Roubini on the Economy

[D-Mack]

[goadam1]

Re: Roubini on the Economy

Here is a sort of transcript from Generational Dynamics. Carry trade and bubbles everywhere:

http://www.GenerationalDynamics.com/...091027#e091027


"[Could we see the stock market run continue?]
Yes, in the short run what's happening is that there's a wall of liquidity, not just in the United States but around the world, that's chasing assets -- it's equities, it's commodities, it's gold, it's emerging market asset classes.


Nouriel Roubini (Source: CNBC)
And now we have even the mother of all carry trades. Everyone is borrowing short, shorting the dollar, borrowing and investing in assets all over the world. Global equities, comodities, credit, emerging market asset classes.

The risk is however, right now people are borrowing at zero percent interest rates in the United States. Effectively the rate of borrowing is negative, because with the dollar falling -- ?? in the capital gain, -- you're buying any asset around the world. All these assets are perfectly correlated.

Eventually, the dollar cannot keep on falling. Once the dollar stops falling, it reverses. You have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world. That's a risk.

[Is that anywhere near happening?]

No, it's not near happening because for the time being the Fed is keeping short rates at zero, expected to remain zero, and the Fed is becoming the biggest seller of volatility because it's buying $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility on the long end is low, and on the short end is zero, so this game is played until ????.

[Question about central banks]

There's a gap between what you have to do for the real economy, and what you have to do for financial stability. The real economy is still weak. There's deflation actually in the economy. Look at the cycle 2001-2006. They kept the fund rates all the way down to 1% through 2004, three years after the recession was over. Then they did step by step [raises of] 25 basis points every six weeks.

This time it's the same, only worse. Output has fallen 4%, not 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We have actual deflation rather than risk of deflation.

So if the Fed wants to target the real economy and avoid deflation, it has to keep the Fed funds rate at 0 for longer. But if it does that, then you create another huge asset bubble.

With the carry trade, that asset bubble is now becoming global, and everyone has to follow U.S. monetary policy by intervening in a non-sterilized way. That eases money at reduced rates, and therefore we're exporting our monetary policy to the rest of the world.

And that's leading to a global asset bubble. And once there's the unraveling of that carry trade that eventually is going to occur, because the dollar cannot keep on falling, then you can have a market crash on a global basis.

[q: Is this current asset bubble worse than the one that preceded the fall of Lehman?]

It could become worse because if the Fed keeps the rates at zero, and if the Fed keeps controlling and reducing volatility on the long end, then everybody is playing the same game. Everybody is buying dollars and going long in risky assets all over the world.

[Have we put out one fire, only to create another one?]

I think we have two objectives here -- stabilize the real economy, and avoid financial instability. But we're using one target, the Fed funds rate, to target the real economy, but we're creating a new asset bubble, bigger than the previous one, and that's a mistake we're doing right now."

[metalman]

Re: Roubini on the Economy

Here is a sort of transcript from Generational Dynamics. Carry trade and bubbles everywhere:

http://www.GenerationalDynamics.com/...091027#e091027


"[Could we see the stock market run continue?]
Yes, in the short run what's happening is that there's a wall of liquidity, not just in the United States but around the world, that's chasing assets -- it's equities, it's commodities, it's gold, it's emerging market asset classes.


Nouriel Roubini (Source: CNBC)
And now we have even the mother of all carry trades. Everyone is borrowing short, shorting the dollar, borrowing and investing in assets all over the world. Global equities, comodities, credit, emerging market asset classes.

The risk is however, right now people are borrowing at zero percent interest rates in the United States. Effectively the rate of borrowing is negative, because with the dollar falling -- ?? in the capital gain, -- you're buying any asset around the world. All these assets are perfectly correlated.

Eventually, the dollar cannot keep on falling. Once the dollar stops falling, it reverses. You have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world. That's a risk.

[Is that anywhere near happening?]

No, it's not near happening because for the time being the Fed is keeping short rates at zero, expected to remain zero, and the Fed is becoming the biggest seller of volatility because it's buying $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility on the long end is low, and on the short end is zero, so this game is played until ????.

[Question about central banks]

There's a gap between what you have to do for the real economy, and what you have to do for financial stability. The real economy is still weak. There's deflation actually in the economy. Look at the cycle 2001-2006. They kept the fund rates all the way down to 1% through 2004, three years after the recession was over. Then they did step by step [raises of] 25 basis points every six weeks.

