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Nouriel Roubini on U-Shaped Recovery, Carry Trade Bubble and Housing
By Economic Forecasts & Opinions
In this interview with CNBC on Nov. 4, 2009, Dr. Nouriel Roubini, professor of economics at the Stern School of Business, New York University and chairman of RGE Monitor, cautions investors of the coming asset bubble and crash caused by the dollar carry trade, and at the same time shared his views on the economy and housing.
Video Source: CNBC
This is the second time in many weeks that Dr. Roubini warned of a growing dollar carry trade and threatening to cause a global implosion. The following is a summary of his CNBC interview along with my comments.
The Economy
Roubini: The recovery will be U-shape rather than V-shape due to "extremely weak" labor market resulting in lower consumer spending, and low capacity utilization (currently at around 70%) discouraging business investment. But the market is pricing in a V-shaped recovery, where in fact the recovery is going to be U-shaped.
My Take: By predicting a U-shaped economic recovery, Dr. Roubini implicitly diverged from his assertion less than two weeks ago that we have averted a depression. Note: I refuted his macro view in my article dated 11/03/09.
Dollar Carry-Trade
Roubini: The current monetary policy of the Fed will further weaken the dollar and thus, prolong the dollar carry trade. Eventually the carry-trade will be unraveled. Once this occurs, the dollar could have a sharp snap back probably 15-20% creating a huge asset bubble 6 month to a year from now.
"In the Meanwhile the bubble's going to become bigger globally and the bigger the bubble the bigger is going to be the crash."
This unraveling process is not expected to be "orderly", unless the central banks start more aggressively phasing out the quantitative easing, which is not the indication right now.
My Take: Carry trade has been around for decades. People involved in carry trade are among the most sophisticated investors. There could be 15-25% correction, but the unwinding process will most likely be gradual and orderly. The “crash trade” scenario could happen only with a once-in-a-life-time event such as the 9/11.
Housing
Roubini: Quantity has bottomed out with supply and demand both falling 80% from peak. However, the gap between demand and supply is so large that home price could fall another 10% before the end of next year, off 40% from peak. The situation in the commercial real estate sector is even worse.
My Take: Commercial real estate valuations have been falling over 35% since October 2007. Over the next three years, about $1.5 trillion in commercial real estate loans are coming due. If anything is going to implode, commercial real estate would trump carry trade as the number one candidate.
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Error below, edit button u/s...formula (1090-265)/(121-75)=46
17x17.9=304
1090+304=1394
Dollar/YC Reference chart http://yfrog.com/5j15694509p
Since the turmoil starting mid 2007 we had a dollar bounce in 2008 from 71 to 89.
Last dollar crisis was 1985-1995, a stellar drop 164-80 more than halving the price of the USD.
In 1988 in the midst of its decline the dollar bounced [85-105] ahead of a steepening yield curve & continued with 6 more disrupting reversals in a broad trading range of 80-100 right through the yield curve’s rise, peak & decline cycle into 1995 when yield curve was flat again. 1987-1995 was a period of dollar volatility through the top of the yc cycle.
Again the large inverted V the dollar made 1999-2005 matched the rise, peak & fall of the 2003 yield curve peak with 5 volatile reverses at the top of the dollar & yc cycles. Less volatility at cycle top than bottom.
In 1992 the dollar made 2 lows w/ one reverse. I would say the downleg we're on today is one or other of these equivalent legs. If the first (interim) then a ~10 point bounce is due any day now. If the second 1992 downleg the dollar should drop to about 69 from here. The first is more likely IMO.
Repeating sequence today. Dollar bounce from 71 in 2008 to 89 early 2009 synchronizing with steepening yield curve. Of interest, the gold:silver ratio correlates very well to the yield curve & from here one might anticipate a falling GSR into the 40s range unless the yield curve climbs higher which is quite possible, even probable & if so GSR would climb to the 70s.
If the dollar follows the 1993 bracket pattern the next bounce will show up around summer 2010 & getting the dollar back up close to 2009’s high of 89.
But before that can happen the current downtrend would continue to ~5% or so below the 2008 low of 71, say 68-69.
If the 1993 pattern repeats from here a dollar low would be reached in 2013-2014 with a ~50%+ drop from 121 in 2000 to 58ish, 17 point lower than this morning's price which would be worth (121-75)/(1090-265)= $17.8 gold dollars per dollar point. 17x17.9=304. 304+1090=$1394 gold by 2014 + manic overshhot.
Certeris paribus
Doing some calculations a 10point move in the USD would move the SPX 200-375 points down in a period of 4-8 weeks based on past history.
SPX Target 700-900 Dec/Jan 2010
"I believe Steve Keen is a more reliable authority on all matters economics than NR"
Keen and Roubini are working the same problem. Borrow big, invest big, repeat....till it blows up. Roubini would have a much larger impact if he could name names and quantify the borrowing. How much are Bank of America and JPMC lending to large scale asset investors? Who are these investors? What are their leverage ratios? Which ones are large enough to create systematic risk?
9/11? So what? A few billion in insured RE trashed, a small fraction of yearly traffic accidents killed. It facilitated a nice expensive war debt (unrelated to actual 9/11 events, of course), but in all likelihood GWB would have found something else to screw up, like cut taxes more or privatize social security. Remember that? That would have worked nicely, eh? And look at all the increased employment it's caused with TSA-- those people would all be on welfare! Screw 9/11. Get over it.
Seek help.
+1 9/what?
I believe Steve Keen is a more reliable authority on all matters economics than NR:
http://www.debtdeflation.com/blogs/2009/11/06/my-per-capita-talk-on-debt/
Perhaps he would make an excellent contributor on ZH?
