The cocktail party test has to be one of the world's most reliable economic indicators. "If you save in America and you talk about it at a cocktail party, people make fun of you," says Stephen Roach, managing director and chief economist at Morgan Stanley. "People talk about their big houses and their broker."
Roach, who is well known for his gloomy outlook on the US economy, was addressing the luncheon crowd at the Morgan Stanley Asia Pacific Summit held at the Mandarin Oriental in Singapore, which this year has attracted 150 companies from the region and more than 500 investment professionals.
His speech, entitled for the third consecutive year "Global Rebalancing", was familiar if you are a follower of Roach's published commentaries, testimonies before United States Congress, and his oft-quoted quips. Indeed, he joked he that needs to continue to use the title of this talk, until he gets it right - and global economies rebalance.
In a nutshell he argues that China, and countries linked to China's supply demand (which is basically, he argues, the rest of Asia) are all far too dependent upon the American consumer.
"The days of the US-centric global economy are threatened," he says. "The American consumer is the weakest link in global growth and China and the rest of Asia need to take this seriously."
For example, he points to a graph that shows US personal consumption expenditures as a percentage of GDP is at 71% and notes: "There has never been an example in recorded history where a nation has consumed to excess at this degree, and in my view, that excess is at risk."
At the same time he highlights the US' virtually non-existent savings countered by high debt to fund its dependence on equities and housing investments, and says, with a wry smile, "We have a new economy in America. The old income economy is dead. Long live the asset economy."
Later, after pouring over dozenes of such charts showing lines moving in the wrong direction, he adds, "The idea that the world's wealthiest nation is being funded by the world's poorest countries, particularly China, is bizarre."
In his view, over the next three-to-five years the US share of global GDP consumption must go down while China's share must go up.
Throughout his presentation Roach comes across as the friendly professor - he joked that he was surprised that many of the questions from the floor were coming from those sitting in the back rows. With one eyebrow arched slightly higher than the other, it is as if you can see him thinking.And his thoughts are not optimistic. He is on record as predicting a 40% probability of a hard landing. When? Who knows for sure, but he says he expects next year is going to be tough.
Potential trigger points that could shake global confidence (particularly of those crucial Asian central bankers buying US Treasury bonds) include an ongoing oil crisis, a bursting of the US housing bubble (which he does not portray, as some economists do, as a 'so-called bubble'), a risk of an outbreak of a full-blown US-China trade protectionism spat, and the appointment of a new US Federal Reserve chairman. (He characterised nominee Ben Bernanke as a smart man, but history does not bode well for this transition of power, as previous handovers have arguably triggered bond and equity market failures.)
After his speech, someone (actually not in the back row) queried what his prescription was for Americans to fix their economy and thus not effectively poison the rest of the patients in the global financial ward.
Roach's immediate answer: Savings. But, as the cocktail party anecdote illustrates, that is not a forte of your typical man sitting on a barstool in Nebraska these days. He says the US federal government needs to be willing to reduce its own budget. And Roach is in favour of a US federal consumption tax to deter consumer spending.
For China's part, he says mainland officials need to stimulate job creation - he sees room in the services sector. China also needs to create a safety net for employees, particularly from state-owned enterprises, who have lost their jobs. Worker retraining and pension plans need to be put in place.
You can see where his hard landing prediction becomes a possible scenario. Even if you do not agree, if only his ideas were the talk of more cocktail party conversations perhaps then US folks would at least consider a smaller house for a bit more savings. For you brokers out there, perhaps he really didn't mean to advocate not singing your praise while sipping a scotch served neat.
