2009 Inside Commodities Conference: Roubini vs. Rogers

Each year Index Universe holds its annual Inside Commodities Conference at the New York Stock Exchange. The last two conferences have featured speakers such as Jim Rogers, Noriel Roubini, Peter Schiff, and John Brynjolfsson. Unlike last year’s conference where most panelists and speakers agreed that commodities would soon shoot to the moon this year’s conference was full of diverging opinions on everything from $2000 gold to inflation.

The key speaker of this year’s conference was Noriel Roubini. The NYU economist was recently voted the fourth best financial mind in the world by Bloomberg terminal users. He stated that he expects the recovery to be “U” shaped although the markets are pricing in a “V” shaped recovery. As a result asset prices have increased “too much, too far, too soon”. He said that there is a 25% probability of a “W” or a double dip in the economy and he stated if a “W” were to occur the markets would break through previous lows set back in March.

Speaking on commodities, Roubini said that the move from $30 oil to $80 oil has not been justified by supply and demand. He believes oil could go as high as $100 a barrel as a result of the dollar carry trade and that it would cause severe damage to global growth, but he said that hyperinflation is not a scenario that could play out due to the weakened state of the United States economy. The dollar carry trade, which Roubini said is starting to create bubbles in risky assets, could quickly pop sending investors fleeing for the exits. He told the audience that a short dollar trade reversal would be rapid and would cause a massive downturn in risky assets.

Looking forward Roubini is worried about the second half of 2010 and advised the audience to be cautious. By then the stimulus funds will have finished moving through the economy and China will not be able to carry the world on its shoulders. He dismissed ideas that emerging markets could decouple from the United States. Structural issues exist in China that cause a high savings rates among citizens and these issues cannot be changed for at least a decade. He stated that their current growth is unsustainable and that the excess capacity that is currently being added will eventually be adding to global deflationary pressures.

It started to get interesting when last year’s key note speaker Jim Rogers chimed in through the air waves at Bloomberg to comment on Roubini’ s prognostication. Rogers had stated in the press that gold would rise to $2000 an ounce in the next decade, which Roubini called “utter nonsense” during the conference. After listening to both sides I believe that the issue is that Roubini is referring to a much shorter term forecast than Rogers. Roubini did mention a light at the end of the tunnel by 2011 or 2012, while Rogers was referring to a forecast that stretches out to 2019. Rogers and Roubini also argued whether bubbles are developing in risky assets, but both agreed that the prices of risky assets are being inflated by the dollar.

Despite the diverging opinions among the experts, I felt like I had a better sense of where things were headed after listening to both sides. In the near term (0-4 months) the dollar carry trade momentum may carry us higher, however we are due for a short term reversal in that trade, which will cause risky assets to fall in value quickly and sharply. The reversal of the dollar carry trade will be short lived as the government continues to print money in turn causing the dollar to fall again and asset prices to rise again.

By sometime in 2011 the economy begins to fully recover and function normally. Higher inflation rates will persist in the longer term, but hyperinflation will not occur.

Comments

[jrainspe:]

Don't you just love those "absolute" statements people make about very indeterminable events. "There will not be hyperinflation." No one really knows or not whether this will occur. Just like in the early recover of the dot com recession, we had 9/11, resulting in a double dip bottom. No one in the financial world could see that event unfolding. And, just like 9/11, another unforeseen and unforecastable event is waiting in the wings; no one knows what it's probability is because you can't estimate the probability of an event that you cannot define.

Nov 12 04:58 AM

[Shocksink:]

Jim Rogers rules...and Roubini sucks.

Nov 12 12:43 PM

[Shocksink:]

if hyperinflation will not occur....why not print another 20 trillion dollars?.......but shortage of trees will occur...lol

Nov 12 12:48 PM

[The Recusant:]

Although the U.S. still has a large manufacturing and service base, we no longer have a profitable base for our dollars. The banking institution, in their voracious appetite for quick profits, has leveraged every aspect of our wealth. Together with the government's penchant for throwing new fiat money at every problem, we now are faced with a double problem that can only result in a decreasing value for the dollar.

The safe-haven gold will be floated higher on a sea of dollars. And when the 70% of all foreign reserves, which are denominated in U.S. dollars, begin to make their way back into the country, we can expect tremendous inflation, especially in any imported goods (think oil here...$100 a barrel oil will look cheap.) Let's all hope that hyperinflation is kept at bay by some sort of government magic, but it is a distinct possibility.

How can we avoid a worse case hyperinflation scenario? For one, we have to stop the exportation of our currency for oil and goods and as foreign Treasury bonds. We also need an immediate employment plan to be instituted. Which if one looks at oil costs as a problem, then alternative energy and domestic oil production comes to mind as an employment solution. And most importantly, we need to de-leverage the actions of the banking system by enforcing regulations, breaking up the TBTF companies, and returning those laws that held the financial institutions in check. (As a side, did you know that the banks by the end of this year will have more leveraged mortgages than when the crisis started last year?) And then finally, we MUST eliminate banks and other service and industry companies from being part of our government and vice versa by creating effective lobbying laws and conflict of interest policies. Oh well, I can pipe dream on my way to buy more PMs, can't I?

Nov 12 02:56 PM

[bobbybutte:]

Rouibini is aguy who is a acadmeia nut who understand theory but little about managing money but he does throw some wild parties

Rogers at least has really actually earned money but liek Soros both are bitter towards america

As a person who has made money SOLELY from allocating capital and has a investment newsletter i dismiss roubini and when he said the s&P was going to 500 in March I took an equity loan and got some great bargains

Nov 12 03:14 PM

[Kimball Corson:]

Excellent report. I appreciated it. It puts a lot of things in perspective. I happen to agree with most of it.

Nov 12 04:29 PM

[Keith Robison:]

Roubini seemed very sure that hyperinflation would not occur (at least before 2012) because he said that the economy in it's current state is not strong enough to handle significantly higher prices.

On Nov 12 04:58 AM jrainspe wrote:

> Don't you just love those "absolute" statements people make about
> very indeterminable events. "There will not be hyperinflation." No
> one really knows or not whether this will occur. Just like in the
> early recover of the dot com recession, we had 9/11, resulting in
> a double dip bottom. No one in the financial world could see that
> event unfolding. And, just like 9/11, another unforeseen and unforecastable
> event is waiting in the wings; no one knows what it's probability
> is because you can't estimate the probability of an event that you
> cannot define.

Nov 13 05:00 PM