Vigilant Investor

Yet this time is different. Sure, that’s the classic “ah ha!” — code words for ever-cynical investors to ignore anything that follows. But it’s important to understand the corollary of this reaction — namely that nothing ever changes. That’s where I have a serious problem. Consider globalization — the most important mega-force of our lifetime. This is the first time that the powerful disinflationary forces of globalization have had a major impact on the endgame of a modern-day business cycle. Consider IT-enabled technological change; this is the first time that revolutionary breakthroughs in connectivity, miniaturization, and software programming have shaped the cyclical endgame. Consider ever-mounting global imbalances — a disparity between current account surpluses and deficits that has reached a record 6% of world GDP. This is the first time that imbalances of this magnitude have threatened the global economy and world financial markets. Consider also the gap between record returns on capital and the sharply depressed rewards of labor in the developed world; it’s been a long time since the potential social and political consequences of such tensions were in play. I could go on and on — underscoring the unprecedented growth in synthetic securities (i.e., derivatives), the doubling of the global labor supply traceable to the emergence of China, India, and the former Soviet Union, rapidly aging populations in the developed world, unfunded retirement and medical-care liabilities, and surging M&A and LBO activity. The point is that it makes no sense whatsoever to ignore the truly unique features of the current climate. Those who dismiss such possibilities because of the legendary lore of four words — “this time is different” — do so at great peril, in my view.

That’s Stephen Roach, Managing Director and Chief Economist of Morgan Stanley, in his most recent dispatch — yesterday’s “The End is Never the Same“. Roach knows a skunk when he smells it. He’s just having a hard time getting his arms all the way around it given he’s missing a fundamental understanding of the Austrian Business Cycle, at the core of the Austrian School of Economics’ thinking on bubble environments. Hence Roach has been waffling on the outcome of the current mess — one that he’s partially identifying very well, hence please give this entire piece a read.

For those who want the complete picture that Roach is missing, we recommend our post yesterday and the reference to Sean Corrigan for a concise and thorough update.

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