Mr. Nouriel Roubini, whose shot to fame and stardom came after accurately predicting last year's crisis and has been media's du jour favorite gloom spinmeister or otherwise known as "Dr. Doom", recently predicted that every assets, including commodities and emerging markets stocks are in a bubble!
Mr. Roubini's captivating 'one size fits all' theory for this forecast is based on the US dollar as the "mother" of all carry trade.
In a recent column at the Financial Times Mr. Roubini wrote, ``Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions."
Portraits from BloombergHence he predicts a massive recovery of the US dollar, as every asset class anchored to the carry trade collapses.
It would seem that the 2008 financial crash functions as Mr. Roubini's operating paragon from which this call has been predicated (Anchoring bias?).
Bloomberg recently interviewed commodity king Jim Rogers, who dismissed Mr. Roubini's prediction.
According to Bloomberg,
``Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.
“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”
``Rogers countered Roubini’s arguments by saying that Chinese stocks and sugar, silver, coffee and cotton have all dropped from their historical highs by at least 50 percent.
A sample of commodities (sugar and cotton) cited by Mr. Rogers are far from their all highs, as seen from the chart above courtesy of Moore Research Center.
One must note that the above charts exhibits nominal and not inflation adjusted prices.
Again from Bloomberg, ``When asked if gains made this year pointed to a bubble, he said: “It’s not a bubble if something is up 100 percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year. Maybe it’s too high for this year, but that’s not a bubble.”
``“I suspect it’s going to go over $2000 some time in the bull market, but depending on what happens in the world it could go much, much higher,” Rogers said. “The old high, back in 1980 adjusted for inflation, would be over $2000 now, just to get back to the old high. So we’ll certainly get there some time in the next decade.”
``“I don’t know any emerging market stock markets that are so high I’d call them a bubble,” Rogers said. “They’re certainly all up a lot, maybe they’re too high, but being too high is not a bubble for anyone who knows financial markets.”...
``In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds."
You can watch the video of Jim Roger's interview here
Meanwhile Mr. Roubini countered Mr. Rogers' objection by saying that gold at $2,000 is "utter nonsense".
According to Bloomberg, ``There is no inflation or “near-depression” to drive gold prices that high, Roubini said today at the Inside Commodities Conference in New York. If a severe depression came to pass, with investors buying canned goods and hiding out in log cabins, “maybe you want some gold in that scenario,” Roubini said.
``“Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense,” Roubini said. Gold rose to a record $1,098.50 today in New York on speculation that central banks and investors will purchase the metal to hedge against a declining dollar...
``“It is very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand,” Roubini said. Prices are “in part” a bubble, Roubini said.
``Roubini predicted in 2006 the financial crisis that spurred more than $1.6 trillion of credit losses and asset writedowns at global financial companies".
As you would note, media highlights on Mr. Roubini's favorable call but ignores his glitches and miscalls.
Earlier this year Mr. Roubini predicted stagdeflation, a continuing rout in asset markets including oil. According to Bloomberg (Jan 20th), ``Nouriel Roubini, the New York University professor who predicted last year’s economic and stock market meltdowns, said oil prices will trade between $30 and $40 a barrel this year.
“I see oil remaining throughout 2009 in the range of $30 to $40” a barrel, Roubini said in Dubai today."
In an earlier post we noted how Mr. Roubini hit only one out of several calls,see earlier post Wall St. Cheat Sheet: Nouriel Roubini Unmasked; Lessons, yet managed to harvest media's attention.
Going back to Mr. Roubini's theme of the US Dollar Carry. Here is why we are in the camp of Jim Rogers.
1. Past Performance don't guarantee future results.
Last year's carry trade paradigm had been based on financial institutions, such as the shadow banking system, and foreign banks (as Iceland and parts of Europe) which leveraged on the currency arbitrage.
Today, hardly the same parties or sector appear to be engaged in the said arbitrage activities considering their debilitated conditions.
Next, it isn't the carry trade that brought down the house in 2008, it was the US housing bubble. The carry trade only exacerbated on the downturn.
2. Barking At the Wrong Tree.
It isn't just private sector speculation as Mr. Roubini sees it, but governments' "speculating" as well.
The recent sale of half of IMF's gold stash to India (Bloomberg) came as surprise to the market whom expected China to do the bidding.
To add China has been engaged in a buying spree of commodity assets globally as seen by the World Bank table above.
In short, the governments of emerging markets have in themselves been "speculating".
Of course we'd like to add that these speculative activities isn't myopically based on "animal spirits", because there are underlying geopolitical and monetary dimensions in these.
3. US dollar carry isn't likely to be a major factor.
Given the massive deficits and the monetary inflation engaged by the US, it would be naive or blind allegiance on the side of professional investors to discard the risks of higher interest rates by taking large positions for such arbitrage.
4. Money is neutral.
Mainstream always view money as a seeming constant where additional inputs of money are deemed as not to have an impact on the supply and demand balances. This is evident on Mr. Roubini remarks "very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand"
Mr. Roubini underestimates the impact of the global reflation efforts by collective governments on global economies. Moreover, Mr. Roubini reflects on the mainstream view which have been moored upon the US as still the key engine of global growth.
Yet apparently Mr. Roubini sees today's higher commodity prices as having little impact on inflation, he says, there ``is no inflation or “near-depression” to drive gold prices that high"
On the other hand, Bespoke Invest sees inflation on the horizon, ``Over the last ten years, trends in the CS have often preceded moves in the CPI. So when the net reading in the CS rises, increases in the CPI are typically not far off. Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don't be surprised if upcoming inflation reports come in on the high side of expectations."
5. Wrong Models/Apples And Oranges
Gold isn't likely to rise during a deflationary depression (a view which Mr. Roubini leans on).
