In this interview with CNBC on Nov. 4, 2009, Dr. Nouriel Roubini, professor of economics at the Stern School of Business, New York University and chairman of RGE Monitor, cautions investors of the coming asset bubble and crash caused by the dollar carry trade, and at the same time shared his views on the economy and housing.
Video Source: CNBC
This is the second time in many weeks that Dr. Roubini warned of a growing dollar carry trade and threatening to cause a global implosion. The following is a summary of his CNBC interview along with my comments.
Roubini: The recovery will be U-shape rather than V-shape due to "extremely weak" labor market resulting in lower consumer spending, and low capacity utilization (currently at around 70%) discouraging business investment. But the market is pricing in a V-shaped recovery, where in fact the recovery is going to be U-shaped.
My Take: By predicting a U-shaped economic recovery, Dr. Roubini implicitly diverged from his assertion less than two weeks ago that we have averted a depression. Note: I refuted his macro view in my article dated 11/03/09.
Roubini: The current monetary policy of the Fed will further weaken the dollar and thus, prolong the dollar carry trade. Eventually the carry-trade will be unraveled. Once this occurs, the dollar could have a sharp snap back probably 15-20% creating a huge asset bubble 6 month to a year from now.
In the Meanwhile the bubble's going to become bigger globally and the bigger the bubble the bigger is going to be the crash.
This unraveling process is not expected to be "orderly", unless the central banks start more aggressively phasing out the quantitative easing, which is not the indication right now.
My Take: Carry trade has been around for decades. People involved in carry trade are among the most sophisticated investors. There could be 15-25% correction, but the unwinding process will most likely be gradual and orderly. The “crash trade” scenario could happen only with a once-in-a-life-time event such as the 9/11.
Roubini: Quantity has bottomed out with supply and demand both falling 80% from peak. However, the gap between demand and supply is so large that home price could fall another 10% before the end of next year, off 40% from peak. The situation in the commercial real estate sector is even worse.
My Take: Commercial real estate valuations have been falling over 35% since October 2007. Over the next three years, about $1.5 trillion in commercial real estate loans are coming due. If anything is going to implode,commercial real estate would trump carry trade as the number one candidate.
Author's Disclosure: No Positions