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How Far Will Slime Spread?

Could America’s subprime slime spell big trouble for foreign economies? Find out what to expect from Stephen Roach, Chairman Of Morgan Stanley Asia.

Following is a synopsis of the main points made during the conversation between Roach and the "Fast Money" traders.

Do you believe in de-coupling?

There’s no region that has benefited more from the global boom of the last 5 to 6 years than developing Asia, replies Roach, through trade linkages, capital flows, and information flows. Now you don’t eliminate those linkages just because you move to the downside of the cycle. These are export dependent economies and as the global economy slows they’re going to feel it.

Are you cautious on any specific market in Asia, specifically China?

China has a huge cushion, replies Roach. They get hit with a shock at 12% growth and what’s their downside... 8% or so. Japan is the one that’s got me worried. They’re the second largest economy in the world and they have no cushion. Their 2% economy gets hit with an external shock and they go into recession. I was in Japan last week and I think the recession watch is on.

You’ve said, in the housing aftermath phase 1 was Wall Street and phase 2 is Main Street. What does that mean?

Consumers in America are asset dependant, replies Roach. They’ve been sucking money out of over-vauled homes with cheap credit. Both of those bubbles have burst; credit and property. Consumers have no savings and a lot of debt. They’ve got to realign themselves.

How does it bear out in the financial markets?

Weak growth and a Fed that doesn’t tighten aggressively, he replies. I think the American economy remains very soft either in recession or in a soft growth climate.

How would you invest?

Government bonds have probably sold off a lot, Roach says. I think the inflation scare in the developed world will turn out to be a false alarm. You might want to buy bonds at these levels.

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Trader disclosure: On June 2, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (INTC), (DIS), (MSFT), (WMT); Adami Owns (C), (AGU), (BTU), (NUE), (GS), (INTC), (MSFT); Finerman Owns (GS), (AAPL); Finerman's Firm Owns (GE), (MSFT), (NYX), (SBUX), (SUN), (TSO), (VLO); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM); Finerman's Firm Owns SPX Index Puts; Finerman's Firm And Finerman Own (C) And (C) Leaps; Jon Najarian Owns A Call Spread In (HOC), (MEE), (SBUX), (TSO), (VLO), (AAPL), (COP), (FTO); Jon Najarian Owns (ACI) Call Spreads And Calls; Jon Najarian Owns (ANR) Calls Spreads And Calls; Jon Najarian Owns (C) Preferred Shares; Jon Najarian Owns (KEY) Puts, (LEH) Puts; Jon Najarian Owns (SNM); GE Is The Parent Company Of CNBC; NBC Universal Is The Parent Company Of CNBC

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