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Roubini On The Dollar Carry Reversal, And Why He Is Only Half Way There
Nouriel has a great op-ed in the FT, discussing the imminent reversal of the dollar carry trade, a topic Zero Hedge has been harping on for quite some time: not because we believe that in the long run America will stabilize its economy (on the contrary), but because in a globalized economy (yes, a sad side effect of $1.4 quadrillion in derivatives is the fungibility of declining asset leverage) economies are relative, not absolute concepts. While our biggest pet peeve has to do with the lack of contrarian thought in whatever the groupthink trade de jour is (when everyone is on the same side of the boat, it always inevitably capsizes), Nouriel is similarly unimpressed with what he sees is doomed to end badly for so many institutional and retail traders who are part of the herd mentality. Never one to mince words, Roubini's conclusion is scary:
[O]ne 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.
His reasons for the inevitable unwind are as follows:
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.
In principle, we couldn't agree more with Dr. Doom. In practice, we think Roubini is only half way there, implying that the swift reversal will be even uglier (and swifter) than even Nouriel thinks possible. By that, we refer to our analysis of BIS estimates of dollar-denominated duration funding mismatches. Observant readers will recall that this number was estimated as large as $6.5 trillion shortly before Lehman. While the number (hopefully) has declined in the past year, the primary reason why the Fed took on over half a trillion in FX liquidity swaps with foreign banks had precisely to do with providing a near-term dollar-based funding source. And this was the point we made in our previous piece: while it is true that on one hand the global economic system is now faced with a potential massive dollar short squeeze, the fundamental maturity mismatch problems are still endemic to the international system. Simply said, dollar unwind risks are based on both a short squeeze as well as another unsecured/FX swap market implosion, most likely in some form of vicious circle.
Curiously, none other than the NY Fed came out with a research piece, subsequent to Zero Hedge publishing its thoughts, entitled "The Global Financial Crisis and Offshore Dollar Markets" in which it essentially recapped our salient points regarding the inception (but not the consequences) of a predominantly dollar-denominated asset holding philosophy.
The paper does a good job at quantifying the impact on the dollar basis (a very interesting topic in its own right), yet stops short of providing an estimate of what could happen, should the biggest potential squeeze trade go haywire again. As Satan says in the Devil's Advocate, "well consider the source, son," this is not very surprising.
In conclusion: we agree with Roubini on the imminent threat of the squeeze counterplay, yet we wish to underscore the danger of the speed of the eventual unwind: the coupling of the carry unwind as major financial and non-financial players seek suddenly rare dollars, coupled with what will undoubtedly be another FX swap implosion, will make the Volkswagen melt up in which the company quadrupled its market cap to over $300 billion in a matter of hours, seem like shroomed up slow motion. When that happens not all the printing presses in the world will make an iota of difference as approximately $50 trillion in assets all try to exit single file through the side door of the burning Bernanke cinema where Moral Hazard, the movie plays 24/7.
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The exit door is only so wide. Fridays system failure is ominious indeed.
Nice analysis, the question becomes; does it happen this month, 3 months, 9 months, 2 years? Everything involving macro economics seems to always take much longer to play out than one would imagine possible. Its like warning of the housing bubble in 2004, plenty of people were doing it but you lost your *ss for two years shorting the builders if you acted on it.
Excellent point. This also illustrates the problem with shorting on the come. Unless your timing is perfect, you'll be subjected to a tremendous amount of psychological stress.
"The market can stay irrational longer than you can stay solvent."
Cock-a-doodle-doo
Indeed. And ominous too!
I wonder how Bernanke sleeps at night... he has to know somewhere down deep that he cannot possibly control the multiple forces that are at work which could at any moment capsize the boat that he has built for the United States... the dollar carry reversal sounds like great entertainment and it has my vote... especially it if is triggered by flight from risk due to the fear of a double dip.
The rubber bands are getting stretched longer and longer... i.e. equity meltup and dollar meltdown... one day something will snap.
Ms. MnNice -The answer may well be found in this Tyler classic; "seem like shroomed up slow motion". Our central bankers and their sponsors are grasping for straws in the vain attempt to avoid what must be done and sustain the status quo. Problem is that there aint enough 'shrooms, Ben Bucks or both.
