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."