V-shaped recovery is in ‘tatters,' and Wall Street doesn't seem to care: Economist Stephen Roach

Economist Stephen Roach sees trouble on Wall Street.

His observation: The market is placing too much emphasis on the Federal Reserve holding interest rates at zero to prevent the economy from falling into another recession.

“That gives markets conviction to look though literally anything from political insurrection to the likelihood of a double dip to a V-shaped recovery that’s in tatters,” the Yale University senior fellow told CNBC’s “Trading Nation” on Monday. “The markets do not seem to care.”

Roach, who served as chairman of Morgan Stanley Asia during the deadly 2003 SARS epidemic, believes the economy is relapsing into a downturn under the force of Covid-19 surges and continued lockdowns. He estimates first quarter GDP could see a decline in the mid-single percentage range.

“We saw an unexpectedly sharp decline in consumer retail sales in November, weakness in consumer confidence and then significant downside surprise with unemployment numbers released for December,” said Roach. “The economy is slipping right before our very eyes.”

According to Roach, additional federal coronavirus aid is critical right now. However, he warns there will be consequences.

“The budget deficit, which is at a record right now, is going to get even larger,” he said. “That will put further downward pressure on domestic saving, the current account and eventually the dollar which has been falling pretty sharply in the last nine months.”

The U.S. Dollar Currency Index has shown strength recently, up 0.73% over the past week. But Roach is sticking by his dollar crash warning. He predicted on “Trading Nation” last June the dollar would plummet by 35% in the next year or two. Since the interview, the greenback is down 7%.

“I do see another 15% to 20% downside to the broad dollar index over the course of this year — reflecting not just the current account deficit, but the strength of the Euro, and most importantly, the Federal Reserve in holding interest rates at zero,” added Roach.

There’s one thing he’s not worried about yet: Inflation.

“Down the road, I would definitely worry about inflation with supply chains having been disrupted the way they have been with the dollar,” Roach said. “But with aggregate demand remaining weak in the U.S., I think it’s going to take a while.”

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