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Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble
Oct. 27 (Bloomberg) — Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.
“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”
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35 Comments
Thanks for posting this, john. The problem as I see it is that there is no place to put money for investors who have it; there’s no safe haven. Because the rate is so low, they borrow and put it in those things which continue to be consumed in spite of conditions (people don’t stop eating, so they buy pork bellies…).
This is a slightly less rabid replay of May-July last year when petroleum was skyrocketing; when legislation forced an increase to margins, the speculation stopped and prices plummeted. It may have spurred the problems with toxic assets since demand for liquidation may have increased at that time.
What a freaking mess.
WE fail to remember in years past people put their money in banks to draw interest and save.
Then the Congress let the Banks go private, become stock holder owned and they no longer paid a good interest on savings, because they could make more money in the markets.
This forced people to put their money in the markets, and more risky investments to make something on their money
So the Governemnt actually forced people to take risk with their money. The recent crash and Madoff scandel showed how risy these things were.
People need a place to put their money. that is safe Guaranteed, and pays a good rate of interest.
Our Government is missing the boat, If it sold Government insured stock, and paid a reasonable interest, and was safe, people would give them their money by the hords. It would give the people safe investment, and the Government all the money it needed to work with. The interest is what the assholes in Government don’t want to pay because they are cheap bastards.
They know they can take our money as taxes, and have to pay nothing for it.
This is flawed thinking because most businesses sell stock to get what they need to operate, and the dividends paid are a small price for the use of the investors money.
If all the taxes we pay were used to pay interest, can You imagine how much money the Government would have to work with.
Our governemnt also does very little to make money with our money. They like to give it away, but seldom try to turn a profit. Right now they and we know that small businesses need credit. The best way is a government Bank, that would make those loans, and profit from the interest. Things like the small business loans are so rediculously hard to get, many businesses I know won’t even try.
So what is the Governments answer to the problem, give our money to banks to loan out, and let them make the interest. We are again helping private banks make money off our money.
We have a Government of fools, who can’t think real terms to money and finance. All they know is how to tax, give away, and spend our money.
Wouldn’t it be nice if our Governemnt was run like those banks who are making such big profits, instead of a giant give away agency.
Like I say It’s all our fault, because of the people we elect, and have given the power to, and the whole system we support and participate in.
We can’t blame them, when it is us that put them in office, and failed to keep them accountable for anything they do.
Dead On. It just feels like things are going to Hell, doesn’t it?
I figured the uptick in oil was due to a return of more speculative activity in the commodities markets.
Come to think of it, it’s one thing for Japan to take their currency to zero interest, but for U.S. currency, it’s a whole ‘nother kettle of stinking fish. We’re talking serious explosion in other currencies purchased with dollars:
From last Sept:
I have great respect for Roubini but I’ve made a lot of jack this year on carry trades. Besides it’s our own government who is keeping interest rates artificially low in the ignorant hopes of saving the housing market. It will not. If the government is going to be dumb then lets all profit from it. Right?
PS- The dollar is down something like 20% this year.
How does an individual make jack on the forex markets? Isn’t a fat pile of cash needed to start?
My problem with Roubini is that after being initially right about the financial crisis and establishing a reputation based on that, he went all mealymouthed. Yes, he is right here but he is stating something that some of us have been talking about for 4-6 months.
Euro (euro-dollar)
January 2, 2009: 1.3946
October 30, 2009: 1.4805
dollar down 5.8% change
Yen (dollar-yen)
January 2, 2009: 91.1200
October 30, 2009: 91.2159
dollar up .15% change
Yuan (dollar-yuan)
January 2, 2009: 6.8225
October 30, 2009: 6.8275
dollar up .07% change
Pound (pound-dollar)
January 2, 2009: 1.4520
October 30, 2009: 1.6517
dollar down 12.1% change
Where do you get this 20% figure from?
US dollar index around 88 in late February. Today around 75.
The dollar is a dead duck. We’ve printed too many of them.
PS-There will be more pain for the dollar so there will be more opportunity to profit. I suspect we’ll see a DX of below 70 before it stops falling. Some are even predicting it to fall into the 50′s.
The nice thing is you can bet against the dollar and get nice interest on your foreign currency while you wait.
When I go to bed at night I always say a little prayer for Bernanke and Obama for making all this possible.
No, you can get in with not all that much by using leverage but of course you might get cashed out if things don’t go your way for even a short time. If you have the cash Everbank CD’s are a good option although they take a cut of the interest the foreign currency is paying. They used to pay better than they do now.
