The Next Bubble


Nouriel Roubini, one of those economists who can credibly claim to have predicted the financial crisis, delivered big on one of my favorite genres of columns last week: predicting the Next Bubble. Get your gloom on at the Financial Times:

Dollar shorts

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. 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 – as the total returns have been in the 50-70 per cent range since March. […]

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles. […]

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 – as was seen in previous reversals, such as the yen-funded carry trade – 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 Washington Post's Robert Samuelson gives his two cents here.

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  1. Roubini can’t credibly claim to have predicted shit. If you say every year that there is going to be a recession, you will be right eventually. He is the Jim Cramer of doom and gloom.

    1. The same could be said about the permabear Austrians.

    2. I’m not his greatest fan, but he did call a real estate bust that many of his peers said wouldn’t happen because the fundamentals were there.

  2. No discussion of Nouriel Roubini is complete without at least one mention of his plaster-vagina studded TriBeCa Loft.

  3. First, the dollar cannot fall to zero and at some point it will stabilise(sic)

    I wish Roubini had supplied something more than his religious conviction to support that claim.

    1. Well even paper has value. The coupons in the weekend edition of those things called “newspapers” are worth a fraction of a cent.

  4. traders are borrowing at negative 20 per cent rates

    Um…what? How do I get on this gravy train?

    1. you need to short dollars and buy some other currency… assuming the dollar keeps falling, then you buy back the cheaper dollars with the other currency. The 20% is on an annualized basis. Howeverm if the dollar strengthens, then you lose money with this trade.

  5. Warty,

    near 0% percent real rate combined with weakening US dollar equals negative interest rates in whatever currency they are trading into.

    The sidebar is actually informative.

  6. I wish the gold bubble would break already. I’d like to buy some, but it’s way too high, so I’m sticking with a commodities ETF for now.

    1. I don’t think gold is a bubble. At $1100/oz it reflects the weakening dollar. I see no way the dollar can strengthen and expect gold to hit $10,000/oz over the next several years. Look for gold to go up $100/oz in the first quarter of 2010

      1. Make that:
        Look for gold to go up $100/oz in a single day in the first quarter of 2010

  7. IMO Roubini did a very nice job at both predicting our present problems AND listing their causes. Whereas the masters of the unverise (Fed, Wallstreet etc) were pretty much blind sided.

    Of course we left them in power, and amped up the policies that got us in trouble in the first place, but that’s a whole nother discussion.

    1. While I don’t disagree with your comment, I must immediately dismiss it because of your use of “a whole nother”.

  8. Or invest in Euro- or Yen-denominated stocks. I’m looking at German utility stocks.

  9. sage,

    not sure gold is a bubble. It might be high, but I dont see it crashing back down to $300.

    1. Yeah, not that low. But geez. #1100 an oz is just wild.

      1. People are going to start melting down their spoons and whatnot pretty soon.

        1. From what I’ve heard $1500-2000 is a pretty reasonable number for gold, and if things get real bad, we might see $3000.

        2. You eat with goldware?

          1. Who doesn’t?

            1. I have some gold spoons for eating grapefruit (their slender-bowled and slightlt pointed) that belonged to a great grandmother, but I never heard of goldware beyond that.

          2. Only when wearing my monocle and tophat.

        3. Apparently, the companies that buy “scrap” gold (jewelry and what-not) are seeing deliveries dry up, especially in the lower carat-weight stuff. This is taken as indication that an awful lot of jewelry that people would be willing to sell is already sold.

          Not good, from any number of perspectives.

    2. Junk silver is where it’s at now, since

      (1) gold is extremely hard to find at any price, and

      (2) I’m more worried about paying for the bare necessities after hyperinflation sets in than I am about making a profit on metals. Even a tenth-ounce gold coin, now worth about $110, is going to be too valuable to buy groceries with.

  10. I wish the gold bubble would break already. I’d like to buy some, but it’s way too high, so I’m sticking with a commodities ETF for now.


    1. Uh, wha?

      Dutch Bank of Canada?
      Durable Brass Cahones?
      Delectable British Chocolate?

      1. Don’t Be Changin’

        1. AH! I’m a buy and hold type of investor. The ETF allows me to get in on the precious metal action with smaller amounts of money. Plus I jump in on oil, natural gas, etc. Seems that when/if things get better that these items are going to get expensive along with gold.

