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U.S. consumers are only in the beginning stages of paying down excess debt and their savings rates are lagging, leading to the creation of a generation of "zombie" consumers who will continue to tighten their belts despite government incentives to spend, Stephen Roach, non-executive chairman of Morgan Stanley Asia, wrote Wednesday in an op-ed in the Financial Times.

"I suspect it will take a minimum of another three to five years before debt loads and saving rates have been restored to more sustainable levels," wrote Roach, who also is a member of the Yale University faculty.

"With consumption still about 70% of gross domestic product, that points to sharply reduced growth in the U.S. economy – unless America is quick to uncover a new and vibrant source of growth. Policy paralysis in Washington is hardly encouraging in that regard."
                                           The Wall Street Journal

Commentary & Analysis
Global linkage headwinds spell r-i-s-k b-i-d

I will be the first to admit it: it is a sad state of global affairs when anyone can believe, as I do, the US dollar can rally in the morass the US finds itself ensconced. To say we are witnessing a global ugly contest in the world of currencies doesn’t do ugly justice.

If we step back and view the linkages which drive the global economy and the headwinds they are facing, we get a better sense of the rising risk profile. Arguably these linkages are now breaking down in unison. The reason this is especially dangerous is because there is little left in the global stimulus gun–fiscal or monetary–and global rebalancing as promised by our esteemed global leadership was yet just another title to another filed G-20 meeting communiqué.

Notice the “Key Risk” column at the right of this chart below; we prepared this and presented it to our Members back in February or early March of this year, I think:

It seems all the key risks are all poised to play out.

  • US growth fading fast and the Misery Index is rising
  • China real estate breaking and social unrest rising as global demand falters
  • Eurozone periphery crisis contagion-watch and grinding austerity biting

But, this is stuff we all know, so it is all likely discounted, say the bulls. They have a point. But I don’t believe it is discounted. Stocks could carry higher from here, no doubt. But it appears the Osama bin Laden Takeout Top is in place and the primary trend in stocks, i.e. risk-assets, is down:

Dow Jones Industrial Average vs. US$ Index Daily:

For now, my dollar bullish potential seems predicated only on a risk bid. But the potential for a very big risk bid seems to be rising.