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Posted: 11/1/2009 5:10:28 PM EST
[Last Edit: 11/4/2009 4:33:38 AM EST by glockO]
'Mother of Carry Trades' Leading to 'Asset Bust': Roubini
NOURIEL ROUBINI, ECONOMY, ASSET BUBBLE, DOLLAR, CURRENCIES, STOCK MARKET NEWS, MOTHER OF ALL CARRY TRADES, DR. DOOM
Posted By: Jeff Cox | CNBC.com
CNBC.com
| 04 Nov 2009 | 08:19 AM ET

The "mother of all carry trades" that Nouriel Roubini warned of recently is growing and threatening to cause a global implosion, the economist warned in a CNBC interview.

For the second time in as many weeks, Roubini cautioned that investors using cheap US dollars to embrace risk will quickly reverse course once the greenback strengthens.

But he intensified his prediction, saying that the likelihood of the Fed keeping interest rates low and thus weakening the dollar will prolong the carry trade and make it all the more painful when it starts to unwind. Roubini is an economist at New York University and chairman of RGE Monitor.

"Eventually there's going to be an end to this carry trade," he said in an interview. "When that snapback of the dollar is going occur it's not going to be 2 percent or 3 percent, it's going to be more like 25 or 20 percent. And then everybody will have to close their shorts on the dollar, they'll have to sell these risky assets across the world and you could have this huge asset bubble going into an asset bust."

With the Fed unlikely to change its monetary stance following the close of its Open Market Committee meeting today, the dollar carry trade will grow through next year and continue to boost the prices of commodities and global equities, he said.

"It's going to eventually occur but it's going to be six months from now, a year from now," Roubini said. "In the meanwhile the bubble's going to become bigger globally and the bigger the bubble the bigger is going to be the crash."

Another problem he cited was the market's pricing in of a V-shaped recovery, which would see the economy improve sharply without a significant additional decline.

Instead, Roubini predicted the bounceback will look more like a U-shaped move, with the expiration of the dollar carry trade and the subsequent popping of the asset bubble exacerbating the slowness.

"It's like a rush to the exits. When everybody tries to go at the same time there will be a stampede," he said. "Risky assets are going to collapse, the dollar's going to snap back. So the risk is that there's not an orderly way of doing it unless you more aggressively signal (a change in monetary policy). That's not what the Fed is telling us, that's not what the other central banks are telling us."

Yet Roubini conceded that at least part of the seven-month stocks rally has been based on fundamentals, but they're not strong enough to justify all of the growth.

"Part of that increase in price is fundamentals, but it's become so rapid and so perfectly correlated around the world," he said. "Price (to) earnings ratios are out of hand. So there's a signal of a bubble and that's what many policy makers in this country are worried out."

Central banks will be looking at the issue of asset bubbles more closely in the months to come, Roubini predicted.

"It's not just Roubini's worried about it," he said. "Globally, people are starting to worry about it because it's getting out of control. That's the reality of it."

© 2009 CNBC.com

URL: http://www.cnbc.com/id/33616897/




Mother of all carry trades faces an inevitable bust

link
By Nouriel Roubini

Published: November 1 2009 18:44 | Last updated: November 1 2009 18:44

Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.


Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage- backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

The writer is a professor at New York University’s Stern School of Business and chairman of Roubini Global Economics

Copyright The Financial Times Limited 2009. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.


The inevitable will eventually happen.
No matter what the Government tries to manipulate

Link Posted: 11/1/2009 5:21:30 PM EST
It's like an old car. It gets more squeaks, shakes, and rattles as it gets nearer to simply falling apart and dying.

The last ride on an old roller coaster is by far the most thrilling.


The only way to avoid a total crash is to eliminate the government that got us into this mess and set up a new, HONEST government,
which would have no reasonable choice but to repudiate the current debts and hit the reset button on everything. The rest of the world
would have NO choice but to follow.


The time comes when everybody owes money to everybody else, and none of them can pay it back, so they just look at each other,
shrug, grin, and say "Forget about it. Let's get on with our lives, already."



CJ
Link Posted: 11/1/2009 5:30:47 PM EST
[Last Edit: 11/1/2009 5:35:16 PM EST by ARsonist]
The longer they remain blind, the harder the markets will fall.


Does Roubini REALLY think they are blind to what they are doing? Really?


ETA: So I post the above in this thread and then click on THIS thread:

http://www.ar15.com/forums/topic.html?b=1&f=5&t=949786

and THIS video:

http://www.freedomslighthouse.com/2009/11/rush-limbaugh-says-obama-is-destroying.html

Wow.
Link Posted: 11/1/2009 6:59:33 PM EST
[Last Edit: 11/1/2009 7:06:37 PM EST by jeffers_mz]
Roubini is correct in that the dollar's sharp drops accelerate gains in assets, and the dollar will continue to drop rapidly only so long as the US run the massive QE program they've embarked upon, but QE and low interest rates aren't the only reason these markets are appreciating.