I can see you know what you’re talking about (I’m an ex commodity broker among other ‘things’) BUT what you are describing gets to the crux of capitalism. What are you producing that benefits society or others? You’re just Goldman Sachs on a much smaller level.
And the forex markets are like the others,manipulated by the major players. Glad you haven’t been hurt (‘past results should not be taken as an indicator of future results’) but please share how your making a ‘ton of jack’ has helped anyone else.
They are, and it is eveident why. People are so wrapped up in some things, but just overlook what is happening around them.
Take Healthcare, the real solution to that would be the Congress get together and give us National Health care.
The people aren’t noticing that they are getting about one one thousnadth of what they should be getting, and happy that Congress is trying for a Public option.
What they are over looking is that the Congress is Failing to fix any of the other problems we have, adding taxes by the day, spending like there is no end, and has been bought by every interest other than the people.
Nothing will ever get fixed as long as it is business as usual, because business as usual is what caused most of the problems.
I was wondering what would break next in the economy.
The dollar index trades as a futures contract on ICE. Otherwise it is just an index. It measures the dollar against a weighted basket of currencies, more than half of that is the euro. The 3 largest components are the euro, yen, and pound making up more than 80% of the total so really my original question stands.
What you are saying is that the dollar is down on this one betting platform. That is a world of difference from it actually being at that level.
Been busy. Thanks for the comments, I always learn something from you all
About the dollar: Here’s a not so pretty blog about the latest M-3 figures
PS I know the M-3 isn’t being officially reported but people are still tracking it
Have a question: I can’t read every diary posted but does anyone know if there was a diary on Taibbi’s piece on Wall Street’s Naked Swindle?
If not, I’m going to try to make time for it this weekend
Again we have been talking about a lot of this stuff for a long time now. The article you cite is about the contraction in credit, and that’s absolutely true. Credit needs to contract from its bubble levels. Also with the high levels of debt we should expect fewer people and businesses to seek credit. All that said, what we are seeing is a real contraction on the bank side. And no, I don’t think it has that much to do with capital ratios. The Fed ran a reverse repo test recently which failed spectacularly. This showed that the banks have, in fact, very little capital on hand. (Not to go into it that much but in a reverse repo the Fed would have been seeking an exchange of its assets for cash from the banks, only they didn’t have any.) So where has the money gone? We all know they are back to their old games of leveraging to the skies. It’s gone into the bubbles that Roubini seems to have stumbled over.
Re Naked Swindle, montanamaven was going to interview Taibbi Saturday I think per her diary. She mentioned but did not discuss the article so have at it.
thanks john. re asset bubbles. i guess it’s probably people who think fed policy is inflationary and therefore expect asset prices to climb when inflation sets in. if so, it’s a perfect example of soro’s reflextivity. and scary as hell.
re m3 contraction, you may be interested in this paper written (i think) last winter. looks like keen may be right. (and if money creation/destruction interests you in the slightest, i highly recommend keen’s the roving cavaliers of credit)
hugh, have you started reading roubini at rge, or are you judging based on selected excerpts posted at naked capitalism, bloomberg and similar? the reason i ask is that i don’t think the excerpts have been an accurate reflection of his writing.
google is my friend.
looks like montanmaven’s diary is the only one to have mentioned it.
Hugh, in the article John cited, it was averred that the huge pile of toxic assets banks, so-called, hold was dwarfing the wealth of the entire global economy, not just the their capital ratios. The characterization seems to suggest they are still zombies, and that Fed policy has had no appreciable effect on stimulating lending. Admittedly, the argument was also made that they were adhering to higher capital ratios and therefore not lending. But one or the other must be sustaining the deflationary trend.
Thanks for the links selise.
Listen pal, it’s making me money…lots of it.
Verstehen?
It my main purpose in life to benefit others? I think not. I don’t mind doing that as a secondary consideration but this country has drifted too far away from self sufficiency. We’re becoming the welfare state.
I read a comment a few days ago and it may have been right here. The guy said something like we should pay more taxes because it is our “moral obligation” or some such nonsense. He was talking about California and Prop 13 and how that should be done away with to give those dummies even more money to waste. CA already has the highest income and sales tax. Doing away with Prop 13 would likely give them the highest property tax as well. What they need out there (I lived out there for a few years) is to drastically reduce spending….not raise taxes.
IN CA the Dems have run the state into the ground. They teach school in about 80 different languages which can get expensive. The state desperately needs to fire many state employees. They simply can’t afford them anymore. But the state can’t do that because they were pressured into signing contracts with who? The unions. And now they much carry the gold bricks and go further in debt.
I’m glad I no longer live there.