This time it's the same, only worse. Output has fallen 4%, not 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We have actual deflation rather than risk of deflation.

So if the Fed wants to target the real economy and avoid deflation, it has to keep the Fed funds rate at 0 for longer. But if it does that, then you create another huge asset bubble.

With the carry trade, that asset bubble is now becoming global, and everyone has to follow U.S. monetary policy by intervening in a non-sterilized way. That eases money at reduced rates, and therefore we're exporting our monetary policy to the rest of the world.

And that's leading to a global asset bubble. And once there's the unraveling of that carry trade that eventually is going to occur, because the dollar cannot keep on falling, then you can have a market crash on a global basis.

[q: Is this current asset bubble worse than the one that preceded the fall of Lehman?]

It could become worse because if the Fed keeps the rates at zero, and if the Fed keeps controlling and reducing volatility on the long end, then everybody is playing the same game. Everybody is buying dollars and going long in risky assets all over the world.

[Have we put out one fire, only to create another one?]

I think we have two objectives here -- stabilize the real economy, and avoid financial instability. But we're using one target, the Fed funds rate, to target the real economy, but we're creating a new asset bubble, bigger than the previous one, and that's a mistake we're doing right now."

if i had 1 oz of gold for every wrong call roubini's made about gold i the last 5 yrs i'd retire.

[goadam1]

Re: Roubini on the Economy

if i had 1 oz of gold for every wrong call roubini's made about gold i the last 5 yrs i'd retire.

I think he is right about the carry trade but wrong about gold.

[metalman]

Re: Roubini on the Economy

I think he is right about the carry trade but wrong about gold.

the carry trade is obvious... gold is not.

[goadam1]

Re: Roubini on the Economy

the carry trade is obvious... gold is not.

True, we have been talking carry trade ever since EJ said he would discuss emerging markets!

You can't tune out everyone who isn't all excited about gold. You either see gold as a currency and store of wealth or you don't.

[metalman]

Re: Roubini on the Economy

True, we have been talking carry trade ever since EJ said he would discuss emerging markets!

You can't tune out everyone who isn't all excited about gold. You either see gold as a currency and store of wealth or you don't.

oh... i read roubini... but with less enthusiasm since...

Roubini: Geithner and Summers "Excellent Choices"

&

Roubini: Tim Geithner's Favorite Economist

&

Type	Private
Founded	2004
Headquarters	New York, United States
Area served	Global
Key people	Nouriel Roubini, Chairman Dean Daniels, CEO Larry Summers, Advisor

no wonder he doesn't 'see gold as a currency and store of wealth'.

[Down Under]

Re: Roubini on the Economy

You either see gold as a currency and store of wealth or you don't.

Exactly. Jim Sinclair said something along the lines of:

"in an inflationary environment, gold acts as a currency, in a deflationary environment, it acts as a commodity".

I know Jim has his quirks, but it was that comment that initially clued me into gold acting as a currency. Since then I discovered iTulip and have a much better understanding of why/how gold acts as a currency.

[goadam1]

Re: Roubini on the Economy

oh... i read roubini... but with less enthusiasm since...

Roubini: Geithner and Summers "Excellent Choices"

&

Roubini: Tim Geithner's Favorite Economist

&

Type	Private
Founded	2004
Headquarters	New York, United States
Area served	Global
Key people	Nouriel Roubini, Chairman Dean Daniels, CEO Larry Summers, Advisor

no wonder he doesn't 'see gold as a currency and store of wealth'.

Poor Roubini. He had his little moment. Now he will play the bear stooge.


He just wanted to be invited to the party. Clearly, they didn't like him. Bad table manners and talked over everyone else. Good for t.v. bad for an Obama dinner party. Now he is getting back at them.



"Screw your stupid bubble."

[Chomsky]

Re: Roubini on the Economy

Poor Roubini. He had his little moment. Now he will play the bear stooge.


He just wanted to be invited to the party. Clearly, they didn't like him. Bad table manners and talked over everyone else. Good for t.v. bad for an Obama dinner party. Now he is getting back at them.



"Screw your stupid bubble."

That is exactly it, and it was clear as his TV appearances increased that he was hoping for something from Washington, but like Krugman, who never got the call from Bill Clinton, Roubini was obviously destined for this one big moment and nothing more. Now he's the lovably cranky guy with the funny accent, comic relief, and he's not in on the joke.