Underlying the current declines in dollar value is a decades long devaluation of the US dollar, with few and short exceptions.

When the effective negative interest rates go to zero or even positive, there WILL be a bloodletting in the assets markets, simply due to the sudden decline in demand for non-dollarassets, covering dollar shorts, and contagious fear of asset prices, but once the new equilibrium is established, or perhaps better put, once the buying motivation retreats from negative dollar interest rates to normal long term dollar devaluation, there will still be appreciation in any market which the dollar declines against, in the long term, which is almost all of them.

The dollar is simply poorly managed, it loses value over time. It began losing value more rapidly after the US went off the gold standard in 1973, and it reached dangerous rates of decline when the US began QE to stave off global economic collapse in 2008, but it has been losing value since 1910 at least, and even in the absence of these magnifying pressures currently in effect, is most likely to continue losing value until and unless the US adopts sane currency management practices.

Trying to manage currency supply thru interest rates is like trying to build an AR with two ski poles that have tweezers attached to the ends. currency demand is managed thru currency supply, period. Money supply, capital, is managed thru interest rates, period. Any manager who can't differientiate between the two is going to lead his currency, in this case the USD, down, period.

Trying to manage a currency against the ridiculously managed CPI is folly, you might as well...in fact you ARE...managing the currency by political fiat, it cannot and will not sustain. You have exactly two choices, you manage the currency against the best standard you can obtain, and achieve relative currency value stability, or you suffer constant inflation, deflationary crises, and constant long term currency value declines.

I don't care if your currency standard is fucking carrots, you either pick a reasonable, openly public standard, or you pay in currency chaos and currency decline.

Period.

the laws of mathematics and those of economics which are rooted in numerical sanity are not negotiable. This universe runs by the numbers, not by the whims of the crooks you send to Washington.

Why then do governments choose any other path?

Very simple.

If the currency standards are complex, too complex for any average person to understand and predict, the government is able to loot the both treasury AND the wealth of the population, by any of numerous nefarious means, in the dark, where no one can see or understand the theft.

Open standards or pay the price.

Open standards, or pay the price...to me, and to people like me, who are not afraid to profit on the decline of your currency.

You leave us no choice but to profit at your expense.

We see the folly of you sitting in front of the television, ignoring what your politicians are doing to your money.

We choose not to allow our wealth to be dissipated by the crooks and scumbags you ignore.

We either lose, or we diversify against your poorly managed currency, and when we do, we profit heartily...and at your expense.

Profit is not my motive.

My motive is merely preservation of what I have already traded sweat and blood to get.

But your ignorance of your own poorly managed currency does not give me an option to merely preserve what I have worked for.

I don't want your money. You worked for it, you earned, you should be able to keep it. All I want is the right to keep my own.

By the nature of your abdication of responsibility, I must either lose with you, or else profit handsomely at your expense.

Given this choice, I choose profit, and I see those profits and I structure my investments to profit with vengeance.

Get off your ass and INSIST your money be properly managed, or else lose it to me.

Link Posted: 11/2/2009 2:44:54 AM EST
Originally Posted By ARsonist:
The longer they remain blind, the harder the markets will fall.


Does Roubini REALLY think they are blind to what they are doing? Really?


ETA: So I post the above in this thread and then click on THIS thread:

http://www.ar15.com/forums/topic.html?b=1&f=5&t=949786

and THIS video:

http://www.freedomslighthouse.com/2009/11/rush-limbaugh-says-obama-is-destroying.html

Wow.


Maybe these Elitists just aren't that smart.
Link Posted: 11/2/2009 3:17:11 AM EST
I don't follow Roubini too much anymore.
Seems like I remember at one point, he was saying that the government needed to spend their way out of this recession before it got worse....... even though the recession was partly caused by............ -government over-spending.

Paul Krugman was another high-brow academic economist saying this kind of thing.

––––––

According to some, apparently the government has a magic money lamp they can just rub to harmlessly create billions of trillions of dollars, and it won't hurt anything. Like,,,,,,, your life savings.

I don't have any damn doctorate in economics––but as I watch a video of people sifting through Zimbabwe river mud for specks of gold, there's something about that sentiment that I just don't believe. -And that those people in Zimbabwe probably wouldn't believe, either.
~
Link Posted: 11/2/2009 5:45:27 AM EST
Originally Posted By jeffers_mz:
Roubini is correct in that the dollar's sharp drops accelerate gains in assets, and the dollar will continue to drop rapidly only so long as the US run the massive QE program they've embarked upon, but QE and low interest rates aren't the only reason these markets are appreciating.

Underlying the current declines in dollar value is a decades long devaluation of the US dollar, with few and short exceptions.

When the effective negative interest rates go to zero or even positive, there WILL be a bloodletting in the assets markets, simply due to the sudden decline in demand for non-dollarassets, covering dollar shorts, and contagious fear of asset prices, but once the new equilibrium is established, or perhaps better put, once the buying motivation retreats from negative dollar interest rates to normal long term dollar devaluation, there will still be appreciation in any market which the dollar declines against, in the long term, which is almost all of them.

