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Dr. Doom is back. Last week, New York University economist Nouriel Roubini decided to speak out about the current economic recovery, warning that it cannot last. I'm not quite sure how this blog missed my radar screen, so I must thank Robert J. Samuelson for bringing it to my attention yesterday.
Roubini contends that while there was a massive rally in "all sorts of risky assets" has caused the dollar had weakened sharply and government bond yields have "increased but stayed low and stable." These risky assets that Roubini discusses are equities, oil, energy, and commodity. Dr. Doom believes that the prices for these risky assets have risen too far and too fast compared to macroeconomic fundamentals.
Roubini points out that our recent rally has been fostered by "a wave of liquidity from near-zero interest rates and quantitative easing." That said, Roubini believes that the most important factor in our current "bubble" is the weakness of the U.S. dollar.
This is something that we need to watch, as Roubini makes an excellent point. I don't necessarily agree with him, but I am not an "economic expert" like Dr. Doom. Roubini argues that traders are borrowing at negative 20% rates to "invest on a highly leveraged basis on a mass of risky global asests that are rising in price due to excess liquidity and a massive carry trade." What I like is that Roubini takes on those who are taking advantage of the bubble to rake in returns of 50% to 70% since March.
So, is anyone going to heed Dr. Doom's warnings? Why should they? As long as the Federal Reserve keeps interest rates at zero, there is no reason to pay any attention to the naysayers, right? Wrong. It is this thinking that set up the housing bubble and the DotCom bubble. But this time, it is on the policymakers and the Fed, says Roubini, who notes that the longer "they remain blind, the harder the markets will fall." He adds that the longer this growing bubble is ignored, the harder will be the burst.
So, what should we, as investors, watch for? Roubini notes that the Fed will eventually have to raise interest rates or outside events will occur. Either of these could cause a crash as investors "rush to lock in profits." If this situation comes to fruition, why not invest until there is an interest-rate hike or some sign of outside pressure that could impact these assets and the dollar? Well, even Roubini himself believes that the "unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while."
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Reader Comments (Page 1 of 1)
11-10-2009 @ 1:19PM
MyKisa said...
....my mower guy was right about the last fall...he says we are doomed as long as we allow the parasitic fed to exist...he is batting a 1,000 so far
11-10-2009 @ 1:26PM
randy said...
This administration is clueless. They are parading all over the country trying to give away free insurance. While the economic house is burning down. The hell with insurance get the economy back on track I will gladdly pay for my own insurance. Yep totally clueless.The only good to come out of this lame duck administration is we only have 3 more years if the economy makes it. LOL
11-10-2009 @ 2:42PM
Iridium said...
Reality is very simple. I said in the late 1990s that the DotCom boom was bogus. I asked people, "How are these internet companies going to make hundreds of millions to support their stock valuation when the total retail market for the product they sell is under $100 million a year."
I asked for justification, just as I am now. For some reason the gain could never be justified beyond a single answer.
The answer was always, "I don't care how they are going to make money, I bought the stock at $18 and now it is trading at $120. I'm making a killing."
Reality is that your gains are worthless unless you can cash them in. Some people do but the mega rich who truly control the market will always be able to cash in before you. We call this THE HOUSE ALWAYS WINS!!!
Every year millions of people lose billions of dollars to casinos. A few hundred cash out with massive gains. Same story with the lottery. The stock market has become nothing but a casino. The owner operators are Goldman Sachs, JP Morgan, and the Fed. However we do not dedicate TV networks, newspapers, and hundreds of pundits to cover casinos. We do however for Wall Street, isn't that a bit odd. Wall Street has become a game, the problem is that the umpires don't play fair. The definitely favor the home team.
What makes me so angry is that the asset bubbles have been proven. Dow 14,000 was proven to be attained only through the massive leveraging of assets. Leverage ratios higher than 100:1. How can a climb back to that be justified?
The Dotcom fiasco was proven to be caused by massive amounts of venture capital being spent to grow corporations that never even had a chance to make dollar one. Rather than look at real business models, investors bought on wild predictions and drove stocks to massive earnings ratios. The exact same thing that is happening now. No company can justify a P/E ratio over 50 even with double digit profit growth. Right now we are valuing quite a few corporations at a few hundred times their actual earnings. Why is this going on again?
The housing bubble was driven mainly by the speculation of complete morons that convinced themselves that homes could appreciate in value by 100% every 3-5 years. Realtors and banks worked together to promote this charade because they were making out like bandits.
That was until reality set in. It doesn't take a genius to figure out when assets and stocks are overvalued. It just takes a little common sense. The problem is that common sense usually takes a backseat to the illusion of easy money. Goldman Sachs and the rest of the thieves know this all too well. As long as people are stupid enough to believe in the promise of easy money they'll be there to take your money in exchange for it.
11-12-2009 @ 11:52AM
Tim Jowers said...
Great posts. "The owner operators are Goldman Sachs, JP Morgan, and the Fed."
The money printing era could kill itself. As other countries stabilize then money will flow there. Thus the money printing must go into over-drive to keep the ponzi scheme alive. I think its $750B in commerical losses int he pipe.
Once the credit bubble pops at the FED then the dollar - and the USA - can recover. The sooner the banksters stop stealing from the working Americans through money printing, the better for all Americans.