‘Vital’ scarring will restrict pent-up client demand: Stephen Roach

Economist Stephen Roach said Monday he believes Wall Street overestimates a consumer comeback.

According to the senior fellow at Yale University, demand will decline like a rubber band later this year as the V-shaped recovery loses momentum.

“With vaccines that are withdrawn from the market along with a lot of impulses, you can feel this immediate satisfaction of a long-deferred pent-up demand,” Roach told CNBC’s “Trading Nation”. “But when I look at the numbers, you know most of that surge has probably already occurred.”

He bases part of his case on the share of consumer goods in GDP data.

“We’re back to the level of consumer goods we haven’t been at for 13 or 14 years,” said Roach. “We’ve largely met the pent-up demand, and it looks like it’s borrowing from the growth that would otherwise have occurred in the second half of this year or early 2022.”

Roach said he doesn’t think more people who get vaccinated will move from spending wildly on furniture and cars to spending wildly on restaurants and theaters.

“These personal activities are still lagging behind in terms of employment and demand,” he said. “Even if we get vaccines, I think there will be some significant long-term scars here … I fear quarters, if not years.”

If the pent-up demand collapses, Roach expects inflation fears to decline.

“The supply-demand gap will prevent inflation from rising significantly and sharply,” he said, suggesting that the yield on the benchmark 10-year Treasury note would decrease a few inches.

Roach, who served as chairman of Morgan Stanley Asia during the deadly SARS epidemic in 2003, also sees the weakness of the global economy linked to the supply chain and technological breakthroughs limiting higher prices.

Despite his bullish call for inflation, he still questions the strength of the US recovery. He views the latest stimulus package as a temporary measure as the relief controls do not support organic current income growth.

“It’s going to be very difficult to maintain that V-shaped trajectory that many have relied on,” said Roach.

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