More Devaluation Fallacies

Celebrity guru Nouriel Roubini writes about the Euro crisis and delivers his grand prescription,

So if you cannot devalue, or grow, or deflate to a real depreciation, the only option left will end up being to give up on the euro and to go back to the lira and other national currencies. Of course that will trigger a forced conversion of euro debts into new national currency debts.

Utter nonsense.

First of all, devaluation represents a default, not against the duplicity of the central bank-bankers-welfare state but against the average Greeks or the Italians. So politicians will be saving their skins at the expense of their respective citizenry.

Thus, the currency devaluation nostrum aims to preserve the welfare state which serves as the root of the Eurozone’s problem. This does nothing to solve the problem.

Second, if devaluation causes economic growth, then why has Zimbabwe’s massive devaluation (hyperinflation) not spurred her economy into the stratosphere?

Chart from Wikipedia.org

The answer; since inflationism forcibly redistributes resources from creditors to debtors, such policies impairs an economy’s division of labor via price signal distortions (aside from regulatory obstructions, particularly the twin of inflation: price controls) which restrains competitiveness and consequently poses a significant impediment to trading activities, capital accumulation, and most importantly, a substantial reduction in the purchasing power.

Chart from Indexmundi.com

Zimbabwe’s inflationism has led to 7 years of hyperinflationary depression (where economic recession has ranged from minus 3% to minus 18% in 2001-2008).

Zimbabwe’s economy has only begun to recover after the Mugabe government abdicated on such cataclysmic hyperinflationist policies which resulted to the demise of the Zimbabwe dollar and the adaption of the US dollar and South African Rand as mediums of exchanges.

This so applies with Brazil's experience too.

Three, devaluation will be a messy and chaotic process as pointed out by Professor Steve Hanke because this will translate to massive and widespread bankruptcies of the private sector (such as in Zimbabwe).

It is true that lowered standards of living from devaluation will force those affected to work more to cover for the loss of purchasing power, but this can hardly be construed as an improvement. Effects must not be read as a cause.

What is needed is to allow markets to clear by reducing the amount of government interferences, and importantly, by allowing malinvestments to be liquidated

As Professor Philipp Bagus writes,

First, relative prices must adjust. For instances, housing prices had to fall, which made other projects look relatively more profitable. If relative housing prices do not fall, ever more houses will be built, adding to existing distortions.

Second, savings must be available to finance investments in the hitherto neglected sectors, such as the commodity sector. Additional savings hasten the process as the new processes need savings.

Lastly, factor markets must be flexible to allow the factors of production to shift from the bubble sectors to the more urgently demanded projects. Workers must stop building additional houses and instead engage in more-urgent projects, such as the production of oil.

Fourth, currency devaluation nostrum signifies as an appeal to emotion rather than a logical construction of economic reality.

Such pretentious policy prescription has been predicated upon the oversimplistic assumptions of the world as operating in the prism of aggregates (where there is a single dynamic for wages, labor, product, price sensitivity and demand).

Again the Zimbabwe example shows how much quackery currency devaluation prescriptions are.

Fifth Mr. Roubini has an inferior batting average in terms of predicting markets (such as his debate with Jim Rogers on Gold), which implies that his analytical methodology must be severely flawed. And instead his views seem to be influenced by his political connections.

I am reminded of the great Ludwig von Mises who demolished the populist fallacies of inflationism…(bold emphasis mine)

The popularity of inflationism is in great part due to deep-rooted hatred of creditors. Inflation is considered just because it favors debtors at the expense of creditors. However, the inflationist view of history which we have to deal with in this section is only loosely related to this anticreditor argument. Its assertion that "expansionism" is the driving force of economic progress and that "restrictionism" is the worst of all evils is mainly based on other arguments…

…The question is whether the fall in purchasing power was or was not an indispensable factor in the evolution which led from the poverty of ages gone by to the more satisfactory conditions of modern Western capitalism. This question must be answered without reference to the historical experience, which can be and always is interpreted in different ways, and to which supporters and adversaries of every theory and of every explanation of history refer as a proof of their mutually contradictory and incompatible statements. What is needed is a clarification of the effects of changes in purchasing power on the division of labor, the accumulation of capital, and technological improvement…

