fukiyama (Free Press, 1992). With the
   demise of communism, the triumph of market-based capitalism was argued to be
   the functional equivalent of permanent support for the US-centric growth
   model of the global economy. US current account deficits were depicted as
   being only symptomatic of how feeble the rest of the growth-impaired world
   really is. Even if it takes more debt for America to continue to pull the
   rest of the world along for the ride, so be it. After all, claim the
   optimists, the one thing non-US economies can do is fund America's external
   imbalances and keep US interest rates down. If that's the case, never mind
   the so-called excesses of the American consumer. As one investor quipped,
   "We can always be counted on to go down to the mall and support the global
   economy." In the end, it turned out that by a thin margin, even the
   sentiment in the rump session was skewed toward a US economy that continues
   to finesse its ever-mounting twin deficits.
   
   Maybe I'm making too much out of all this. But over the years, my experience
   has taught me to pay much greater attention to the body language of the most
   passionate investors than to the results of the various polls we conduct in
   an effort to glean insights into consensus thinking. Of course, it's always
   easy to "game" the consensus at this conference. The now infamous "Curse of
   Lyford Cay" suggests that the consensus is invariably wrong on the big views
   in which there is most agreement. To the extent the curse is alive and well,
   that points to two possibilities -- a sharp further upside move in world
   equity markets or an equally sharp downside breakout. I know where I'm
   leaning.