          1. Yes but you are also paying fees to the fund. ETFs are great for traders that get in and out quickly but sure losers for buy and hold investors. I learned this lesson painfully.

            1. Eh, the expense ratio is only 0.75%. It’s not an actively managed fund, it merely tracks with the S$P commodities index. And it’s a small part of my overall picture.

            2. That’s the whole point of an ETF (as opposed to Mutual Fund); unlike mutual funds, ETF’s are not actively managed and therefore have very low management fees. Also, rather than owning a fractional portion of the Fund, with an ETF you own actual fractional interests in shares in the stocks in the ETF (you can theoretically even exchange your ETF shares for shares of the stocks with the Trustee)

  11. DBC = Dead Brain Cells, ’80s Canadian prog-thrash band whose second record was a concept album about inflation (of the universe).

    1. Is this real? I’m guessing it isn’t, but I hope it is.

  12. It’s really quite the catch-22 situation our economic policy makers have created here – you don’t want to hold non-dollar denominated assests since there’s a massive bubble brewing in them, but you don’t want to hold dollar-denominated assets since the value of the dollar is being rapidly eroded. Assets that are gradually becoming worthless vs assets that will suddenly become worthless at some point in the fairly near future isn’t much of a choice. Mind as well convert your personal wealth out to small value bills and give it a viking funeral – at least then the destruction of it will look cool and contribute to a grassroots reduction of M0.

  13. Roubini was far from a permabear. He was bearish before most, but not always so. the Bubble he saw was a long time coming.

  14. The problem with Roubini’s article imo is that a short position, or in this case a collection of them are, almost by definition, not a bubble.

    And if your shorting the dollar, how exactly is that inflating dollar demoninated assets, like for instance, the Dow?

    I mean, his logic here is to me like blaming the collapse of the housing & mortgage securitization markets starting in 2007 on the people that *shorted* that market – which although some people did (specifically those that whined about short sellers) – I would think Roubini would find ridiculous.

    1. As I understand it, the short positions are highly leveraged (actually, any short is, since you borrow whatever you are shorting). Leverage feeds bubbles. Shorting the reserve currency can mean lots and lots of leverage, hence a big, big bubble.

  15. Also, what would Roubini like the Fed to do? Does he really want to raise interest rates? In what has been a deflationary environment?

    Doesn’t that what everyone left right and center agree that was the biggest single cause of things going downhill from 1929-1933?

    1. You’re thinking of Smoot-Hawley.

      Roubini has praised the Fed for their actions over the last year, IIRC. Now he wants them to unwind faster so that investors stop playing around with monopoly money.

      Money actually has to be based on something. We need a Volker type to take the punch bowl away, sooner rather than later. The Federal Funds Rate went as high as 20% in 1980/81, and that was after years of deficits that just don’t compare to what we’re looking at today.

      1. Not everybody agrees that Smoot-Hawley was the biggest factor – some argue it wasn’t a factor. (I do, btw, agree it was a factor, just not the biggest factor)

        But everybody, at least from the Keynes to Uncle Milty continuum agrees that the principle cause of the *start* of the great depression was the inexplicabily tight monetary policy of the Fed during the Hoover years in a deflationary environment – which was caused by and caused to continue the cascading bank failures.

        Which was quickly reversed upon FDR taking office. Now, there’s a heck of a lot a disagreement on what happened *after* 1933, but most everyone concurs with what was and was not a mistake before then.

        1. You are right about the consensus on tight money, excepting the opinion of Murray Rothbard and the Austrian school. Rothbard made a strong argument that a credit bubble caused the Great Depression, and easy credit would only prolong it. And let’s not forget about the long run–if banks were to learn that they were “fail-proof” they would behave differently, and make poor economic choices. Bank failures are not a flaw of capitalism, they are a feature.

    2. Whether it’s a deflationary environment depends on how you look at it. If you look at consumer good price metrics like the CPI, we’ve had mild deflation earlier giving way to mild inflation at present, so the low rates are justified. If you look at asset prices, it looks like they’re rapidly being driven up by loose monetary policy.

