Morgan Stanley's Chief Economist Andy Xie: "U.S. Headed for Recession & Stagflation"

Discussion in 'Wall St. News' started by ByLoSellHi, Sep 20, 2006.

  1. U.S. Recession on Horizon, Morgan Stanley's Xie Says (Update2)

    By Hans van Leeuwen and Haslinda Amin

    Sept. 15 (Bloomberg) -- The U.S. economy may fall into recession in 2008 as ``inflation pressure'' drives up borrowing costs next year, Morgan Stanley's chief Asia economist Andy Xie forecast.

    Xie said the U.S. Federal Reserve policy makers have so far persuaded investors that they will contain inflation, helping keep yields on 10-year notes below 5 percent. U.S. consumer prices will increase more than expected, Xie predicts, prompting a bond market selloff.

    ``We're headed for stagflation because the bond market believes the Fed,'' Xie said in an interview today on the sidelines of the International Monetary Fund annual meeting in Singapore. ``Recession will happen when the bond market sees through the Fed and sells off. People will have nowhere to borrow money anymore.''

    Xie's view is darker than the predictions published yesterday by the IMF, which also expects a slowdown in the U.S. He says that inflation will persist because of rising prices in Asia, whose growth will fuel the global expansion next year.

    ``Inflation is not going away at all,'' said Xie. ``It's coming from land prices in Asia, and that's feeding into production costs.''

    Rising Risks

    The IMF yesterday said that inflation, oil prices and the risk of an abrupt drop in U.S. housing prices the strongest global expansion in three decades. The fund cut its prediction for U.S. growth next year to 2.9 percent from the 3.3 percent it forecast in April. That would be the weakest since 2003.

    Morgan Stanley's New York-based chief economist, Stephen Roach, said that while he didn't share Xie's view, the ``odds of a U.S.-led global recession are rising in the 2007-08 period and cannot be taken lightly.'' David Rosenberg, chief North America economist at Merrill Lynch & Co., forecasts a 45 percent risk of a U.S. recession next year.

    U.S. government 10-year bonds are yielding 4.77 percent and consumer prices rose 4.1 percent in July from a year earlier. The average rate on a 30-year fixed mortgage was 6.32 percent last week, close to the lowest since March.

    ``The bond market is not sustainable because inflation pressure is quite strong, so at some point next year the bond market will go down and the yield will go up,'' Xie. ``At that time, the U.S. economy will be in a tough spot.''

    The Federal Reserve left interest rates unchanged at 5.25 percent at its last meeting on Aug. 8 after 17 consecutive increases since June 2004. The U.S. accounts for more than a quarter of the world economy.

    Chinese Growth

    Asia may be insulated from a U.S. recession at first, as China's high savings rate could fund continued investment in the world's fourth-largest economy.

    ``But if the U.S. stays down for several years then China will also slow down, because in the end Chinese liquidity is based on exports,'' Xie said.

    The IMF forecasts the global economy will expand 5.1 percent this year, slowing to 4.9 percent in 2007. Both forecasts are 0.2 percentage points higher than its April estimates. Growth was 4.9 percent last year.

    U.S. economic growth slowed to an annualized rate of 2.9 percent in the second quarter, after expanding 5.6 percent in the first quarter. China's economy advanced 11.3 percent in the quarter from a year earlier.
  2. 2008 recession? Good luck if it takes until that long. I vote sooner.

    The U.S. Recession Risk is Now as Strong as Ever...Hard Landing Ahead!
    Nouriel Roubini | Sep 19, 2006

    I get asked every day whether my view that we will have an ugly recession in 2007 is as strong now as when I made this recession call in July. The simple and clear answer is yes: the probability of a recession is now higher than ever, in spite of the recent fall in oil and commodity prices. As I read the flow of macroeconomic indicators that have come out in recent weeks, it is even clearer to me that, instead of the consensus view of a “soft landing”, we will have an ugly “hard landing” of the US economy in the next few quarters. Indeed, I still expect US Q3 GDP growth to be as low as 1.5% (as I predicted in July when the consensus was 3%); I also expect the economy to stall by Q4 of this year and enter into a recession by Q1 – or at the latest Q2 - of 2007. The basic math of the recent macro indicators confirms this sharp hard landing scenario for the US, starting with a dramatic slowdown in Q3 growth. Also, I stick with my pre-August FOMC prediction that the next move of the Fed will be a cut in the Fed Funds rate in the winter of 2006 or early 2007: recent indicators all suggests that inflationary pressures are falling while the downside risks to growth are sharply increasing. And I also I stick with my prediction that the Fed will ease in the winter but that this Fed interest rate cut will not prevent the 2007 recession given the massive glut of housing and consumer durables.

    In order to predict Q3 and Q4 growth, remember what happened in Q2: then, residential investment was falling sharply (-9.8%); non-residential investment in software and equipment was falling too –1.6%); consumption of durables was flat and the rest of consumption was anemic; the trade balance was modestly improving; inventories were sharply up as the slowdown is demand was leading to an increase in unsold goods given the still sustained pace of production. Based on the data for July and August and some early indicators for September what can we predict about Q3 growth? My math adds up to a most mediocre annualized growth rate of 1.5% for Q3, half the rate of Q2 (2.9%) and almost a quarter of the growth rate of Q1 (5.6%). The economy is decelerating at a scary rate that will lead us into a recession by 2007, a recession that will be deeper, uglier and more protracted than the one in 2001. Why do I expect a most mediocre 1.5% growth for Q3? Here are the details of my forecast for the main components of aggregate demand and supply that show that Q3 growth will be sharply lower than the market consensus.

    ***His model is available for paid subscribers (of which I am not one)***
  4. What new trends do you expect to begin?

    I imagine if there is a recession it means higher interest rates, bond price decreases, US dollar exchange rate increases, and stock prices generally decrease.

    What other opportunities do you all perceive?
  5. Stagflation: I don't have any money on it yet, but I suspect oil will turn up soon. ($60 bottom??). That guy from Iran doesn't strike me as a somebody who's gonna help out the U.S. consumer.
  6. Shorting very high multiple stocks.

    If we have a recession, stagflation, or even weak growth, those companies won't meet earnings expectations (there will be exceptions).