Roubini: Mother of All Carry Trades Faces Inevitable Bust

Posted November 1st, 2009 by Michael Nystrom

By Nouriel Roubini
November 1 2009 | Financial Times

Snip:
-------------------
So what is behind this massive [stock market & financial asset] rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

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.

------------

But it will eventually unwind in the biggest co-ordinated asset bust ever... Read the whole thing.

output

Professor Roubini

On November 2nd, 2009 Gil says:

assumes that an environment of risk aversion will create demand for U.S. Treasuries. Given its new identity as the carry trade currency of choice, we will see if the USD continues to be considered a "safe haven" during times of geopolitical crises.

More on the carry trade: http://jsmineset.com/2009...

Yes

On November 3rd, 2009 Liberty4Compassion says:

Assume is a dangerous word.

Thanks for

On November 2nd, 2009 quiltingsando says:

posting this.

Doesn't this suggest that gold and silver will go up as the

On November 2nd, 2009 Henry says:

dollar falls under the weight of the carry trade, but maybe a year from now, when the carry trade unwinds, the US dollar will soar as asset values, gold, silver and real estate included, collapse. My own bet is that next October (2010) we will see the second wave of credit collapse and it will be much larger than the first wave of 2007-2009.

Read this deflation argument which I think fits in well with this thread:

http://europe.theoildrum....

I also think that the pain and suffering from this economic collapse will bring civil war to our doorstep.