International investors will continue to diversify away from U.S. assets as the American economy suffers through a severe recession, says Stephen Roach, chairman of Morgan Stanley Asia.
"Global investors have been concerned about being overweight in dollar assets for a long time,” he said in a recent interview with Bloomberg.
"This is one of the biggest overweights in world financial markets of modern times.”
Sixty-four percent of global currency reserves are in dollars, Roach points out, more than double the U.S. share of global GDP.
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"It’s only a question of time before that recedes,” he tells Bloomberg News. "Given that the U.S. is headed toward recession, I’m quite concerned that diversification out of dollar assets will accelerate.”
Roach offers rare words of support for the Federal Reserve’s handling of the credit market crisis. "I’ve been critical of the Fed for the last several years,” he notes.
"But the move this week giving $200 billion to support the mortgage market in cooperation with foreign central banks was a good one. Still, that shouldn’t be misconstrued as a move to arrest the U.S. recession,” Roach says.
"As long as house prices keep falling, and the appetite for risk remains subdued in the credit markets, there isn’t a whole lot traditional monetary policy can do to arrest recession.”
Roach sees the current recession inflicting much more damage than the last one seven years ago.
"Back then, business capital spending drove us down, and it was 13 percent of GDP,” he says.
"Now, homebuilding and housing-dependent consumption are the problem, and they account for 78 percent of GDP. The idea that this will be a short, shallow, mild recession is a real stretch.”
In fact, Roach thinks the credit market crisis will only get worse.
"The estimates of write-downs keep getting escalated. Those taken so far are specific to narrow developments in the housing market,” he says.
"As these developments spread to the broader economy, there will be a further deterioration of loan quality that will come back to hit banks. The first order of this crisis may be near an end, but there is plenty more to come as recession takes hold.”
One problem Roach isn’t concerned about is global inflation.
"I think we get relief as the U.S. goes into recession and the rest of the world feels the reverberations,” he tells Bloomberg.
"I would be more worried about inflation in the next economic recovery, if central banks inject excess credit, rather than the next few years.”
Roach also maintains that the recent explosion of commodity prices is overdone. "I don’t want to sound blasé. If this continues for an indefinite period of time, it’s a major concern,” he says.
"I’m just believer that for a lot of these commodities, they’re ultimately quite sensitive to the economic cycle. If I have the economic cycle right – that the U.S. recession will reverberate around the world, and we are about to enter a period of weaker growth – that should put downward pressure on commodities, including oil.”
Still, Roach is quick to admit, on commodity prices at least, his record is spotty so far: "I’ve been saying this for a while and have been dead wrong.”
© NewsMax 2008. All rights reserved.
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