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Posts Tagged ‘carry trade’

Nouriel Roubini Warns That the U.S. Federal Reserve Is Constructing a “Monster Bubble.”

November 3rd, 2009 Comments off

 

In the Financial Times Professor Roubini wrote a thoughtful and frightening piece on the implications of the U.S. dollar’s sinking value and its increasing role in the global carry trade. Given Nouriel Roubini’s track record  in offering a timely warning on the collapse of the subprime mortgage  bubble, his latest red flag should be looked at very closely.

In essence, the loose monetary policies of the Fed have  poured a tidal wave of liquidity into the world, in the form of U.S. dollars being offered at effectively zero interest rates while simultaneously being devalued. This explains the explosive role the American dollar is exercising on the carry trade. As Roubini points out, speculators can borrow cheap dollars at effectively negative interest rates, and plough this cheap currency into higher yielding assets available in foreign exchange. What Professor Roubini describes as the “mother of all carry trades” is building a global speculative bubble of vast proportions, and in a manner that is utterly unsustainable.

Roubini closes his sober article in the Financial Times with the following chilling warning:

“This unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. 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.”

 

 

* Global Economic Forecast 2010-2015: Recession Into Depression, now available. More information at:

http://www.createspace.com/3403422

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

Dow Jones Soars While U.S. Dollar Sinks

September 23rd, 2009 Comments off

Two contradictory financial trends are in evidence, in effect the Ying and Yang of the global economic crisis. The NYSE has experienced a steep Bear Market rally from its March lows, setting the stage for the Dow Jones to pass above the 10,000 level. On the other hand, the American greenback is plunging to new lows, having previously demonstrated impressive strength as a safe haven when the global economy imploded after the demise of Lehman Brothers.

Actually, there may be less of a contradiction than meets the eyes. If the U.S. national debt and annual budget deficits continue to expand with reckless abandon, it is inevitable that global market forces, especially the bond market, will set in stage a deep contraction in the U.S. dollar’s relative value. The apparent replacement of the Japanese yen by the U.S. dollar as the preferred vehicle for the carry trade seems to point in the direction of growing weakness. In that scenario, equities may, for a time, become the new flight to safety for investors.

The rise in equity prices may reflect an inverse relationship to the decline of the value of the American dollar, as opposed to a realistic market appreciation of economic fundamentals. Now, when the value of both the dollar and the Dow Jones plummet, what would that convey?

A global economic depression, most likely. At present, however, the inverse relationship of the U.S. dollar and NYSE merely reflects a synchronized global recession.  The dangerous moment will come when the world’s central banks begin to engage their long-speculated exit strategies. Then, I think, we will witness volatility with both the American dollar and equity prices.