Investors should be wary of the mania surrounding the “v-shaped” recovery, warns a leading economist. The same person says investors should instead be preparing for the dreaded “double-dip” recession.
Stephen Roach, a Yale professor and the former Morgan Stanley Asia chairman, was interviewed by CNBC yesterday and shared his sobering outlook for the next few months in the markets.
“The economy is not strong. Statistically, the third quarter is going to show a strong bounce back from a record-setting plunge in the second quarter. But the odds of a relapse, not just in the virus but in the economy itself, the so-called dreaded double-dip, is very real,” said Roach.
Market Defying Logic?
In a recent article for Economic Times, Roach acknowledges that his prediction for a second market plunge hasn’t come true. He says that the market is “once again defying what seems to be logic and powering ahead.”
Historically most severe market corrections undergo an initial rally before succumbing to a second drop to retest the previous lows. Roach believes this downturn will be no different, despite the unique circumstances that caused the initial drop.
Roach also believes that as the economy struggles to recover, businesses will continue to struggle. He also thinks there will inevitably be another round of stimulus in an attempt to keep the economy afloat.
“I think this behavioral capitulation on the demand side of the US economy is going to continue to create a lot of problems for businesses, business hiring, potential corporate bankruptcies in the second half of this year. So a new stimulus package is certainly essential in this climate.”
Recovery: U.S. v.s. China
He also compared the economic recovery to the one in China, as the country locked down before the US and also reopened ahead of the US.
“Both economies were able to bring production back quickly, but they’re struggling to bring consumer demand back especially for face to face services where individuals are fearful of getting re-infected,” Roach said.
He believes this will lead to a protracted downturn in the US dollar, and devaluing the dollar will ultimately fail.
“I think the dollar is in the early stages of what’s going to be a protracted downturn. Our savings and current account dynamic is starting to look terrible as I thought it would… no country has ever been successful in devaluing its way to prosperity.”
Roach predicts the dollar will plunge as much as 35% in the next 18 months, mirroring three previous corrections since 1970.
“I have noted that the dollar is probably going to correct by as much as 35% on a broad trade-weighted basis over the course of this year and next. That would be a sharp correction but not an unprecedented correction. We have had three such corrections comparable to that since 1970.”