SOS Coming Crash?

Great Things are Ahead for This Country!
But only after the Coming Crash ......by Jim Shepherd (referring to USA)

Remember, winning is great.... but avoiding loss of capital is paramount!

So what is behind this rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades.

The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. 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...

Every investor who plays this risky game looks like a genius — even if they are just riding a huge bubble financed by a large negative cost of borrowing..

...This policy feeds the global asset bubble it is also feeding a new US asset bubble...The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy... This is keeping short-term rates lower than is desirable... So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate... the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long-leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets — equities, commodities, emerging market asset classes and credit instruments." ("The Mother of all Carry Trades Faces an Inevitable Bust," Nouriel Roubini, Financial Times.)

Everyone who watches the market has noticed the inverse correlation of stocks to the dollar. When the dollar fades, stocks soar. And when the dollar strengthens, stocks plunge. Eventually, the dollar will reverse-course and stage a comeback, probably when Bernanke stops his printing operations. That will trigger the next severe correction which will burst bubbles across all asset classes.

Bernanke's success in reflating sagging asset prices has depended entirely on interest rate manipulation and liquidity injections. There's been no effort to patch household balance sheets, increase production, or strengthen overall demand. It's a clever trick by a master illusionist, but it has its costs. When the dollar rallies, markets will crash. And Bernanke will be responsible.

MyView

Carry Trade. Derivatives. Asset Bubble. QE. The question is when will the MUSIC STOP.