Saturday, November 14, 2009

Dissing Nouriel Roubini

Earlier this week, I questioned whether Nouriel Roubini was correct in warning about a huge carry trade being put on between the dollar versus high yield currencies. I also linked to a post from the Mad Hedge Trader discussing the same topic.

Now, UBS analyst Larry Hatheway is jumping into the act. Bloomberg reports:
“The assertion that asset prices have been mainly driven by leverage, ‘carry trades,’ and liquidity is not supported by the data,” Larry Hatheway, global head of asset allocation at UBS’s investment bank in London, wrote in a research report dated Nov. 12. The report cited New York University professor Roubini’s Nov. 2 editorial in the Financial Times titled “Mother of All Carry Trades Faces an Inevitable Bust.”...

Rather than increasing leverage, data shows investors have been reducing borrowing used to finance investments, according to Hatheway. Outstanding margin debt at U.S. broker-dealers has declined by about $175 billion since mid-2008 to about $200 billion, according to the UBS report. Roubini...wrote in his Nov. 2 editorial that while the recovery in asset prices is “in part” driven by better economic fundamentals, the rally was “too much, too soon and too fast.” An “important factor fuelling this asset bubble is the weakness of the U.S. dollar, driven by the mother of all carry trades,” Roubini wrote.

Roubini is simply not looking at the data and understanding what is really going on. First, we had the mother of all Federal Reserve money growth bursts, when M2 money supply increased between September 2008 and February 2009 at an annualized rate of 15%. Then, of course, the dead cat bounce would surely occur after the panic period we had in 2008. But, it has been the mother of dead cat bounces (probably as a result of the extra kicker from the money supply growth). That said, Bernanke stopped printing money back in February, and the dead cat has been in the air so long, I am going to start looking to see if it has grown wings.

This is all a long way of saying that I think Roubini is correct on his forecast of trouble ahead for the stock market and commodities market, he just has the reasons wrong. The downturn is coming because the money supply has stopped growing, and dead cats bounce, they don't run down the street. If anything, what Roubini is working off of are good trader instincts, not forecasts because of accurate data.

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