In general every dollar that gets funneled through the government might actually benefit someone who needs it to the tune of twenty cents. The waste in government is off the charts. Also, welfare fraud is off the charts as well. I think it’s at least 35-40% but some think its even higher. We don’t have very many good figures because when welfare programs were set up no one thought to fund studies of fraudulent activity. Duh!!!!!!
Jawohl Herr Capitan.
I don’t think it is just some filtering process going on. Roubini supported the re-confirmation of Bernanke and his reasoning on that was the same convoluted mush I have seen in his writing on the recovery.
I would remind you that full access to rge monitor is to subscribers only. So why exactly would I be that much better off getting Roubini’s edited version from him rather than a site like Naked Capitalism or another?
“It my main purpose in life to benefit others? I think not.” ; no one is saying such should be your ‘main’ purpose in life, just not an exalted one.
I’ve been ‘rich’ and I’ve been poor; rich can be more fun via activities and access but being poor has a peace about it that being rich can’t compare to.
“He was talking about California and Prop 13 and how that should be done away with to give those dummies even more money to waste” ; well, Warren Buffet said the same thing before he was booted from the Schwarz’s election team. AND I do hope you understand that Prop 13 wasn’t just about residential property but commercial as well.
“What they need out there (I lived out there for a few years) is to drastically reduce spending….not raise taxes.” ; yeah, well, the Schwarz pushed through spending cuts and all they did was affect those less fortunate or disabled. And I always find it humorous when someone who hasn’t lived in CA for years relies upon an experience that hasn’t relevance to the current situation.
For instance you write “The state desperately needs to fire many state employees. They simply can’t afford them anymore.” when ,actually,with 138 state employees per 10,000 population, it has fewer state
employees per capita than all states except Pennsylvania, Illinois and Florida. The folowing links are pdf’s.
http://www.csba.org/…/0609_FewerStateEmployeesPerCapita_FINAL.ashx
http://www.ccsce.com/PDF/Numbers-oct08-govt-employees.pdf
“I’m glad I no longer live there” ; I’m glad also.
oh, imo roubini’s politics sucks (remember when he had good things to say about obama’s appointment of summers?), i would never recommend anyone read him for that!
the reason i was asking about reading roubini is that when i was reading everything he wrote at rge (took advantage of a special offer free subscription that lasted about 6 months iirc) i don’t think that the excerpts i read elsewhere were a good reflection of what i was reading from him directly. so, i wouldn’t be surprised if it was the same now… but i didn’t know what you were basing your comment on, so i thought i’d ask.
Well, what I do read of Roubini is what I can get citing him directly and hopefully at some length. I don’t pay much attention to Bloomberg. Most of my current opinion stems from what I heard him saying in various interviews from a year ago or more and what I have seen of his conclusions and positions in the last 3-4 months. I have the same problem with Krugman. There seems to be a dreadful inconsistency in them or a failure to simply follow the logic of their own arguments.
Good. We at least agree on something.
When and if I get bored being rich perhaps I’ll try being poor.
I don’t mind helping others but most of you people are so obnoxious you turn a lot of people like me off completely.
That’s your choice.
Hi tinman
In case you didn’t notice this diary is about Wall Street excess
Your comment is mischaracterizing what I said in that diary. Are you tired? Because your reading comprehension seems to be lacking. I said this in a comment to clarify my point
Rhetorical question: Where do you think those well educated and skilled employees come from?
If you had read through that diary you would have also noted that I also quoted that “radical, lefty, hater of capitalism” /s Adam Smith when he said:
Which seems to support this video
Why didn’t you comment in that diary? Do you have 7 minutes and 57 seconds?
Watch this video and learn
This state is very dysfunctional and badly needs reform, but you seem to believe that there is some kind of panacea in the lowest taxes for the wealthy.
About the welfare fraud – can you support your blind assertion of 35-40%? I can tell you for a fact it’s much, much lower than that.
Do you really want to talk about waste? Let’s talk about the billions of dollars given by state and local governments to the people who live in and build gated communities – lets talk about corporate welfare. Have you ever watched a game at the Staples Center?
I wish they’d haave given the amount he sold these parcels for, but, the fact that they’re in downtown LA I would guess that they are a significant portion of that 70 million. And in echos of the Kelo decision they used eminent domain to take the property from one private citizen to give to another private citizen
Wouldn’t this be a form of welfare fraud?
Thanks for commenting. Please don’t take anything I’ve said as snark except for where the tag is.
PS what does this mean? I suppose my reading comprehension is also lacking because I have no idea as to your point
PS The Great Tax Shift from Business Week, 2004