What Happens If Roubini Is Right?

Nouriel Roubini writes in the November 1st edition of the FT (here) about his concern for a disorderly unwinding of the short dollar - risky assets carry trade.

The premise is a lack of uncorrelated assets suggest a Keystone Cops scenario when the negative dollar trend reverses. Everyone switches direction at the same time and the inflated stock, bond and commodity markets crash in unison.

Roubini points out that the dollar can't go to zero, and the Fed will soon cease to be a buyer of securities with freshly created dollars; as indicators of the end of the line for the dollar carry trade.

I believe Roubini's premise has merit. Could the Bernanke Fed and the major central and commercial banks worldwide be the buyers of all those cheap stocks, bonds and commodities in order to soften the blow? It might be an opportunity to unload the excess dollars that the banks now hold. It would take a spectacular financial "high wire act " to balance all these markets. And, all those dollars would still be out there suggesting the onset of an inflation. That's more Keystone Cops!

In fact this financial engineering may not prevent current stock, bond and commodity longs from serious market value losses. At several points in the last 12 months both commercial banks and securities markets were under nearly unprecedented stress.

If Roubini's premise presents itself in reality, might the central bank conclude that like separating conjoined twins, they'll try to save both? What happens if they can only save one?

Disclosure: Long GDX, long DOG,

Comments

[Daniel Herkes:]

Thanks for the interesting perspective. Dr. Roubini has been pretty quiet for a few weeks pending the directions of the US dollar and markets apparent direction. I would tend to agree that the asset bubble caused by the quantitive easing is in danger of bursting. How soon depends on how many of the debt instruments our creditor decide to purchase, and the perception that unemployment is a huge factor in the recovery. He has now spoken!

Nov 02 07:08 AM

[optionsgirl:]

Time to go to cash?

Nov 02 08:51 AM

[D. McHattie:]

"[T]he Fed will soon cease to be a buyer of securities with freshly created dollars"?

With 10%+ unemployment?

Not bloody likely.

Any Fed statements to the contrary are nothing more than jaw-boning.

Nov 02 09:15 AM

[ken3602:]

And, now is the perfect time for Tim and Ben to start strengthening dollar. They need good numbers (at least better than expected...) on consumer spending for the coming holiday season, and pulling gas price down is the easiest way to do so. If they fail to bring oil down below 60 anytime soon, they are in a big trouble.

Nov 02 09:37 AM

[Graham and ...:]

I am selling my positions one by one. Except my gold stocks, and some dividend payers.


On Nov 02 08:51 AM optionsgirl wrote:

> Time to go to cash?

Nov 02 10:01 AM

[Old Trader:]

If the good Doctor is correct.....in a word, yes.


On Nov 02 08:51 AM optionsgirl wrote:

> Time to go to cash?

Nov 02 10:50 AM

[Ricard:]

Agreed. The Fed will keep things easy for a very long time.


On Nov 02 09:15 AM D. McHattie wrote:

> "[T]he Fed will soon cease to be a buyer of securities with freshly
> created dollars"?
>
> With 10%+ unemployment?
>
> Not bloody likely.
>
> Any Fed statements to the contrary are nothing more than jaw-boning.

Nov 02 11:02 AM

[Douglas Hvi...:]

I've been researching companies that mostly ignored the price drop in March. They might make a better place to park the cash than treasuries. There aren't many of them, though.

Nov 02 11:02 AM

[jerrydd:]

If China doesn't let their peg to the $, lowering the $ won't do that much good.
One way to recover our economy and strengthen the dollar.

We can have a stimulus that costs almost nothing to the taxpayer, in fact paid a lot by Iran, Russia, oil dictators!!

How is start up loans for RE companies and energy eff ones. Let most anyone with a good business plan through the SBA get start up loans to build or install windgenerators, solar CSP unit, CHP, small lightweight, aero 3 wheel EV's, etc. Then loans to buy, install, etc these.

Loans for home, building eff upgrades from windows, insulation, etc are next.

All these can be paid for in energy savings in 5 yrs so no new income costs either. This will create about 3 million jobs directly and probably 6 million indirectly of people supporting them.

Next is a fossil fuel tax to pay their full cost of the direct, indirect subsidies we already pay in our income tax, health care, etc. it's time those who make, benefit from those costs to pay them It should be a $1.50/gal on oil and about double the price of coal.

But you say a tax will kill the economy. Not if it's put in over 2 yrs each month and loans given to buy more eff cars, etc. Switching truck, semi's to NG is very cost effective now being under 50% of the cost of diesel/gasoline. The beauty of this is oil, coal will drop in price making Iran, Russia, oil dictators pay most of the oil tax, coal is only 25% of your electric bill so it won't go up much.

But new, more eff cars, trucks, EV's, PHEV's and mass transit will create more new jobs too.

The fossil fuel tax revenue, 1/3 would go to a tax cut so those people paying it have the extra money needed if they continue to use the same amount or better, use less and have extra income, the more likely outcome. 1/3 to to help switching to more eff cars, trucks, homes, buildings and 1/3 to balance the budget fossil fuels have been a large part in making.

