Why Nouriel Roubini is Wrong

madhedgefundtrader's picture

Nouriel Roubini is using his platform at Davos to warn the world, Cassandra-like, of the “mother of all highly leveraged asset bubbles” now in progress. Shorts in the US dollar have been built up to unprecedented levels, and are used to finance the purchase of every asset class, especially in energy, commodities, and precious metals.

This bubble will be pricked by a huge snap back rally in the greenback which may have already begun, the exhaustion of Fed support measures, a growth surprise in the US leading to an early Fed tightening, or a real double dip recession. The inevitable collapse will make the last financial crisis look like a cake walk, and take all markets, especially equities, down to new lows.

The flaw in the Turkish New York University economic professor’s logic is lurking in his own arguments. The basis for his “U” shaped recession (described by others as “bathtub” or “toilet bowl” shaped), is the absence of credit, especially at the regional and small business level. But I can tell you from my own experience that credit is also absent, or at least severely diminished, in the hedge fund community too.

Terms have been tightened across the board. Collateral requirements are much stricter. Margin requirements on the futures markets are vastly heavier than they were two years ago, especially for the most volatile contracts, like crude. You can forget about financing for any kind of instrument that is illiquid or trading over-the-counter.

Prime brokers now play hard ball. The days when big hedge funds borrowed stock and shorted them with no money down are a distant memory. If you want to borrow and short a highly volatile stock, expect to pledge your first born child as collateral. The last time I checked, Lehman, Bear Stearns, and AIG weren’t doing any new lending at all. Many credit markets, such as those for certain CDO’s, are still completely closed, and are never coming back.

So where is all this leverage? The net-net is that speculative positions are but a fraction of those seen at the 2007 peak. To get a real crash with new lows, you have to have the same kind of leverage that we had three years ago.

I think Nouriel is one of those Mount Olympus guys who gives broad, general views of what were mere mortals are up to. But never having worked on a trading desk, he doesn’t understand that what he is proposing can’t actually be executed. The eminent doctor is increasingly looking like a one hit wonder. When the current trends reverse, there will be much volatility, pain, hand wringing, and gnashing of teeth, for sure. But it is much more likely that we are going to die from ice, not fire, and of boredom, not from cardiac arrest.

For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, and where you can also catch me on Hedge Fund Radio weekly.



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Chopshop's picture

" So where is all this leverage? The net-net is that speculative positions are but a fraction of those seen at the 2007 peak. To get a real crash with new lows, you have to have the same kind of leverage that we had three years ago. "

Since there are oh so very many ways to tear a prophetic statement of fact like this to absolute shreds, i'll simply say that this is one i'll be storing in a docx file alongside other gems; i.e. those of gold bug short-sighted asininity just a few short weeks ago.

P.S. ALL equity and .... positions are "speculative", so way to frame that issue correctly.

P.P.S. the rather sensationalistically confrontational title, which is just damn good, is issued as a declaratory statement but the r-tickle simply picks at one semantic tag-line ... conflating it in into a catch-all for NR's rather impeccably argued opinions. 

At this point, after 'the mkt' has already peaked & topped and it is not safe for the joe the plumber's & sarah palin's of the world to be swimming in this pool ... and it's not whether 'you're' right or wrong (to make this one real easy) but rather about how ones argument actually holds weight once wrung out.  To sum: this g-string article exhibited a substantively weak thread of.

Anonymous's picture

hey DB, get the monthly US treasury report- Exhibit 1.
then get the latest Federal Reserve balance sheet- Exhbit 2.

You want leverage, you can't handle the leverage!

Is this douche bag for f'in real??????

Anonymous's picture

what a douche bag!

Anonymous's picture

It looks to me that somehow the writer of this article is concentrating on hedge funds,and forgetting in the process that the biggest six or so banks has about 10 trillions of assets to speculate with. We still don't have Glass-Stegal act,remember?

Anonymous's picture

Only idiots that believe in fairy tales will have anything to do with trading these cinderella markets.

"Death to the middle class," they shout!

No More Bubbles's picture

I'm stunned this poster has ANY money under management!  I bet if you give him 10 cents, you might get back a penny.  This clown is a total buffoon!

Anonymous's picture

Well MHFT, we're down a modest 120 Dow points so far today after higher forecasts from the BB reappointment and SOTU. Gold is trading for the cost of the S&P. Wait until the market stage trap door springs open...


pros's picture


Mad Hedge Fund Trader talks nonsense,

is no hedge fund trader

is "mad", however---

choose your sense of the word


Anonymous's picture

Thats true.

Anonymous's picture

Unless of course lots of people are Long risky assets and Short risk-free assets (i.e. S TBT), and then shock horror get smacked on both sides of their book at the same time...run for the exit at the same time since they can't afford another 2008 (so soon)...and find, err there's no liquidity because everyone has the same trade on!

Anonymous's picture

Your premise that new constraints such as lack of available capital, decreased leverage, increased collateral, etc., is logical, however, you are missing one big point that most people miss: the U.S. stock market is a financial ponzi scheme that benefits the few at the expense of the many. When one actually goes back to the very beginning and looks at the valuation of companies through the prism of "real" earnings---that is, dividends paid to the shareholders (owners) of a company in return for "risk", it is not hard to see that the market is grossly overvalued.

I find it amusing that Wall Street and its ilk continuously try to justify the ongoing fiat money ponzi scheme through all sorts of new paradigms----in the end, the reason the market belongs much lower has nothing to do with economic prospects---virtually all assets are grossly overvalued because the risk/reward is not favorable. Why it is that people cannot understand this baffles my mind to no end.

Trifecta Man's picture

You argue that the lack of current credit sources means bubbles will not be formed.  Reasonable.  But could NR be referring to existing bubbles, such as t-bonds, bank reserves, JPM silver shorts, and political bullcrap?

Trifecta Man's picture

Add stocks to the bubble list.  Just got a major sell signal:  QQQQ has fallen below its 20-week moving average.

moneymutt's picture

Hope you are right and there is not that much leverage out there...but I don't think hedge funds would need to be the only source of such bets...God only knows what FED and friends may be up to.

TimmyM's picture

As we take financial services from 21% of GDP down to its rightful place of 4% of GDP it will get very boring for those who do not embrace a new productive enterprise.

Dirtt's picture

The reality of 21% is sloshing in a toxic stew in some land far far away.  It was not sustainable.  Not transparent.


We are not talking about the dog food buisiness where every can and bag could be counted.  Dog shit? Yes.Look down before you step.