All The Best
Yep... I think that is the right perspective... and it is not only a 'shroomed up slow motion' event... but an 'Alice in Wonderland' event that seems to have distorted the appropriate sizes of all the different asset classes... I think a shroom helped Alice keep Wonderland in the proper size and perspective... maybe that is what we all need to help adjust to the clear distortion in the markets :-)
I understand the practical need to "adjust to the clear distortion in the markets." After all, if you're trapped in a system or culture, you still must live, eat, work, in short exist despite or in spite of the culture.
But this is precisely the slippery slope we must not slide down. When we attempt to cope with, to in effect assimilate into the insanity in order to deal with it physically and mentally (even profit from it?) the chaos and distortion, the outrageous and illegal behaviour becomes normalized, accepted and finally the status quo.
This is the beginning of the end for any system or culture. The slid into insanity doesn't happen with the participants kicking and screaming but rather calmly and even willingly. This is why throughout recorded history, a cultures demise is always a shock to those inside and inevitable to those outside.
If one then believes that this carry trade has the possibility to unwind rapidly causing the corresponding collapse in the equity, energy and other risk markets, won't it be then another fantastic opportunity to short the dollar? It seems to be that the gold vs dow and gold vs dollar divergence that we saw on Friday might be the first stage of a larger picture up until Friday it has been a tick for tick relationship between a strong gold market and a weak dollar strong equity market.
It would seem to me that any dollar strength, caused by the GDP stronger then expected (see tudor jones comments), a normal commodity short covering or any other extraneous event will do nothing to change the trillion dollar deficit picture that is the basis for a weaker dollar. After making up almost all my losses by being long gold/silver/ and foreign bonds (didn't do any teeth mashing over missing the equity rally) I guess I have to start to protect the foreign positions from this snap back rally. Question I would like to see answered by Dr. Doom is where will the dollar be one year from now?
-1, nice try though, dude...
If one then believes that this carry trade has the possibility to unwind rapidly causing the corresponding collapse in the equity, energy and other risk markets, won't it be then another fantastic opportunity to short the dollar?
a normal commodity short covering or any other extraneous event will do nothing to change the trillion dollar deficit picture that is the basis for a weaker dollar.
IMO, YES. The so-called economic recovery / strengthening is based solely on deficit spending-based "stimulus" and not on true productive economic activity. This means the primary underlying factors causing dollar weakness (high and increasing debt and fiscal deficits) have not changed. There has been no recovery in tax revenues, yet there is a significant and ongoing increase in demand for social spending due to unemployment etc.
I have been waiting for this risk-off event; it is time for Bernanke to smash the dollar shorts and goldbugs, and stocks will get pummeled in the process. So when we get to crash 2.0, and tax revenues crash still firther, and unemployment rises still further, and therefor deficits rise still further, I will begin pushing more of my long-term chips onto the "dollar shorts" spot. I'm about 65/35 cash / dollar shorts now, I intend to be 35/65 or better. Already dumped the short-term part of my dollar shorts, holding the core with strong hands.
Bring it, you Street fuckers.
The trillion dollar deficit is not the only reason for the weakening dollar but it is a sallient point
At the end of the day, herd mentality will take over, traders/investors have it ingrained in their mind that if you want to avert risk, you go long USD.
Trillion dollar deficits and the like will not be taken into account when investors look to avert risk
Keynes regarding a newspaper beuaty contest; Keynes noted that a competitor did not have to pick “those faces which he himself finds prettiest, but those that he thinks likeliest to catch the fancy of the other competitors.”
missing the central bank USD unwind tsunami. doors helpful to float on though. nice try, rubanke.
Conditions necessary for a black swan? Perhaps something like this:
The charts: (These are long term charts, # stocks above their 200DMA
DOW: http://alturl.com/wdof
NASDAQ: http://alturl.com/gcbm
NAS 100: http://alturl.com/3xkv
NYSE: http://alturl.com/nspo
S&P100: http://alturl.com/u7d8
S&P500: http://alturl.com/ffsw
THE 20 Day EMA is crossing the 50 Day SMA, but the SMA & EMA THEMSELVES are both some 42% ABOVE the 200 Day MA! WITH MORE STOCKS ABOVE THEIR 200 SMA then at the PEAK in 2007!
