Tuesday, May 11, 2004

BonoboLand - Three Quotes That Tell It All

BonoboLand - Three Quotes That Tell It All
By Edward Hugh

Stephen Roach is back on form. Yesterday's MS GEF post contains three quotes which just about sum everything up.

"I am still in the soft landing camp insofar as the trajectory of the China slowdown is concerned. However, I would be the first to concede that what is soft for China — something like a halving in industrial output growth over the next year — may not seem that way for the rest of the global economy or world financial markets."

Exactly. Then there is the oil price shock problem. I couldn't tell you where the price shock sets in, but Roach's guess seems as good as any that are on the table. And remember, any China slowdown may not be accompanied by a pro-rata reduction in oil consumption: so we may get the worst of both world's.

"In my view, however, the “true” shock probably comes with $50 oil. A sustained increase to that level for 3-6 months would represent in excess of a 70% surge above the post-2000 average — on a par with full-blown oil shocks of the past.......it is only guesswork at this point as to whether developments in the Middle East spiral out of control in a fashion that would push petroleum prices up to that ominous level."

Then there is the US deficit problem and the possibility of fiscal tightening accompanying interest rate tightening.

".........the impacts of the coming Fed tightening will coincide with a shift to fiscal restraint, as tax cuts hit their maximum; moreover, a monetary tightening will also exacerbate the downside of the home mortgage refinancing cycle — heretofore a powerful source of incremental growth in consumer purchasing power. As I see it, those developments, in conjunction with the negative impacts of higher oil prices, paint an increasingly worrisome picture for the US economy in 2005."

All in all a very hard call. Which makes you wonder why all those 'consensus analysts' seem so convinced.........

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