To argue for gold's strength on a Great Depression paragon misses the point that the US dollar then operated under a quasi gold standard. Thereby the rush to the US dollar equaled the rush to gold. That would be comparing apples to oranges today.
Gold doesn't serve as a medium of exchange for the consuming public today, but is still used as reserves by central banks. So gold's strength will be magnified by an inflationary depression and not during deflation.
In contrast to Jim Rogers who says Mr Roubini hasn't done his homework, Mr. Roubini's call would seem like an attention generating act.
An oversimplified theme which connects to the prevailing bias, appeals to the public. Publicity matters more than the content.
One must note that the above charts exhibits nominal and not inflation adjusted prices.
Again from Bloomberg, ``When asked if gains made this year pointed to a bubble, he said: “It’s not a bubble if something is up 100 percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year. Maybe it’s too high for this year, but that’s not a bubble.”
``“I suspect it’s going to go over $2000 some time in the bull market, but depending on what happens in the world it could go much, much higher,” Rogers said. “The old high, back in 1980 adjusted for inflation, would be over $2000 now, just to get back to the old high. So we’ll certainly get there some time in the next decade.”
``“I don’t know any emerging market stock markets that are so high I’d call them a bubble,” Rogers said. “They’re certainly all up a lot, maybe they’re too high, but being too high is not a bubble for anyone who knows financial markets.”...
``In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds."
You can watch the video of Jim Roger's interview here
Meanwhile Mr. Roubini countered Mr. Rogers' objection by saying that gold at $2,000 is "utter nonsense".
According to Bloomberg, ``There is no inflation or “near-depression” to drive gold prices that high, Roubini said today at the Inside Commodities Conference in New York. If a severe depression came to pass, with investors buying canned goods and hiding out in log cabins, “maybe you want some gold in that scenario,” Roubini said.
``“Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense,” Roubini said. Gold rose to a record $1,098.50 today in New York on speculation that central banks and investors will purchase the metal to hedge against a declining dollar...
``“It is very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand,” Roubini said. Prices are “in part” a bubble, Roubini said.
``Roubini predicted in 2006 the financial crisis that spurred more than $1.6 trillion of credit losses and asset writedowns at global financial companies".
As you would note, media highlights on Mr. Roubini's favorable call but ignores his glitches and miscalls.
Earlier this year Mr. Roubini predicted stagdeflation, a continuing rout in asset markets including oil. According to Bloomberg (Jan 20th), ``Nouriel Roubini, the New York University professor who predicted last year’s economic and stock market meltdowns, said oil prices will trade between $30 and $40 a barrel this year.
“I see oil remaining throughout 2009 in the range of $30 to $40” a barrel, Roubini said in Dubai today."
In an earlier post we noted how Mr. Roubini hit only one out of several calls,see earlier post Wall St. Cheat Sheet: Nouriel Roubini Unmasked; Lessons, yet managed to harvest media's attention.
Going back to Mr. Roubini's theme of the US Dollar Carry. Here is why we are in the camp of Jim Rogers.
1. Past Performance don't guarantee future results.
Last year's carry trade paradigm had been based on financial institutions, such as the shadow banking system, and foreign banks (as Iceland and parts of Europe) which leveraged on the currency arbitrage.
Today, hardly the same parties or sector appear to be engaged in the said arbitrage activities considering their debilitated conditions.
Next, it isn't the carry trade that brought down the house in 2008, it was the US housing bubble. The carry trade only exacerbated on the downturn.
2. Barking At the Wrong Tree.
It isn't just private sector speculation as Mr. Roubini sees it, but governments' "speculating" as well.
The recent sale of half of IMF's gold stash to India (Bloomberg) came as surprise to the market whom expected China to do the bidding.
To add China has been engaged in a buying spree of commodity assets globally as seen by the World Bank table above.In short, the governments of emerging markets have in themselves been "speculating".
Of course we'd like to add that these speculative activities isn't myopically based on "animal spirits", because there are underlying geopolitical and monetary dimensions in these.
3. US dollar carry isn't likely to be a major factor.
Given the massive deficits and the monetary inflation engaged by the US, it would be naive or blind allegiance on the side of professional investors to discard the risks of higher interest rates by taking large positions for such arbitrage.
4. Money is neutral.
Mainstream always view money as a seeming constant where additional inputs of money are deemed as not to have an impact on the supply and demand balances. This is evident on Mr. Roubini remarks "very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand"
Mr. Roubini underestimates the impact of the global reflation efforts by collective governments on global economies. Moreover, Mr. Roubini reflects on the mainstream view which have been moored upon the US as still the key engine of global growth.
Yet apparently Mr. Roubini sees today's higher commodity prices as having little impact on inflation, he says, there ``is no inflation or “near-depression” to drive gold prices that high"
On the other hand, Bespoke Invest sees inflation on the horizon, ``Over the last ten years, trends in the CS have often preceded moves in the CPI. So when the net reading in the CS rises, increases in the CPI are typically not far off. Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don't be surprised if upcoming inflation reports come in on the high side of expectations."
5. Wrong Models/Apples And Oranges
Gold isn't likely to rise during a deflationary depression (a view which Mr. Roubini leans on).
To argue for gold's strength on a Great Depression paragon misses the point that the US dollar then operated under a quasi gold standard. Thereby the rush to the US dollar equaled the rush to gold. That would be comparing apples to oranges today.
Gold doesn't serve as a medium of exchange for the consuming public today, but is still used as reserves by central banks. So gold's strength will be magnified by an inflationary depression and not during deflation.
In contrast to Jim Rogers who says Mr Roubini hasn't done his homework, Mr. Roubini's call would seem like an attention generating act.
An oversimplified theme which connects to the prevailing bias, appeals to the public. Publicity matters more than the content.
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