IF they are looking for support, that's some 42% DROP to find the closest support.
What do the credit markets look like? are the engines seizing again? or are they still posting trades?
Conditions necessary for a black swan? Perhaps something like this:
The charts: (These are long term charts, # stocks above their 200DMA
DOW: http://alturl.com/wdof
NASDAQ: http://alturl.com/gcbm
NAS 100: http://alturl.com/3xkv
NYSE: http://alturl.com/nspo
S&P100: http://alturl.com/u7d8
S&P500: http://alturl.com/ffsw
THE 20 Day EMA is crossing the 50 Day SMA, but the SMA & EMA THEMSELVES are both some 42% ABOVE the 200 Day MA! WITH MORE STOCKS ABOVE THEIR 200 SMA then at the PEAK in 2007!
IF they are looking for support, that's some 42% DROP to find the closest support.
?? are my posts being blocked?
Im with him...
The market moving event of this week is not on the financial calendar. To the extent that Tuesday's off-year elections show that the ruling party's plans for increasing fiscal malpractice and state control of the economy will not go unchecked, the currency could see the best weekly gain in more than 6 months, with commodity bulls taking a big hit and equity bulls returning some of their profit.
$50 trillion in assets all try to exit... and go to? another planet? spooooky. I think I'm gonna go buy some USD's right now, before that cosmic event happened.
I have been attempting to communicate to Dr. Roubini for months that his faith in some of his professional associates was grossly misplaced. Perhaps he is finally waking up to this fact publicly. I for one will hit the hopium pipe on this one folks. His would be a powerful voice and his timing is excellent.
Tyler, your efforts to go up tempo at this time are also very much appreciated.
All The Best
Mile,
Roubini seems to move in cycles. He publicly steps to the ledge screaming for all the world to wake up. He's noticed and begins to receive public acceptance and even accolades for his insight and bravery for going against the flow.
His ego begins to inflate (somehwat understandably) as he's flattered and celebrated and he beings to tone down his message and rhetoric in order to fit in more easily and to be accepted by his peers and the public.
I've been saying for a while that he has lost credibility as a honest to god contrarian because he's gone mainstream. You don't beat up your professional associates if you wish to be accepted by them and the public.
Somewhere along this path, he begins to sound like everyone else and is no longer a novelty. At this point, either out of a crisis of conscious or the desire to return to the limelight, he begins the entire process again by making public statements contrary to established thinking and his light begins to shine brightly again.
The Roubini roller coaster if you will. BTW he doesn't answer my inquires as well so you're in good company.
I've noticed this too,and always assumed he'd been co-opted with a seat at the table.
For I am full of words; The spirit within me constrains me. Job 32:18
Miles you little devil. I didn't know you were fluent in the Bible as well.
First DOD, then DOJ, now GOD. You're one SOB. :>)
"I discovered later, and I'm still discovering right up to this moment, that is it only by living completely in this world that one learns to have faith. By this-worldliness I mean living unreservedly in life's duties, problems, successes and failures, experiences and perplexities. In so doing we throw ourselves completely into the arms of God, taking seriously, not our own sufferings, but those of God in the world. That, I think, is faith." - Dietrich Bonhoeffer
Very good.
I've found with myself that as I learn the extremely difficult lessons of life, my faith has grown by leaps and bounds. It isn't so much by suffering that one learns but by understanding the suffering of others. By identifying with those sufferers I can begin to understand myself.
Only by walking a mile in an other's shoes do I learn the compassion I need to understand, and then forgive myself for, my own missteps and transgressions.
Compassion for Bernanke. Forgiveness for Geithner.
I agree with max225, I expect fuses to be blown later this week or next Monday after the 10.3% unemployment number comes out, Dow down 1000 points in couple of hours and the USD up 2% to 5%. It’s coming. In fact, it’s hard to believe the circuit hasn’t been blown yet during this secular bear market beginning in 2000.
If that happens within two weeks, Park City, I'll buy you a case of beer.
You pick the beer.
http://www.slyfoxbeer.com/index.php/front/beer_saison
Is the adage "do not bet against the FED" not true anymore?
Yes, the USD is going up and smelling a newly printed note is a natural deterrent to the H1N1. Preforate it and you have a homeopathic mask. A couple of penny, nickel lozenges in your mouth and your nose will stop running before everyone elses starts. How do I know this?
