October 30, 2009
Investors worldwide are borrowing U.S. dollars to buy assets including equities and commodities, fueling "huge" bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini on Wednesday.
"We have the mother of all carry trades," Mr. Roubini, who predicted the banking crisis that spurred more than US$1.6-trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. "Everybody's playing the same game and this game is becoming dangerous."
The dollar has dropped 12% in the past year against a basket of six major currencies as the Federal Reserve, led by chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Mr. Roubini said the dollar will eventually "bottom out" as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and "rush to the exit," he said.
"The risk is that we are planting the seeds of the next financial crisis," said Mr. Roubini, chairman of New York-based research and advisory service Roubini Global Economics. "This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals."
The MSCI World Index of advanced-nation equities has surged 65% from this year's low on March 9, while the MSCI Emerging Markets Index has jumped 96%. The Reuters/Jefferies CRB Index of 19 commodities has added 33%.
Mr. Roubini said he sees a bubble in emerging-market equities and that gains in some developing-nation currencies are becoming "excessive." The rally in oil "is not justified by the fundamentals," he said.
An asset "bust" may not occur for another year or two as a "wall of liquidity" pushes prices higher, Mr. Roubini said. In a carry trade, investors borrow in countries with low interest rates to invest in higher-yielding assets.
Mr. Roubini said the U.S. recession seems to be over, though the economic recovery in advanced nations will be "anemic." He's "more optimistic" on the outlook for emerging-nation growth.
The U.S. economy likely expanded at a 3.2% pace from July through September after shrinking the previous four quarters, according to the median estimate of 65 economists surveyed by Bloomberg News before the Commerce Department's report on gross domestic product due Oct. 29.
The economy shrank 3.8% in the 12 months to June, the worst performance in seven decades.
Mr. Roubini's July 2006 warning about the financial crisis protected investors from losses in the Standard & Poor's 500 index's worst annual tumble in seven decades. The U.S. equity benchmark has surged 58% from a 12-year low in March even as Mr. Roubini said that month the advance was a "dead-cat bounce," that it may "fizzle" in May and warned in July that the economy is "not out of the woods."
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