During the early stages of the housing bubble Morgan Stanley's Stephen Roach was one of the few sane voices on Wall Street. His warnings about the global economy were clear and obviously true, and his willingness to bite the hand that fed him was admirable. The guy had guts. In early 2006 I had the following article all ready to post:
The Bravest Man on Wall Street
People tend to lump the big-name critics of the U.S. economy together, and assume that they're all coming from the same place and somehow benefiting, one way or another, from their points of view. But that's not true. It's relatively easy for a Bob Prechter or Doug Noland or Marc Faber to hold to their positions for years while their truth gradually dawns on the rest of us, because they more-or-less run their own shows. The might lose a few investors, but they don't face institutional resistance from above and below.
That's why Morgan Stanley's Stephen Roach deserves our admiration. He doesn't work for a short seller and he's not the author of best selling gloom-and-doom books. He works for a big, mainstream investment bank, where optimism is golden and pessimism scares clients, lowers trading volumes and eventually gets you fired. To grasp the truth of this you have to understand the internal structure of an investment bank. It's made up of bankers who do deals, traders who trade, and salespeople who convince money managers and other traders to buy the firm's securities. None of these guys likes the idea of a global economic meltdown. In fact they hate sell recommendations in general.
For a salesman, getting a client to buy a given stock or bond builds a relationship and creates an ongoing income stream. At the very least, knowing a customer likes a given security allows the salesman to sharpen the pitch for the next call. On the other hand, if a customer sells everything and goes to cash, that's it. They don't need updates and you have no way of knowing what to offer them by looking at their holdings. Your income goes down, maybe you get fired, and you blame the senior strategist who terrified the money manger into doing this.
It's the same with investment bankers. If investors are selling rather than buying and the overall market is falling, there's no demand for new IPOs. So investment bank economists who predict trouble and aren't immediately proven right tend to be escorted to the door by security.
And yet here's Stephen Roach, coming out every week with some new take on the chaos sure to result from growing global financial imbalances. A couple of years ago he is said to have told a group of Boston money managers that a global meltdown was a near-certainty...
Then, in May of 2006, Roach threw in the towel:
Former bear turns bullish on global economy
The world economy may be able to unwind its current imbalances without serious disruption, Stephen Roach, Morgan Stanley's famously bearish chief economist, predicted on Monday, in a remarkable revision to several years of gloomy prognosis.
Mr. Roach had long warned that the US current account deficit and Asian central banks' ballooning currency reserves risked destabilizing the global financial system.
But on Monday, in a note to clients, he said: "I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages." His comments came as the dollar hit a one-year low against the euro and seven-month low against the yen, as investors remained confident the US Federal Reserve was nearing the end of its interest-rate-tightening cycle.
I sadly filed the blog post away, glad that I hadn't published it just before Roach's apostasy. And over the next couple of years it became clear that this was a sign of a market top. By 2008 the global economy was melting down and Roach was no doubt haunted by visions of the superstar he would have become if he'd only held on a little longer. You don't see that much of him these days.
Now fast-forward to April 2011. The markets are rocking, the risk trade is back on with a vengeance, and bears are suffering through the same death-by-a-thousand-cuts as in 2006. Stephen Roach has been replaced by David Rosenberg, former Merrill Lynch economist and now senior strategist and economist at Gluskin Sheff in Toronto, as the most prominent institutional bear. In clear, well-reasoned reports, he's been predicting doom for the economy and the stock market, only to see everything just keep on rising.
And now he's switched sides:
After trying to call the top in equities every other week for the last two years, David Rosenberg has finally thrown in the towel on the bearish calls. In his Wednesday research report he detailed why he believes equities have achieved a "holy grail" and should continue to move higher:
"On a very near-term basis, and despite my long-standing macro concern list, which has not gone away, it does look like the market is set to rise further. The technicals are suggesting as much, though I do await what Walter Murphy may have to say on the matter. I had said before that a breakout to new highs led by higher volume would be an important technical signpost. Well, we achieved that Holy Grail yesterday - both in level terms and with respect to the change. This is not throwing in the towel, it is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint....
...All that said, we had a breakout to new highs yesterday and this time, the volume rose on the major exchanges, not to mention rising above the 50 DMA on the Nasdaq, which is a clear sign that the big boys are putting money to work. This market continues to impressively climb a wall of worry. Market internals are too strong to ignore right now - the NYSE advancers beat decliners by a 3 to 1 ratio yesterday; the Dow transports soared 1.9%; and the small caps beat their major benchmarks. My overall macro concerns have not gone away, but these market facts on the ground are tough to ignore."
Okay, not exactly an exuberant call for Dow 36,000, but still remarkable after all the gloom and doom Rosenberg has published in the recent past. So is this one of those capitulations at the top that we'll look back on as a signal to mortgage the house and short everything in sight? Who knows? But it sure is interesting...
