SOS Roubini

Roubini's view in Financial Times 1 Nov 2009

Why global risky assets prices goes up?

It is arising from the combine effects of

• zero Fed fund rates
• quantitative easing
• massive purchase of long term debt instrument

that encourages

• carry trade (of USD) on highly leverage global asset bubble

Why will this carry trade unravel?

1. US dollar cannot fall to zero, when it stabilises, many has to cover their shorts
2. Fed USD1.8 trillion purchase plan is over by next spring
3. If US grow in suprise growth in 3Q + 4Q of 09, market may start to expect Fed tightening
4. Fear of double dip and geopolitical risk

What should we do?

• Keep in save assets such as cash/treasuries

because, 2010 will be very volatile of the risky asset bubble due to the liquidity


MyView

Roubini's view of weak recovery mainly due to

• consumption growth slower than the GDP due to over leveraging
• investment spending or capex growth will be slower than GDP growth due to over supply
• credit growth is negative, or at best, very weak due to collapse of shadow financial system e.g. non-bank mortgage lenders
  
• fiscal stimulus drag (when discontinued)

Robert Prechter's view

• USD will unravel, all other asset class will fall
• deleveraging will overwhelm the stimulus plan
• debt problems only postpone but not resolved
  

Depending on when the "money printing stops" and the unravel of the US dollar carry trade, markets will be volatile. When the music stops, the second wave of tsunami will come back with a vengence (this is certain, but the timing is difficult to predict as it is subject to the government quantitative easing policy, zero fund rates policy + massive purchase of LT debt instrument.