Boy, even when he's bright he's pretty gloomy:
> The most serious downside risk to our new baseline forecast remains
> concentrated in the US, in my view ... If America stays this course, the
> endgame will not be pretty. The day will come when US interest rates rise
> -- driven by either domestic or foreign developments. That would
> undoubtedly spark a painful unwinding of the Asset Economy -- all the more
> conceivable now that the US housing market is firmly in bubble territory
> (see my 2 December dispatch, "Bubble Day").
And then two days later he elaborated this view, moved the date much closer and the odds closer to certain. Article attached below. Nut grafs:
<quote>
[I]income-short US consumers are playing this latest bubble for all it is worth ... The resulting shortfall of national savings has helped push America's current account deficit into uncharted territory, raising the risks of a sharp correction in the dollar and a related back-up in longer-term interest rates. The last thing America's housing bubble needs is an interest rate shock. That is a recipe for a sharp decline in US housing prices -- and a disastrous outcome for overly-indebted consumers.
That makes the downside of this bubble potentially far worse than that of the equity bubble, especially as household property holdings of some $14,000bn currently are almost double the aggregate size of equity portfolios.
<unquote>
[And if you think the equity bubble led to a Japanese style hangover, this is quite a downside.]
===========
December 10 2004 02:00 Financial Times
America's ominous housing bubble By Stephen Roach
Nearly five years after the bursting of the equity bubble, America has done it again. This time, it is the housing bubble. But this speculative excess may be the cruellest bubble of all -- and has already led to a sharp compression of national saving, a record current account deficit and an ominous overhang of personal indebtedness. The US was fortunate in avoiding the perils of a post-bubble carnage in 2000-2001. It may not be so lucky this time.
The debate over a US housing bubble is now over. The recent US house prices report for the third quarter was a shocker -- an 18.5 per cent annualised surge from the second quarter and a 13 per cent increase from year-earlier levels, according to the Office of Federal Housing Enterprise Oversight (OFHEO). That represents a stunning acceleration from the 9.8 per cent year-on-year increase of the second quarter, and pushes nationwide house price appreciation to a 25-year high.
Housing analysts and central bankers are typically reluctant to draw macro conclusions from a highly fragmented US property market. The risk is they focus on the trees and miss the forest. The latest OFHEO tally shows house price inflation has run at double-digit rates over the past year in 25 of 50 US states plus the District of Columbia. Housing is an asset class just as prone to excess as stocks, bonds, currencies and commodities. If it feels like a bubble and acts like a bubble, it probably is one.
There is related and equally disconcerting news on the savings side of the equation: the US personal saving rate fell to 0.2 per cent of disposable income in October. The profligate US consumer is not the only source of the saving shortfall. America's net national saving rate, stripping out depreciation and reflecting the combined saving of households, businesses and the dis-saving of the public sector, fell to just 1.2 per cent of gross national product in the third quarter -- down 0.9 of a percentage point from the second quarter and near the record low of 0.4 per cent in the 2003 first quarter. The rest of the story is all too familiar: Lacking domestic savings, the US must then import surplus savings from abroad in order to grow -- and then run massive current account and trade deficits to attract that capital.
These seemingly disparate trends are a perfectly logical outgrowth of the asset economy. Through this lens, "rational" consumers take their income-based saving rates to zero only if asset-based saving provides an offset. As long as asset markets keep rising, that makes sense. However, when asset markets correct, this decision can backfire, as was the case when the equity bubble popped in 2000. It could well be the case after today's US housing bubble bursts.
Complicating the picture, income-short US consumers are playing this latest bubble for all it is worth -- enjoying the psychological benefits of the so-called wealth effect and utilising refinancing and second mortgages to extract purchasing power from over-valued property and ultimately depleting income-based saving rates. The resulting shortfall of national savings has helped push America's current account deficit into uncharted territory, raising the risks of a sharp correction in the dollar and a related back-up in longer-term interest rates. The last thing America's housing bubble needs is an interest rate shock. That is a recipe for a sharp decline in US housing prices -- and a disastrous outcome for overly-indebted consumers.
That makes the downside of this bubble potentially far worse than that of the equity bubble, especially as household property holdings of some $14,000bn (E10,500bn) currently are almost double the aggregate size of equity portfolios. Not surprisingly, these circumstances put the Federal Reserve in a particularly difficult position -- in part, because the US central bank has long suffered from bubble-denial syndrome, unwilling or unable to address speculative excess in asset markets until it is too late. But there are also risks because the US monetary authority depleted most of its policy arsenal in order to contain the damage from the equity bubble. In doing so, the Fed kept interest rates at extraordinarily low levels for far too long -- setting the stage for the housing bubble. The risk all along is that the Fed had just a single bubble-damage containment strategy -- leaving itself with little ammunition in the event of another serious problem.
While it is only a few years since the bursting of the equity bubble, memories of that speculative excess have already dimmed. Yet in retrospect, that may have been only the warm-up for the main event. Bubbles have a way of feeding on each other -- ultimately leading to an even more treacherous shakeout. That is certainly the lesson from Japan and could well be the case in the US. America, so short of savings, will not be spared -- especially if it must now come to grips with the biggest asset bubble of them all.
The writer is chief economist of Morgan Stanley