In the conduct of business, reflections concerning the secular trend of prices do not bother any role whatever. Entrepreneurs and investors do not bother about secular trends. What guides their actions is their opinion about the movement of prices in the coming weeks, months. or at most years. They do not heed the general movement of all prices. What matters for them is the existence of discrepancies between the prices of the complementary factors of production and the anticipated prices of the products. No businessman embarks upon a definite production project because he believes that the prices, i.e., the prices of all goods and services, will rise. He engages himself if he believes that he can profit from a difference between the prices of goods of various orders. In a world with a secular tendency toward falling prices, such opportunities for earning profit will appear in the same way in which they appear in a world with a secular trend toward rising prices. The expectation of a general progressive upward movement of all prices does not bring about intensified production and improvement in well-being. It results in the "flight to real values," in the crack-up boom and the complete breakdown of the monetary system.

See the difference? The analytical backing of inflationism fundamentally relies on heuristics (mental shortcuts/cognitive biases) and or aggregates (math models) against the real world, whose risk-taking operations by capitalists and entrepreneurs are principally driven by the desire to earn profits.

George Selgin on Nouriel Roubini’s Book and Nouriel Roubini the Insider

Economist George Selgin takes down Nouriel Roubini and Stephen Mihm’s analysis of the US mortgage crisis of 2007-2008 (source: The Independent Institute)

(all bold emphasis mine)

Abstract

Nouriel Roubini and Stephen Mihm rightly castigate the Federal Reserve and other central banks for policies that contributed to the recent worldwide housing boom and bust, but they seriously underestimate the role of the Community Reinvestment Act and the government-sponsored enterprises in facilitating the surge of subprime mortgage loans in the United States. In addition, their proposals to prevent future financial crises rest on errors about the repeal of the Glass-Steagall Act and other matters of economic history.

Article

It takes only three paragraphs for Nouriel Roubini and Stephen Mihm, the authors of Crisis Economics: A Crash Course in the Future of Finance, to tell how Roubini stunned listeners at a September 2006 International Monetary Fund seminar by heralding a “once-in-a-lifetime” housing bust to be followed by a deep, long recession (Roubini and Mihm 2010, 1–2). Yet they may still deserve credit for modesty, for if one devoted Roubini watcher is to be believed, “Dr. Doom” actually predicted no fewer than “48 of the last 4 recessions” (comment on Elfenbein 2009). Some quick fact-checking lends credence to our informant’s otherwise incredible claim by showing that Roubini predicted a serious crash for 2004, then a severe slowdown for 2005, then a global reckoning for 2006, and finally a sharp recession for 2007. After the much-trumpeted crisis at last materialized (though not quite for the reasons Roubini had harped on), he declared that the S&P 500 would sink to 600, that oil would get stuck below $40 a barrel, and that a gold “bubble” was about to do what the housing one had done. To be sure, these things have not yet come to pass, but tomorrow is another day, and to succeed prophets need only mark when they hit and never mark when they miss.

If Roubini’s marksmanship impresses you, you are perhaps bound to hang on every word of Crisis Economics, no matter what any less-than-divine reviewer says about it. If, on the other hand, that marksmanship puts you in mind of the accuracy of a stopped clock, you may hearken to the warning that although the book’s assessment of the causes of the recent great housing boom and bust is for the most part sound and informative, some of its claims are highly misleading, if not simply false. Roubini and Mihm start well enough by dismissing as red herrings various popular diagnoses of the crisis, including the “tired” argument that it was caused by “greed,” with its far-fetched though implicit assumption “that the financiers of 2007 were greedier than the Gordon Gekko’s of a generation ago” (pp. 31–32). They draw attention instead to changes in the structure of incentives “that channeled greed in new and dangerous directions” (p. 32). These changes included government policies aimed at increasing poorer (and riskier) persons’ access to mortgages, the growing moral hazard connected with the “too big to fail” doctrine, and the Federal Reserve’s post-2001 easy-money policy.

Read the rest here

My additional comments on the celebrity guru:

It has been a long curiosity for me why many people seem to adore someone who has had a sordid string of utterly wrong predictions or maintains a poor batting average in predicting events (as Mr. Selgin points out).

