While Nouriel Roubini has received some flack of late, and in my estimation his biggest mistake was turning into a "market guru" rather than sticking to his bread and butter, economics - the following video interview this morning on CNBC aligns quite well with my world view. The main difference is he believes stimulus will peter out in 2010 whereas I think our reckless leadership will continue sending stimulus after stimulus with no care to the ultimate costs on future generations. They have elections to win.
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."
(editor's note - be careful when people start referring to themselves in the 3rd person)