“crash trade” scenario could happen only with a once-in-a-life-time event such as the 9/11
"Once-in-a-life-time"'s are thirteen to the dozen. Each of them happens only once, but they come in all shapes and colors all the time.
there is no recovery when the fed funds rate is 0!!!
end of proof...
A beautiful simple statement.
too many land mines in the economic turf to produce recovery....usa will have a few months of moderation where declines pause and which will fool most analysts who can't discern between increases in output vs increases in price inflation...this will be a y = -x^3 recovery; inflection yes; upward no....
i wish krudblow, craper, and other cnbc asswipes were correct but recovery is not going to happen because the bankster-illuminists do not want a recovery...the over all numbers have not recovered - not even the djia has....
they have shipped assets to the east where the new hegemony begins...east = economic; usa = military...everyone in between is fucked...nwo
http://www.youtube.com/watch?v=008BPUdQ1XA
most excellent
"My Take: Carry trade has been around for decades. People involved in carry trade are among the most sophisticated investors. There could be 15-25% correction, but the unwinding process will most likely be gradual and orderly. The “crash trade” scenario could happen only with a once-in-a-life-time event such as the 9/11."
Once in a lifetime huh? he average joe lives for about 80 years. If you started living in 1900 you would have lived through two world wars, a great depression, Vietnam, the oil shock, the mass adoption of the car, the invention and adoption adoption of the home pc and other structural, world shaking events too numerous to mention.
The trouble with once in a lifetime events is that they have an alarming habit of happening every five years. Go back to Taleb, start at page one and keep reading.
I don't know what unintended consequence RvRepos will have on the intended target, namely money market shares but the bottom line is rates on long US Treasuries will have to rise...greatly.
All assets including Gold and stocks will crap their proverbial pants when that day finally comes so much that they are lock limit down and harder to escape from.
Until that day the pump is on. I just don't know if I'd be able to get out without losing a bunch first. That said, I will always love my old coin collection.
Classic bonddude... And I will love my new collection as well.
Adding to my "old collection" for posterity's sake. ;-)
Personally, I prefer the nickname "Count Roubini" to "Dr. Doom"; with that blood curdling accent he really would make a terrifying undead villain should he decide to change careers and go Hollywood.
I think the appreciation of the dollar is not that far fetch once the indications of monetary tightening begin to surface. The flight back to US dollar could be violent if the carry trade bubble is huge. It does not take a lot of sophistication to play carry trades.
I think Nouriel deserves the benefit of the doubt. He has been a lot more right than most, and at the very least appears not to be Working For The Clampdown. And the fact that he moderated his views somewhat over time seems a reflection of the fact that Armageddon did not occur, and that a variety of factors intervened that gave him pause as far as where we are headed. Lately it looks as if those months of moderation and hesitancy have given way to a new clarity for him, so I for one am paying attention. To say, like Jim Rogers, that Roubini is dead wrong, seems a little extreme.
Ned, is that like having the discontented use the web as a means to "blow off steam" rather than use more traditional means of expressing displeasure? While I agree with your premise I also cannot but help thinking that Roubini is a means to an end.
Remember, Rogers is a yellow tractor driver...
F shaped recovery.
Wasn't there another unwinding process last october when the DXY went hogwild for what, a few weeks?
dr doom is one of my favorite characters in this nightmare we call reality
he sounded the warning along with other notables
but hey...dollar "snap" back...look im not half as smart as roubini so who am i to say
but
hey, how the hell is the USD gonna snap back when the fed and the whitehouse and congress are pumpin like a teenage boy into his hat at a porno theater
is the fed gonna liquidate its portfolio of ABS (that big bag of mark to model crap)
and , or is the fed gonna soak up liquidity with reverse repos...or raise the fed funds rate...or stop supporting treasuries?
some combination of those actions, for the foreseeable future, would smash this country to pieces like a wooden row boat onto the rocks of the portland lighthouse in a gale
and in the midst of the deepest recession since the GD what commodity bubble does nouriel have in mind
no doubt gold, oil and a host of other flight to safety commodities will rise, some dramatically...and then fall...but i think (guess) the rise aint done risin and the fall is even farther away
Rube ni.....
What Roubini terms as Dollar funded carry trade is really a Dollar flight and hedging. Roubini is obfuscating the issue.
I think 'flight' and 'carry' are close relatives.
He's got a few right ideas in his head from here and there but there is still no denying the fact that Roubini is a total MORON. There will be no "recovery" - either V, U or W shaped, but an I shaped disintegration. Just look the f--k around for chrissake!
Agreed G.G. but Roubini has the undivided attention of the Council on Foreign Relations because of his correct calls preceeding the Melt Down of last year. Roubini will never see his dollar carry trade unwinding scenario unfold because of the $500 to $600 trillion outstanding in OTC interest rate swaps .
If Credit Default Swaps had little to no capital or collateral as backing which exposed the systemiv risk then subsequent to last years melt down and credit crisis then who is going to step in and back those interest rate swaps that have little or no collatteral or capital behind them?
My guess is that once market forces push interest rates higher there will be an implosion in ALL fiat currencies and military juntas accross the globe or vigilane anarchy.
Have a wonderful weekend.
Fucking RIGHT Gordon--I Fucking love it.
You know i would believe everything I read here but I hear the hum of printing presses hovering over every theory. Who knows where it will all end up. I think everyone everywhere should stop paying their mortages . The banks have already been paid. That might strike a balance, total mortgage anarchy.