Media seem to remember his ‘broken clock’ accurate prediction of 2007, but have been lenient or forgetful or forgiving of his blatant miscalls. As a saying goes, even the broken clock can be right twice a day.

A good example of this was the controversial debate with the legendary investor Jim Rogers where Mr. Roubini said that gold prices won't reach $1,500 to $2,000 which has obviously been proven wrong.

If Mr. Roubini had been a money manager he would have been a mediocre. Except that he isn’t. So wrong calls does not translate to any real or dollar value losses, so he can afford to keep talking.

One reason that makes Mr. Roubini a celebrity is that his themes sells to the consensus or that he provides the public a ‘confirmation bias’ or that his ideas seem to tailor fit with mainstream’s biases.

Recently Mr. Roubini commented

So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labor income, increases inequality and reduces final demand.

Here Mr. Roubini passes the proverbial hot potato blame on the free markets which liberals would gladly rally to and cheer on.

Nevertheless what has sorely been missed in this commentary is that the main source of malignancy can be traced to mostly central banking boom bust policies and other interventionist-welfare-bailout programs, an aspect Mr. Roubini and his ilk chooses to ignore.

Economist Bob Wenzel is right; Mr. Roubini’s real value isn’t his economic expertise but his insider connection. Writes Mr. Wenzel,

The one point I do take away from Roubini's commentary is in the area that he has demonstrated expertise and that is not in the area of economic theory. He is an expert in knowing what insiders are plotting. In the vernacular of the day, he knows what is coming down.

Mr. Roubini seems part of the counsel which help shapes the ‘insider’ philosophy and who provides the ideological cover to promote the 'insider's' interests.

Gold at $1,500 Settles the Jim Rogers-Nouriel Roubini Debate

Celebrity guru Nouriel Roubini has been dead wrong. Prolific investor Jim Rogers has been spot on. They had an impassioned debate in November of 2009.

Professor Roubini earlier said of gold prices,

Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense,” Roubini said.

Professor Roubini represents the mainstream econometric model based analysis whom has constantly failed to predict the markets accurately.

As Professor Robert Higgs points out, mainstream (academia) thinking has [bold highlights mine]

little interest in the search for truth, however one might understand or pursue it. To them, their research and publication amounted to a game in which the winning players receive the greatest rewards in salary, research funding, and professional acclaim. They understood that because of cloistered academic inbreeding, economists at the most prestigious universities consider the “smartest guys” to be those who employ the most advanced, complex, and incomprehensible mathematics in their “modeling” and “empirical testing.

Gold’s record price surge has been nominal based.

Economist John Williams, who uses the old methodology (1990 CPI) to compute for inflation, says that gold is still far away from reaching its inflation adjusted high in 1980s.

The USAWatchdog quotes economist John Williams (bold highlights original)

In a recent report, economist John Williams of Shadowstats.com contends a declining U.S. currency is reflected in spiking gas prices. Williams’ said, “. . . the primary problem behind higher oil and gasoline prices is the Fed’s efforts at dollar debasement, but few in the media are willing to blame the Fed . . . Also hitting the dollar, though, are increasing instabilities in and ineffectiveness of political Washington, D.C., as viewed by the rest of the world.”

Williams says gold and silver are nowhere near their former inflation adjusted highs of 1980. Back then, gold hit $850 per ounce and silver $49.45 per ounce. To truly equal that price in today’s inflated money, gold would have to be “$8,331 per troy ounce” and silver would have to be priced at “$485 per troy ounce,” according to Williams’ recent calculations.

Yet Gold’s record price surge isn’t only a US dollar dynamic but against global currencies.

The following charts from gold.org shows of gold trends in different currencies since 1998

Euro

Yen

Pound

South African Rand

Australian Dollar

Canadian Dollar

Indian Rupee

G-5 basket

In my view, surging gold in all currencies seem to be validating Voltaire’s observation—Paper money eventually returns to its intrinsic value ---- zero.

The blunt way to say this is that zero extrapolates to hyperinflation.

Again, all these mainly depend on the prospective actions of global governments, most especially the US Federal Reserve.

Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case

This seems like good news to me. My favourite mainstream Keynesian bear, Nouriel Roubini, appears to have ‘capitulated’. Mr. Roubini, a popular and very well connected economist, has almost always been on the wrong side of the prediction fence, and this seems to be just another of chapter of his string of failed forecasts and eventual turnaround.

Mr. Roubini has turned bullish on the US markets, reports the Bloomberg,

Nouriel Roubini, the economist who predicted the financial crisis, said U.S. stocks may gain in the next few months as company earnings remain resilient.

Adds Thomas Brown of bankstocks.com

What the heck happened to the L-shaped recovery? Roubini’s view is now squarely within the mainstream expectation. Good for him. The facts changed, and so he changed his opinion. Keynes would be pleased.

For me, Mr Roubini exemplifies as one of the bizarre ironies of the marketplace where despite his persistent wrong predictions, Mr. Roubini has remained quite popular with media.

If his strategy has been patterned to a tournament bridge game called “playing for a swing” as Professor Arnold Kling suggests, where “It would appear that Roubini's strategy is to make forecasts that differentiate himself from the consensus forecast. This allows him to be spectacularly right sometimes and spectacularly wrong sometimes. As long as he succeeds in getting everyone to remember the right forecasts more clearly than the wrong ones, he becomes a prophet”, then his success reflects on the public’s poor memory (or survivorship bias).

Google search trends for Mr. Roubini vis-a-vis Dr. Marc Faber

While there may be some truth to this, I am not convinced.

The public seems jaded to the forecasting accuracy by experts.

In relative performance, another (less) popular grizzly bear (but Austrian school leaning bear), Dr Marc Faber, who appears to have consistently been accurate even in predicting short to medium term trends—even the latest divergence between EM and developed economies stocks—has almost trailed Dr. Roubini’s in terms of popularity. (note the difference in search volume index—X axis).

So the explanation of “spectacularly” right or wrong doesn’t seem to suffice.

Instead, I think, Mr. Roubini signifies what the public wants to hear more than the validity of his theories. He personifies the confirmation of many entrenched but flawed beliefs.

Search volume for Austrian versus Keynesian Economics

One would note of an almost similar performance between Dr. Faber and Dr. Roubini’s popularity variance levels—Austrian economics has largely been subordinate in popularity to Keynesian economics during the past years (although this could be changing).

Finally there could be another factor: pessimism bias sells.

In the question and answer portion of this splendid talk on innovation, economist Deirdre McCloskey points out that Paul Ralph Elrich remains quite popular in spite of his ‘spectacularly’ wrong prediction.

Mr. Elrich is known for having lost the famous Simon-Elrich wager- wager that based on the price of 5 metals anchored upon the overblown risks of overpopulation.

Perhaps many are simply more attracted to a pessimistic outlook, whether valid or not, out of the penchant to see or resist a change in the status quo, or based on social signalling (to conform with the consensus outlook or to show intellectual prowess or promote an ideology, e.g. using fear to expand government control)

As Professor Bryan Caplan writes,

David Hume—economist, philosopher, and Adam Smith’s best friend—blamed popular pessimism on our psychology. “The humour of blaming the present, and admiring the past, is strongly rooted in human nature,” he wrote, “and has an influence even on persons endued with the profoundest judgment and most extensive learning.”

Bottom line: The popularity of economic or market forecasters appear grounded mostly on the confirmation bias or giving the public what they want or desire to hear more than the validity of theories or the batting average or the accuracy of predictions.

Financial Populism Means Confirming Mainstream’s Biases

``Who do you listen to? Who are you trying to please? Which customers, relatives, bloggers, pundits, bosses, peers and passers by have influence over your choices? Should the Pulitzer judges decide what gets written, or the angry boss at the end of the hall so influence the products you pitch? Should the buyer at Walmart be the person you spend all your time trying to please? Your nosy neighbor? The angry trolls that write to the newspaper? The customer you never hear from? Just for a second, think about the influence, buying power, network and track record of the people you listen to the most. Have they earned the right?” Seth Godin The people you should listen to

Some experts will virtually say anything just to get to the limelight or promote ideology. Unfortunately, the public hardly understands the motives behind such actions.

