[THS] Roubini Says Carry Trades Fueling Huge Asset Bubble

[Peter Webster]

http://www.bloomberg.com/apps/news?pid=20601087&sid=atlyygQuBLUI

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble (Update3)
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By Michael Patterson

Oct. 27 (Bloomberg) -- Investors worldwide are borrowing dollars to buy assets
including equities and commodities, fueling “huge” bubbles that may spark another
financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis
that spurred more than $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 percent 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. 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 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.”

‘Wall of Liquidity’

The MSCI World Index of advanced-nation equities has surged 65 percent from this
year’s low on March 9, while the MSCI Emerging Markets Index has jumped 96
percent. The Reuters/Jefferies CRB Index of 19 commodities has added 33 percent.

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, Roubini said. In a carry trade, investors borrow in countries with low
interest rates to invest in higher-yielding assets.

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 probably expanded at a 3.2 percent 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.

Roubini on Stocks

The economy shrank 3.8 percent in the 12 months to June, the worst performance in
seven decades.

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 percent from a 12-year low in March even as
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.”

The S&P 500 gained was little changed at 1,067.30 as of 12:44 p.m. in New York,
while the MSCI emerging markets index lost 1.8 percent. South Africa’s rand dropped
0.9 percent against the dollar as developing-nation currencies weakened. Crude oil
for December delivery added 1.2 percent to $79.60 a barrel.

To contact the reporter on this story: Michael Patterson in London at
mpatterson10 at bloomberg.net.
Last Updated: October 27, 2009 13:07 EDT