Is New Century this decade’s Pets.com, with their pitch of home loans for all? Stephen Roach at Morgan Stanley thinks so.
“Sub-prime is today’s dot-com — the pin that pricks a much larger bubble,” he wrote in a recent report. Roll back the clock to 2000, and Mr. Roach reminds us that “the optimists argued that equities as a broad asset class were in reasonably good shape,” with any excesses confined to about 350 of the “so-called Internet pure-plays,” which he says accounted for about 6% of the total capitalization of the stock market at the time.
“That view turned out to be dead wrong,” he says. “The dot-com bubble burst,” and the S&P 500 — a broad measure of the market — fell nearly 50% over the next two and a half years and the U.S. economy slipped into a “mild recession, pulling the rest of the world down with it.”
Could it be déjà vu all over again? “Fast-forward seven years, and the actors have changed but the plot is strikingly similar,” says Mr. Roach. Of course, this time, it’s the subprimes instead of the dot-coms. The housing bubble burst, borrowers with poor credit failed to make payments and the mortgage lenders got squeezed as the big banks they count on for financial backing turned their backs.
“How far will the ripples spread?” Mr. Roach think he has the answer, and like last time, it isn’t pretty: “As was the case seven years ago, I suspect that a powerful dynamic has now been set in motion by a small mispriced portion of a major asset class that will have surprisingly broad macro consequences for the U.S. economy as a whole.”