For instance when mainstream experts obstinately hammer on a “remittance driven Peso”, even if they have hardly been directly correlated in terms of remittance growth trends relative to the Peso-US dollar value [see How The Surging Philippine Peso Reflects On Global Inflationism], would be analogous to religion, arguing against populism would appear like blasphemy.

This goes to show that it is never about evidences or direct proofs (ipse dixitism) or logical reasoning but about indoctrination- from what academic or institutional experts, as repeatedly quoted by media, thinks they should be.

It’s Isn’t About Adherents, It’s About Profitability

At the start of the year high profile local experts had been in near unison predicting that the Philippine Peso will fall in excess of the Php 50 to a US dollar level.

Yet, in spite of the repeated forays by the local central bank (Bangko Sentral ng Pilipinas) to keep the Peso from firming, the Philippine Peso has virtually been up (by about 1.8% as of Friday’s close on a year to date basis) blatantly defying the collective projections of these mainstream experts.

Media never elaborates on the motivations of the actuations of mainstream experts or their predisposition for more interventionist government via inflationism in an attempt to uphold the plight of OFWs.

Since OFWs have been glorified as economic heroes, populism dictates that socio-political policies have to be directed at alleviating the conditions of the 12% of the economy at the expense of the rest.

However, these experts, who pretend to know how resources ought to be allocated, have failed to see the unintended effects of the 40 years of devaluation, and importantly botched at predicting the Peso level for 2009.

Yet if they can’t predict the whereabouts of the financial markets how the heck should we expect them to know how to deal with an even more complex real economy?

Still, in order to devalue the Peso, the BSP will have to massively intervene by printing money and/or have government spend more in the economy.

Yet, hardly any of these experts dealt with the repercussions of such interventionists actions through flagrant distortions in the production structure of the domestic economy and the resultant higher consumer prices.

Nor have they expounded on the crowding out effect of private investments that would lead to higher unemployment and to greater incidences of corruption from an enlarged bureaucracy, aside from greater inefficiency in the system as a consequence of government’s politicization of the economy.

Also yet none appears to have ever discussed on how the Peso’s over 40 years of devaluation from Php 2 to a US dollar in 1960s to Php 55 in 2005 have NOT lead to a goods and service export economy but to an unintended consequence-labor or manpower exports.

So while we have been correct in predicting for a stronger Peso for 2009 and a meaningful recovery in the Phisix, it’s primarily because we focused on what we thought mattered most-the impact of global political inflationism to asset and consumer prices and its diversified impact to the idiosyncratic structures of national economies.

And maybe lady luck mattered too.

In other words, we didn’t mince words to go against the crowd and worked on the basis of facts operating on free market based economic theory.

So it really doesn’t matter if we don’t gain “adherents”, what we have purported to do is to offer an alternative “contrarian” point of view in spite of the risks of social ostracism. Most importantly, we aim to impart market profitability and not just entertainment value.

In adhering to Warren Buffett’s investment advice, ``Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.''

Populism And Forecasting Accuracy

Does populism imply forecasting accuracy?

Perhaps for some, especially for those with a longer term horizon such as Warren Buffett, Dr. Marc Faber or Jim Rogers, but certainly not for all.

Especially NOT for celebrity gurus.

If it is not saying something radical, populism is always about declaring something outlier that connects with the mainstream ideology or short term views.

Tyler Durden of Zerohedge recently unmasked RealMoney columnist James Cramer “Citigroup” recommendation that prompted for a 14% drop in 3 days. The mercurial TV personality James Cramer appears to have a poor track record in calling the market right (Wall Street Cheat Street).

Another celebrity guru, Nouriel Roubini followed up on his debate with Jim Rogers [see Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble] and has repeatedly but incoherently been thrashing gold (projectsyndicate.org).

Mr. Roubini introduced the US dollar carry trade as a major risk “mother of all carry bubbles” last November, even when we had brought out this possibility last August [see The US Dollar Index’s Seasonality As Barometer For Stocks]- this means we have already reckoned the US dollar carry trade even prior to Mr. Roubini’s admonition.

Mr. Roubini’s derring-do concept has reflexively been embraced by the mainstream institutions like the IMF (Bloomberg), the World Bank (World Bank Blog) and other financial institutions.

