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Friday, September 19, 2003

Friday Night is Roach night.

Yes its Friday again, and the weekend comes round very quickly, doesn't it? Today Stephen Roach takes issue with the financial markets: now who else would dare. Personally I can't help agreeing with him. The facts are, more or less, on the table. Certain conclusions seem to follow. But the markets seem incapable of drawing these conclusions. We are living on spin, and when we run out of spin, it would be surprising if we weren't going to see a 'correction'.

The mood in Dubai is cautiously upbeat as the semi-annual IMF-World Bank meetings now get under way. The direct impacts of the war in Iraq and SARS have faded. In response, the global economy seems to be slowly shifting gears to the upside. The official forecast of the IMF staff underscores the tentative nature of this shift. The mounting imbalances of a US-centric world are at the top of their worry list. Needless to say, that’s a theme I certainly have some sympathy with. World financial markets couldn’t care less............

Which takes us to the critical question of the moment: What do financial markets see that the IMF and its like-minded sympathizers -- yours truly, included -- are missing? The main insight, in my view, is the presumption that global imbalances really don’t matter at all. They are judged as the inevitable, benign, and even desirable outgrowth of yet another burst from the world’s only real growth engine. For what it’s worth, I continue to take issue with that key point (see my 2 September 2003 essay in Investment Perspectives, “Do Imbalances Matter?”). Imbalances, in my view, are tantamount to instability and fundamental disequilibrium. I would be the first to concede that such a state of disequilibrium is not life threatening in and of itself. But it does leave the economy, or economies, under question far more vulnerable to shocks than might otherwise be the case. To the extent such shocks are the rule, not the exception, I continue to be enamored with the case for an economic relapse in early 2004. Reading between the lines of the IMF’s latest assessment of global risks, I suspect such an outcome wouldn’t come as much of a surprise to them either.
Source: Morgan Stanley Global Economic Forum.

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