The dollar is simply poorly managed, it loses value over time. It began losing value more rapidly after the US went off the gold standard in 1973, and it reached dangerous rates of decline when the US began QE to stave off global economic collapse in 2008, but it has been losing value since 1910 at least, and even in the absence of these magnifying pressures currently in effect, is most likely to continue losing value until and unless the US adopts sane currency management practices.

Trying to manage currency supply thru interest rates is like trying to build an AR with two ski poles that have tweezers attached to the ends. currency demand is managed thru currency supply, period. Money supply, capital, is managed thru interest rates, period. Any manager who can't differientiate between the two is going to lead his currency, in this case the USD, down, period.

Trying to manage a currency against the ridiculously managed CPI is folly, you might as well...in fact you ARE...managing the currency by political fiat, it cannot and will not sustain. You have exactly two choices, you manage the currency against the best standard you can obtain, and achieve relative currency value stability, or you suffer constant inflation, deflationary crises, and constant long term currency value declines.

I don't care if your currency standard is fucking carrots, you either pick a reasonable, openly public standard, or you pay in currency chaos and currency decline.

Period.

the laws of mathematics and those of economics which are rooted in numerical sanity are not negotiable. This universe runs by the numbers, not by the whims of the crooks you send to Washington.

Why then do governments choose any other path?

Very simple.

If the currency standards are complex, too complex for any average person to understand and predict, the government is able to loot the both treasury AND the wealth of the population, by any of numerous nefarious means, in the dark, where no one can see or understand the theft.

Open standards or pay the price.

Open standards, or pay the price...to me, and to people like me, who are not afraid to profit on the decline of your currency.

You leave us no choice but to profit at your expense.

We see the folly of you sitting in front of the television, ignoring what your politicians are doing to your money.

We choose not to allow our wealth to be dissipated by the crooks and scumbags you ignore.

We either lose, or we diversify against your poorly managed currency, and when we do, we profit heartily...and at your expense.

Profit is not my motive.

My motive is merely preservation of what I have already traded sweat and blood to get.

But your ignorance of your own poorly managed currency does not give me an option to merely preserve what I have worked for.

I don't want your money. You worked for it, you earned, you should be able to keep it. All I want is the right to keep my own.

By the nature of your abdication of responsibility, I must either lose with you, or else profit handsomely at your expense.

Given this choice, I choose profit, and I see those profits and I structure my investments to profit with vengeance.

Get off your ass and INSIST your money be properly managed, or else lose it to me.



I am curious, how exactly are you doing this?

What strategy is working in this currency situation?

thanks.
Link Posted: 11/2/2009 6:02:25 AM EST
[Last Edit: 11/2/2009 6:03:42 AM EST by jeffers_mz]
Originally Posted By Ken_in_Va:
Originally Posted By jeffers_mz:
snip



I am curious, how exactly are you doing this?

What strategy is working in this currency situation?

thanks.


Precious metals are up, foreign currencies excepting the Ruble and Peso are up, and the BRIC emerging markets are up, all in the short, medium and long term. Part of this is due, as Roubini staes, due to "effective dollar interest rates around -20%". Another part is due to long term down pressure on the buck, and in the case of the emerging markets, part is due to a good work ethic, stable currency, and business savvy tax structures in those countries.

You can take it from there and establish a mix that works for you. I also add a fund "ready to walk out the door" at each broker, and a fund split between "US banks too big to fail" and "US banks too small to have much CDS or MBS exposure", too.

Don't forget your stop loss, trailing stops, and limit sell orders. If the Fed ever decides to stop QE or tightens interest rates while you aren't watching, you lock in gains and dive out ahead of Roubini's projected crash, with structured orders, too.

Link Posted: 11/2/2009 6:19:44 AM EST
Whenever you artificially manipulate a market there are opportunities to exploit. Dislike Soros as much as you want but most of his fortune came from exploiting the opportunities given to him by government intervention in money markets.

Perhaps the best solution is to take monetary policy out of the hands of a central authority and let the free market do what it does best. Of course the government wouldn't be able to use monetary policy for social engineering purposes then.
Link Posted: 11/2/2009 6:22:35 AM EST
What I'd like to know is what comes after red enlarged bold font? Actual blood?
Link Posted: 11/2/2009 6:37:18 AM EST
An airline pilot friend of mine once said, "It's not a crash until you actually hit something."

But...the ride to the ground is very smooth once the wings are ripped off. If you're not looking out the window you think it's smooth sailing.


Link Posted: 11/2/2009 6:42:52 AM EST
Originally Posted By ScopeScar:
What I'd like to know is what comes after red enlarged bold font? Actual blood?


no dude, zombies. I thought everyone knew that?
Link Posted: 11/4/2009 4:33:57 AM EST
updated
Link Posted: 11/4/2009 4:50:17 AM EST
Tag for further observation.

You know, I really don't have much in the way of assets to manage, but if I did, I'd buy into jeffer's plan.
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