Nevertheless we have argued against this [see Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble and Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble] noting of:

-the confusion between the incentives of private purchases against government purchases of commodities and select financial securities,

-the ultimate tasks of (developed economies) governments appear to be securing the stability of its banking system via the manipulation of several key markets including the mortgage, treasury and equity markets coupled with the tacit aim to devalue their currencies (US dollar, UK pound, Japanese Yen),

-the variability of the impact from the recent recession on industries and nations,

-the inability by the old financial system to regenerate systemic leverage,

-expectations of money’s neutrality,

-comparing today’s economic model with that of the Great Depression and

-the tendency of experts, like Mr. Roubini, to anchor on the recent past events or from the success of recent ‘carry’ models.

Mother Of All Carry Trade Bubble, Where?

Yet the proof of the pudding is in the eating.

Figure 3: Stockcharts.com: What US Dollar Carry?

With the US dollar has been up 4.8% from its recent bottom over the last 2 weeks, surprise (!), we are hardly seeing any generalized financial market tumult similar to that of 2008 see figure 3)

Except for the recent weakness in China’s Shanghai index (not shown above), Asian ($DJP1), European ($STOX 50) and Emerging markets (EEM) equities appears to be generally resilient amidst a rising US dollar.

In addition, the infirmity of the gold market, which has reflected on its inverse correlation with that of the US dollar, has yet to spillover to other commodities.

Instead of weakening, it would appear that other commodities have been firming up such as the Dow Agricultural Index ($DJAAG), the Copper markets ($COPPER) and most importantly, rallying oil prices ($WTIC) again, in the face of the recent strength by the US dollar.

So unless we see further deterioration across global financial markets (amidst the Dubai debt Crisis and the recent credit rating downgrade of Greece), there hardly seem any traces of the unwinding of “mother of all carry bubbles”.

So, where o’ where is the US dollar carry?

Seasonal Oil Strength And Celebrity Guru Track Records

Figure 4: US Global Investors: Oil’s Seasonal Price Patterns

Moreover if we should see oil’s seasonal strength play out, as it had during the previous 15 years, similar to gold and US dollar index (which has proven to be quite effective see Gold and the September Stock Market Seasonality Syndrome and The US Dollar Index’s Seasonality As Barometer For Stocks), then we can probably expect oil prices to further rise from current levels (see figure 4) and possibly break above its recent high at $82 per barrel in the face of a rising US dollar.

As a caveat, the rising US dollar appears to be a technical bounce and is likely a short term event more than fundamentally driven inflection or reversal.

Perhaps the US dollar bounce could also be interpreted by markets as anticipating the end of the US QE program, while major trading partners as the UK and Japan proceed with their own versions. In addition, the downgrade of Greece which risks of a contagion may spur more policy easing from the ECB to contain the ripples of the shockwaves.

Nevertheless with 7 banks closed by US regulators this week (marketwatch.com), and with next wave of ALT-A and Prime mortgages (aside from Commercial Real Estate) threatening the US banking system anew [see 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects], we shouldn’t expect any policy tightening or reversals of the QE program even if they expire in March. In fact, if things turns for the worst we should expect QE policies to intensify.

Yet celebrity guru Mr. Roubini has had a poor track record, according to Wall Street Cheat Street, with only 1 out of 7 predictions being accurate over the last few years.

Mr. Roubini had earlier failed to see this year’s rally and vehemently denied of its persistence, and also predicted that oil will trade at the $40 for the rest of 2009 [see Wall St. Cheat Sheet: Nouriel Roubini Unmasked; Lessons].

Realizing his obvious mistake, Mr. Roubini has switched sides during the midyear and declared oil to rise “closer to $100” (CNBC), which apparently hasn’t likewise been valid unless oil explodes during the coming sessions.

With wrong predictions after wrong predictions, it’s a wonder how mainstream institutions and experts have been hasty to freely embrace such flimsy and specious macro theories based on archaic models without addressing the impact from the policy directives by global governments on the economy and markets aside from oversimplistically interpreting economics like some school laboratory experiment.