      We’re in the timeframe where price stickiness matters, so things that reprice very rapidly (equity, gold, etc) are experiencing rapid increases in price driven by expansionary monetary policy, but things that reprice slowly (labor, retail, etc) are experiencing rough price stability. The choices are a falling CPI or an asset bubble, both of which are a problem, but nothing says there has to be a good solution – it’s monetary policy not magic. I’d rather let the deleveraging proceed, traumatic or not, since we’ll just end up in the same place as we were in fall ’08 again in a few years otherwise.

  16. Actually, if you read some more of Roubini’s work he lays out some of the policy solutions.

    Most important, Lay out the exact steps to balance the budget, and WHEN they will happen. The budgetary problems are one of the primary drivers behind dollar weakness. Becuase the US will not be able to borrow enough otherwise, thus turning to the printing presses. You can see China has made several comments relating to this.

    Other important steps would be cracking down on the new ponzi schemes being perpetrated by wall street. Breaking up the two big to fail banks. Higher capital requirments. and changes to incentives. Also, stop allowing banks to get interest on deposits at the federal reserve.

    1. Ok, but any politician today, as any the last 40 years, who says “my plan will balance the budget” (and esp “by year XXXX”) shoud be treated with as much skepticism as a scientist who says “look at my cold fusion device”

      I’ll give Clinton credit for not mucking up a good thing (which is really half of sucess in life) ditto the Republican congress, but the balanced budget(s) (2 of them when you count unified 1 of them if you do not) of the late 90’s were in no way part of a master plan.

      1. we’ll have cold fusion before a balanced federal budget

        1. You wrote: “we’ll have cold fusion before a balanced federal budget”

          The Italian Physical society, the ENEA (Italian DoE) and many others agree. See:

      2. Zero if you look at actual Treasury debt numbers.

        1. Also, also, no where near balanced if you use GAAP budgeting.

        2. We’ve had this debate before.

          from this application:


          3,733,864,472,163.53 1,792,328,536,734.09 5,526,193,008,897.62

          3,636,104,594,501.81 2,020,166,307,131.62 5,656,270,901,633.43

          the 100 billion reduction in debt held by the public is a real reduction. and represents a real balanced budget (actually one with a surplus)

          the increase in intragovernmental holdings (and total debt) is because the (then) SS surplus can only by law be ‘invested’ in govt bonds. (actually the law hasn’t changed, but the existence of a ss surplus has.)

          I concur with your later comment on GAAP.

          1. Um, if the government had a balanced budget, then wouldn’t the total have to go down? Intragovernmental holdings increased $208 billion, so if the budget was perfectly balanced, wouldn’t public debt have to go down by $208 billion?

      3. Exactly. A politician saying he’ll balance the budget within 25 years or whatever is just like a person who says they’re going to lose 25 pounds. If you try to do it all at once you’ll either come off the diet or get sick. If you do it the healthy way — losing a pound a week for six months, you’ve got to have some serious willpower to keep up the weight loss for a long period of time like that with no visible results until you’re almost done.

  17. Actually (and not saying this would happen) but laws could be passed today, to start balancing the budget in say 2011 or 2012 (to allow time for the economy to recover). You could lay out exactly what services would be cut, and what taxes would be raised. (both are almost assuredly going to happen). Also, a lot of the inefficinies could be taken out at any time.

    One idea I’ve heard for doing this is to create a commission to do it. And then allow only an up down vote on the whole plan the commission produces. Thus removing most of the pork and special interests from it.

  18. Kroneborge, not trying to be overly negative here or on your particualr case (it’s the threaded comments), but just sayin if you’re over thirty some odd years old, you would/should remember the same sort of thing was proposed and sorta implemented – Grahm-Ruddman-Hollings – in the late 80’s to laughable results.

    (every politician in our lifetime and heck our grandparents lifetime has always talked about taking out inefficiencies – i.e. “I’m going to stamp out waste fraud and abuse in the system”)

  19. I predict that the next bust will be blamed on capitalism.

  20. No, I agree with you that things probably won’t change, at least not till they get much worse.

    But of all the solutions that are probably not going to happen, a comittee designed plan is problably the most likely to be effecitive and get passed.

  21. Really? you are discussing monetary policy, when the real solution is to devolve government. Dept. of Education,80,000 employees @ $50,000 a year, HUD, the same, go down the list, Health and Human Services, Dept. of Energy, DEA, BATFE, the list goes on. Reduce government by 60%, we’re all doing well.

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