So this program would have a net increase of about 8-10 million jobs of both direct and supporting those who have the new jobs, solve our imported oil problem, let us leave the Persian gulf between the 2 are about $1T/yr in a few yrs if we don't, stop subsidizing our enemies, oil corporations and balance the budget.. All at little cost to the gov, in fact get rid of our debt on our children and make our country strong again.

Or we will be broke, at war, our enemies strong and we will be weak. To me it's the only real patriotic way to go.

Nov 02 11:25 AM

[optionsgirl:]

I'm selling some miners, too. Looks a little toppy here.


On Nov 02 10:01 AM Graham and Dodd Investor wrote:

> I am selling my positions one by one. Except my gold stocks, and
> some dividend payers.

Nov 02 01:25 PM

[Solon:]

Of course Roubini is correct in his assessment. The basic premise that the dollar can not fall to zero underpins the thesis; a suggested fine balancing act by the Wallenda group in Ottawa and Washington will be the next act. I suspect that in terms of an alternate solution; 'wishing will not make it so' (Tinker Belle)

Nov 02 01:47 PM

[Mad Hedge F...:]

wei This is how you trade this market. Buy the dips on any pull back in any asset, keep a tight stop loss, and run like Hell if it get’s triggered. No doubling up or leaning in. There is only one problem with this strategy. This is how the entire rest of the world is trading! So after the first couple of mouse clicks to the downside, the markets will seize up, as they did last year. Anyone with a position larger than the change under your living room sofa cushions won’t be able to get out. Portfolio managers will helplessly watch as their positions get marked down with no trade. The world has been borrowing dollars at zero and buying anything and everything, and the time to pay the piper is fast approaching. Dr. Nouriel Roubini, the economics professor at New York University whose recent negativity has brought him guru like status, made some interesting points yesterday. The Fed is keeping rates low to hasten a recovery before the next election, but Wall Street is jumping on the gravy train and avariciously coining it, creating a new bubble worse than the last one. When the inevitable synchronous global crash happens, it will make last year’s affair look like a walk in the park. There will be no place to hide. If we learned anything last year, it’s that the global capital markets have become Roach Motels. You can check in, but you can’t check out.

Nov 02 02:08 PM

[Mr. Big:]

The longer the Fed continues to intervene in the markets, the bigger the bubbles get.....and the larger the eventual pop. I fear that the machine the Fed has started has already taken a life of its own. When the carry trades end, the selling in the markets will be fast and furious, with investors dumping assets in order to cover their dollar borrowing. Nobody truly knows the extent of the dollar carry trade, however, if the unprecedented run-up in the stock market is any indication, and accounting for the flood of new dollars in the financial system via the Fed purchases of hundreds of billions of MBS's and Treasury securities, then we can potentially be looking at multiple trillions of dollars.

As long as the Fed continues to sing its dovish tunes, the game of musical chairs can go on. But the stakes become higher and higher as it drags on. Eventually, when the music stops, we may all find ourselves left standing at the end.


On Nov 02 11:02 AM Ricard wrote:

> Agreed. The Fed will keep things easy for a very long time.

Nov 02 09:51 PM

[Oscar Sahlberg:]

Roubini's predictions could indeed come true but how you get there is more important than whether you get there or not. One should always remember the power of the speculative flows and the reflexivity of the process (i.e. as more people sell, the lower dollar goes, making it more appealing). Of course the process will end at some point but is this the right time to call the trend reversal? There will be enough time and volatility at that point to give signal to all, in my view...

Also looking at DXY or the The Major Dollar Index leads into many fund managers salivating about oversold dollar but checking out the Broad Index dampens that a little (encompasses 90% of all imports and exports). You've had a massive 30 year run there, and we're only 7 years into the reversal (see graph link).


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Nov 03 03:35 PM

[stocknerd:]

The doom and gloomer shere at SeekingAlpha-ville have been wrong, constantly and consistently wrong. The END OF THE WORLD is not upon us. Sorry for all the light and sweet music, but you investors who keep saying the end is near are funny and only show you are investing with emotions and/or are republican sore loser that want the administration to fail. You are all bloody wrong and have been for months. Sorry, that is the fact jack.

Nov 04 05:04 PM

[GreenMom:]

While we wait for the bubbles to pop, the unintended consequence is that commodities stay at elevated prices, affecting all underlying pricing to the battered consumer and the slaughtered construction industry -- has anyone looked at how grocery and lumber prices have jumped? As a mom of four and someone who does her own home improvement, I am seeing both of these things. Letting the dollar slide is damaging the real economy even more than an orderly increase in interest rates would, but I guess this is what we have to do to save the banks?

Not only do we have the bailout, but we have continued monetary policy that is favoring only the banking sector. In other words, the banking sector must be the one with the most to hide, and the most to lose, and the most systemic risk -- so the "honest" sectors will have to continue to pay up. This is MADNESS, and it's going to end horrribly.

Nov 10 07:38 AM