I asked Chuck Norris.
So where should you be? If all asset classes are going to be devalued and we all know that eventually the dollar will be worthless, where should a small time retail investor be? I already own more than enough guns and ammo for the coming zombie apocalypse so what else should I buy that will actually go up in value? I really don't wanna buy anymore bullets, because I have a hard time picturing myself mass murdering more than 10k people... then again... how many employees does the squid have?
Read about Iceland and Argentina. Then make appropriate purchases.
why do I have the feeling the number has gotten larger than 6.5 T
the CON GAME with REALITY can only go on so long?
Hey surfersd, how are the waves in southern CA? I’m waiting for the powder to arrive here in Utah. The Japanese tried to debase their currency multiple times during the past two decade, their debt to GDP is pretty high and their economic future is as murky as ours. But the yen has appreciated considerably over a long trend line. Don’t get me wrong I’m in the gold $3000/oz camp trigger to sell gold and buy the Dow 3000. However, I believe gold will dive to $750 or maybe even $650 and burn massive numbers of retail investor lured to gold from the countless infomercials. Deflation will win out for a couple of years before inflation swallows all. The whole USD thing is counter intuitive and people should be hedge. In this great bear market all asset classes will get crushed.The goal is; being hedge neutral with them all. However, ego usually is a big obstacle to the goal.
Enjoy the Ride. I hope you find alpha and the ultimate stoke.
Thanks Tyler for making the effort every day.
Dude, gold won't crash with equities because gold holders are not dumping gold. In fact there's a strong demand for gold as more and more investors want to hold physical as part of their portfolio. Long physical gold and good gold producers is the only safe prediction in this market.
Friday's action was a prelude to how the market feels about gold and gold stocks when the rest is flushed. It was almost scary watching the midday reversal.
walküre... agreed, Friday convinced me to stay in precious metal producers (was thinking of moving to bullion) and watch the the rest of the equity markets implode... "Santa Claus is coming to town"... just in time for the meltdown!
Dude, paper gold derivatives...estimated 80:1 physical. How could price NOT crater when promise holders panic their trades?
last time I heard the adage "do not bet against the FED" on a daily basis was from March 2000 to March 2003...
The Europeans are behind the curve in addressing the financial crisis and as the US recovers faster, I expect the US Dollar to strenghthen against the Euro. However, it will likely weaken against the currencies of higher growth BRIC countries.
It all has to do with interest rate differentials and relative economic growth.
time123
admin: http://invetrics.com
BRIC are export contries with large(ish) dollar reserves. Devaluing the dollar is a double blow to both exports and reserves. Don't bet all your eggs on that.
David Roche of Independent Strategy was on Bloomberg (Asia Confidential) around 3:15 UTC today, taking a standard bearish line on stocks, China and the dollar. He made a particular prediction for the shape of the dollar's future, but I can't remember what it was now, beyond slow decline followed by fast decline.
Great piece until the end:
"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."
Please...
Roubini couldn't possibly think that the most powerful group of economists on the planet doesn't know exactly what kind of new bubble they are creating. I'm not saying Dr. Doom is a FED apologist (or maybe I am!). WTF?
USD and VIX continues to get stronger.
My long term USD indicator has been giving bullish warnings for several months.
My indicators can identify trend changes before they occur.
They warned me of an impending stockmarket crash back in early *2007*
http://www.zerohedge.com/forum/market-outlook-0
Zulu
Maybe Bernanke goes to bed every night thinking..."God i have to be wrong! The world just CAN'T be this screwed"
The paper as well as discussions of the $ carry trade do not address that some big banks can borrow directly from the Fed. Funding costs for those players should not change during a crisis.
Is the author missing that or am I missing something?
If you have borrowed USD to fund a position in USD equities or dollar denominated assets, unwinding this will not have much of an fx impact. I can buy the argument that there is too much leveraged risk taking out there, but I do not buy the argument that the Dollar is oversold. The key to this is whether the Bank of China uses the situation to reduce Dollar holdings, to keep the currency and hence the Yuan lower. This would have 2 benefits for them - trade and reserves, so I would expect them to do so.
$ is not dead
FT reveals this morning that most European ETF's ( Barclay's excepted ) don't own the assets but are in reality derivatives based on swaps related to those assets.