Perhaps the common denominator for publicity seeking gurus is the ideological likemindedness, where according to Richard Ebeling, ``a whole host of economists who crave popular approval and political influence have been propounding a whole series of quack medicines to "heal" the economy, with the promise of curing the recession through interventionist and monetary "elixirs." (bold highlights mine)

If it were a choice between 15 minutes of fame from quackery and profitability from accurately predicting markets, the latter would be my choice hands down.

Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble

The celebrity guru strikes again!

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 Bloomberg

Hence 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.

Wall St. Cheat Sheet: Nouriel Roubini Unmasked; Lessons

The following article, from Wall St. Cheat Sheet, scoffs at the track record of high profile economist Nouriel Roubini in making predictions.

According to Wall St. Cheat Sheet:

``In August I wrote an article “Is Nouriel Roubini a False Prophet?” Apparently, some people are so smitten with Roubini they actually ignored all the cited articles and said, “No.” Consequently, I teamed up with a bunch of people around the world on an open source project to continue our mission exposing false prophets and help unwash those well-meaning brains

``The following video is a large collection of evidence proving Roubini has a horrendous record as a prognosticator. If you too know someone who has been listening to the seductive sounds of Roubini’s mantras, send them this helpful deprogramming message:

Normally, such take downs usually won't make my post. However, there are lessons to be gleaned from this critique which necessitates some discussion.

1. The Role of Media. This reveals of the proclivity of media to glamourize personalities who glibly "represent" the Du jour issues regardless of their past performance.

The appearance of fluency, urgency and connectivity to current events translates to more coverage. Ergo, the celebrity status.

2. Expert problem. Nassim Taleb says that "intelligent or informed persons were at no advantage over cabdrivers" in making predictions.

Why? Because of egotistical problem. Again according to Mr. Taleb, ``The problem with experts is that they do not know what they do not know. Lack of knowledge and the delusion about the quality of your knowledge come together-the same process that makes you know less also makes you satisfied." (emphasis added)

In short, experts tend to confine themselves on what they know.

3. Knowledge problem. There is also the tendency for experts to lean on models and mathematical equations to "scientifically" construct predictions while disregarding the variability of the human response aspect.

According to F. A. Hayek, ``the unavoidable imperfection of man's knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired. Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain."

4. Prediction dilemma.

The public tends to look for specific answers or forecasts from experts rather than examining the reasoning behind them.

For publicity seeking experts, an audacious gambit on forecasting could be a rewarding endeavor.

This, in my view, is where Mr. Roubini has capitalized from basking as a celebrity during last year's crisis.


The google trend chart shows of this phenomenon.

According to NYMAG, ``Since his forecasts proved correct, or semi-correct, Roubini's become an economic celebrity, practically a household name (okay, maybe only in the wonkiest of households, but still). He's been the subject of countless magazine profiles and is lauded by his peers. His independent economic research firm, RGE, has flourished, and he's always speaking at some conference, somewhere, around the globe. (And, with respect to Julia Ioffe, who wrote a great profile of the economist recently for The New Republic, we're not buying the idea that he's taking his message on the road out of some noble sense of duty. His fees must be astronomical at this point.) His stock has gone up with the ladies, too; as he recently told New York, "The recession has been great for me."

In my view, this represents as a personal victory for Mr. Roubini. He attained both the fame and the attendant fortune of booming business and adoring ladies. And maybe some of his critics could have been envious of this.

For us, this goes to show how doing our homework matters more than simply listening or heeding on the opinions of celebrity gurus.

Nassim Taleb: We Are Probably Worst Off Than Before

Interesting discussion between Nassim Taleb and Nouriel Roubini on Ben Bernanke at the CNBC.

Mr. Taleb avoids directly confronting Mr. Roubini, but runs an argument against policies undertaken by Bernanke from which Mr. Roubini supports. Nevertheless, Mr. Taleb in pun notes that Mr. Roubini's weakness is that "he likes Bernanke too much".

Here is Henry Blodget's summary of the interview:

-We're all in denial
-We're replacing private debt with public debt.
-We're not dealing with the cancer in our banking system.
-We're not making the structural changes we need to make.
-We're not being aggressive enough about restructuring debt (debt for equity swaps).
-Bernanke is a wimpy Greenspan sycophant
-Obama's rewarding the fools who got us here (Summers, Bernanke, Geithner)
The banksters are taking over again