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.
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