I wonder if these totals have been included in the estimates of outstanding derivatives.
Looking into this is Zero-Hedge worthy.
Can you spell Ka-Boom?
TSF says Goldman FOS
Goldman Sachs: Reasonable Doubt
Sophisticated counterparties like AIG are supposed to protect themselves, and have little chance for recovering damages. But now the American taxpayer has stepped in to make payments for AIG. U.S. taxpayers have a right to recover money paid out for derivatives on deals that include phony collateral.
http://www.tavakolistructuredfinance.com/GSRD.pdf
I've said it before when discussing gold, the short dollar trade is too one sided and gone on too long. As you're pointing out with the BIS data a reversal is going to lead to events similar to early November of last year. The dollar strengthening will build on itself as debt denominated in dollars requires dollars for payment. Of course the morons on CNBC will claim that people are running to the safety of the dollar in times of trouble, when it has nothing to do with safety, and everything to do with the debt requiring payment being denominated in dollars.
Jim Rogers was expounding on this the other day on Bloomberg, the next bubble will be in US Treasuries, and it will have nothing to do with a vote of confidence in the US, but everything to do with the ending of the world-wide liquidity induced asset bubble of the past eight months.
That's a great point, this has nothing to do with faith in the dollar. And that is exactly why it will be a short and aggressive bounce in the USD, not a long term trend reversal.
Look at the fundamentals of the US currency (to the extent that fundamentals can be identified w reg to crncies). Until interest rates are raised, and the monetary base shrinks again, there is no reason to believe the USD should outperform other currencies. This won't happen until Bernanke is SURE he won't create a depression. Everything he says and does should tell us that interest rates will not be raised for a long time. Look at his statements, look at his papers. Even though it is no guarantee, the best indication of future behavior (in people) is past behavior.
Also, gold can outperform not only the USD but paper currencies in general, if a situation with competing devaluation arises: The USD can not fall to zero. But it doesn't have to to that for hard assets to increase in value across the board. If the dollar falls far enough, nations will try to weaken their currencies to improve their competitive position vis a vis the US. Hard assets will be priced higher in all currencies.
tyler; surprised you are actually running this crap! My faith in nouriel instantly evaporated when I learned about larry summers equity position in nouriel's RGE business (plus RGE directorship etc).
http://www.economicpolicyjournal.com/2009/04/summers-was-paid-52-million...
ye canny make this shite up! So black swan spot on above, nouriel is a demonstrably false prophet.
buster B.
So how do we profit from this info...I have been sitting on a pile of cash for 2 years now and making cd rates...any ideas on not too risky plays?
Gold will fall hard. It will fall only because when you need to liquidate you sell what people will readily buy. The same thing happened last fall. Dollar went up, gold strongly corrected. Too many people confused that as people being anti-gold when it had more to do with the need to get dollars to pay dollar denominated debt. The same thing will play out again this time.
End of story is long-term, 10-20 yrs, Gold is the winner. Throughout the long-term period you'll see plenty of corrections.
Bob Hoye says the same thing. The goldbugs will wig out when their inflation-hedge goes bye-bye and they will sell gold off heavily.
That will be a good time to acquire gold again, as the financial crisis begins to implode again and there's a race to the currency of last and accepted resort: Gold. Silver as well to a secondary extent. US was a bi-metal currency before the gold owners shafted silver.
In the meantime, when people need to cover their absurd leveraged borrowing of dollars, we will have a race to senior currencies like the Dollar. That will last for about another 4 months before the currency crisis begins again via TARP 2 and the dollar gets abandoned.
Note the article in bloomberg this am about the banks buying treasury bonds en masse. This is the bailout. Launder money through the bailed out banks to keep the US funding mechanism open. Hope upon hope the economy turns up and a million flowers bloom to pay off the crushing debt load.
I agree, hehehe. It will correct when panic hits. But like last time, it will rebound faster and stronger. timing this exactly is impossible. So what are you going to do: Sit in the asset that will deteriorate over the long term, or the one that will appreciate, although with a few hiccups on the way? I'm sticking to my gold, but your point is valid. Levered gold bugs will probably have to abandon their positions on the way.
Tyler: consider Roubini just inked his book!!! This is just free ride for sales.
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