-- Nouriel Roubini predicts a global market crash
If I'm not mistaken, Nouriel Roubini predicted a global market crash
on CNBC this morning.
The following is my transcription. The lines in brackets [] are
paraphrases of interview questions.
Nouriel Roubini wrote:
> [Could we see the stock market run continue?]
> Yes, in the short run what's happening is that there's a wall
> of liquidity, not just in the United States but around the world,
> that's chasing assets -- it's equities, it's commodities, it's
> gold, it's emerging market asset classes.
> And now we have even the mother of all carry trades. Everyone is
> borrowing short, shorting the dollar, borrowing and investing in
> assets all over the world. Global equities, comodities, credit,
> emerging market asset classes.
> The risk is however, right now people are borrowing at zero
> percent interest rates in the United States. Effectively the rate
> of borrowing is negative, because with the dollar falling -- ?? in
> the capital gain, -- you're buying any asset around the world.
> All these assets are perfectly correlated.
> Eventually, the dollar cannot keep on falling. Once the dollar
> stops falling, it reverses. Yo7 have a sudden reversal of the
> dollar, you have to close your shorts, you have to dump assets,
> and you could have a market crash all over the world. That's a
> risk.
> [Is that anywhere near happening?]
> No, it's not near happening because for the time being the Fed is
> keeping short rates at zero, expected to remain zero, and the Fed
> is becoming the biggest seller of volatility because it's buying
> $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility
> on the long end is low, and on the short end is zero, so this game
> is played until ????.
> [Question about central banks]
> There's a gap between what you have to do for the real economy,
> and what you have to do for financial stability. The real economy
> is still weak. There's deflation actually in the economy. Look
> at the cycle 2001-2006. They kept the fund rates all the way down
> to 1% through 2004, three years after the recession was over.
> Then they did step by step [raises of] 25 basis points every six
> weeks.
> This time it's the same, only worse. Output has fallen 4%, not
> 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We
> have actual deflation rather than risk of deflation.
> So if the Fed wants to target the real economy and avoid
> deflation, it has to keep the Fed funds rate at 0 for longer. But
> if it does that, then you create another huge asset bubble.
> With the carry trade, that asset bubble is now becoming global,
> and everyone has to follow U.S. monetary policy by intervening in
> a non-sterilized way. That eases money at reduced rates, and
> therefore we're exporting our monetary policy to the rest of the
> world.
> And that's leading to a global asset bubble. And once there's
> the unraveling of that carry trade that eventually is going to
> occur, because the dollar cannot keep on falling, then you can
> have a market crash on a global basis.
> [q: Is this current asset bubble worse than the one that preceded
> the fall of Lehman?]
> It could become worse because if the Fed keeps the rates at zero,
> and if the Fed keeps controlling and reducing volatility on the
> long end, then everybody is playing the same game. Everybody is
> buying dollars and going long in risky assets all over the world.
> [Have we put out one fire, only to create another one?]
> I think we have two objectives here -- stabilize the real
> economy, and avoid financial instability. But we're using one
> target, the Fed funds rate, to target the real economy, but we're
> creating a new asset bubble, bigger than the previous one, and
> that's a mistake we're doing right now.
This can be summarized as follows:
- The Fed's zero percent interest rate policy is creating a "wall
of liquidity."
- Investors are using the carry trade -- borrowing dollars at zero
interest rates, and buying risky assets around the world -- equities,
commodities, emerging market asset classes. This is creating a new
asset bubble, bigger than the previous ones.
- This will continue as long as the dollar keeps falling. But
eventually the dollar MUST stop falling.
- At that point, the carry trade will reverse, and investors will
have to return the dollars they've borrowed. This means that they'll
all sell their equities, commodities, emerging market asset classes,
all at the same time, creating a global market crash.
I've read through this transcript several times, and I don't see that
he's left much doubt that this is going to happen. The only point of
ambiguity in what he's saying is the timing. He says that it won't
happen soon because the Fed will keep interest rates low for a while,
but surely he realizes that isn't the issue. The trigger will not be
the Fed funds rate, which is set by policy; the trigger will be the
ending of the fall of the dollar, and that's set by the market. And
with deflation already occurring, the dollar could stop falling at any
time, irrespective of the Fed funds rate.
As usual, you have to ask the question, "What would Nouriel Roubini
say if he believed that a global market crash was imminent?"
And the answer is that he'd be saying what he said in the above
transcript.
He wouldn't be talking about a global market crash at all if he
thought it was a distant possibility; the fact that he seems to
predict it indicates that he believes that it could happen in the
near future.
I've always been puzzled by what people like Nouriel Roubini and Ben
Bernanke really believe. As I've been saying for seven years, a
market crash MUST occur with 100% probability by applying the Law of
Mean Reversion. I don't expect the man on the street to understand
the Law of Mean Reversion, but I DO expect professors of economics at
NYU and Princeton to understand the Law of Mean Reversion.
This is the first time that I've heard Roubini, or indeed any major
financial official in Washington or around the world, predict a
market crash. This is a big change in opinion by Roubini, or at least
a big change in what he's saying.
John
hehehe. .