Personally, I don't agree with every single item, but I do happen to agree with lots of them !
Some on Wall Street see big markets drama in 2005
Thu Dec 23, 2004 01:00 PM ET
By Megan Davies
NEW YORK, Dec 23 (Reuters) - In store for 2005 and beyond: China's torrid growth will fail to slow, the dollar will tumble and higher interest rates will bring a major financial company to its knees.
Oh, and some Asian countries may sell part of their big dollar holdings, driving a collapse in the dollar.
These are a sampling of the bolder predictions from Wall Street's big thinkers as 2004 draws to a close.
Alongside the more mundane consensus calls that Wall Street market-watchers predict at year end -- such as slower earnings growth and a moderate rise in stocks -- can be found occasional wilder forecasts.
DOLLAR DANGERS ABOUND
One such forecast is the potential for a "dangerous financial crisis," according to Chris Dialynas, managing director at bond fund management company PIMCO.
Dialynas, in a research note published this month entitled "Trouble Ahead - Trouble Behind," said there is a potential for some Asian central banks that hold large dollar assets to sell those reserves.
This could produce a "very hard landing in the U.S.," with the risk of a rapid increase in interest rates, a sharp fall in the dollar and a fall in the stock market. He did not state when this could occur.
Dialynas advocates a 15 percent chop in social spending, a 50 percent cut in the minimum wage, an increase in tax rates, and debt renegotiation or forgiveness by countries with cumulative high trade surplus with the United States.
The U.S. standard of living must "decline substantially" if the initiatives he recommends are to be achieved, Dialynas said.
The dollar is also a large concern to Peter Schiff, president of brokerage Euro Pacific Capital, who cites it as the overriding risk to the United States in the coming year.
Schiff sees a risk the dollar could continue to fall, dropping between "10 and 20 percent" next year, but in a worst-case scenario, the dollar could "weaken until it collapses," although that won't necessarily happen in 2005.
He thinks the dollar could fall slowly, "so long as Asian central banks stay together and keep buying" but if "foreign central banks pull out it could fall a lot more."
"If you know eventually that the dollar will collapse, why own any of them?" he said to Reuters. "The dollar is the single biggest risk to the American standard of living and the American economy."
INTEREST RATES RISE FEARED
For others, interest rates are one of the dominant issues for 2005.
Merrill Lynch's chief U.S. strategist, Richard Bernstein, predicts an unidentified "major financial company" will be brought to its knees in 2005 by rising interest rates.
"(Federal Reserve Chairman) Alan Greenspan's warnings to the financial markets about the effects of rising interest rates appear to be falling on deaf ears," Bernstein wrote to clients in a note entitled "10 Surprises for 2005."
Rising rates also worry Ned Riley, chief investment strategist at State Street Global Advisors in Boston.
"I was against the tightening from the beginning. And I'm concerned about it now," he said. Rates are "supposed to be raised" when inflation appears to be the by-product of a strong economic recovery.
"To me, it's been apparent that economic momentum has slowed, and that rising rates may endanger the recovery even further."
CHINA TO KEEP GROWING
Rapid growth in China is "one risk that we rarely hear on Wall Street or Main Street," said Zachary Karabell, senior economic analyst at Fred Alger Management Inc., in a research note to clients he coauthored.
Karabell suggests that there "won't be a hard landing, or a soft landing, but rather no landing," and cautions that the "China effect" will be a significant factor for most U.S. listed companies, as it impacts variables such as interest rates, the cost of goods and the opening of new markets.
That differs from mainstream predictions that China's rapid growth will slow. A Reuters poll published in November showed analysts expected China's economy to moderate slightly in 2005 as Beijing tries to keep a grip on investment and lending.
However, Karabell argues that China's growth will be beneficial to the United States in the long run, as the emergence of "another significant block of consumers is good for the global economy."
"I think in the long term and in general it's a good development. For the past 60 years, a lot of global economic growth has been fueled by American consumption. That's one of the reasons why we have such dramatic trade deficits," Karabell told Reuters.



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