November 10, 2009
Nouriel Roubini, the once-obscure economist who gained celebrity and the title “Dr. Doom” after correctly forecasting the financial crisis, believes that current Fed policies are destabilizing the markets and pushing the economy toward another collapse.
Roubini sounded the alarm while delivering the keynote address at the Index Universe Inside Commodities conference last week in New York.
As a consequence of Fed policy, Roubini said, investors should prepare for an anemic U-shaped recovery and avoid risky assets “across the board.”
Oil prices are the tipping point
The current recession was not triggered by subprime lending, a housing bubble, or the collapse of Lehman; according to Roubini, it was brought on by a global trade shock –oil prices rising to $145/barrel – that crippled the US, European, Chinese, Indian, Japanese and other major commodity-importing economies.
The recent rise in oil prices from $30 to $80/barrel is very hard to justify based on fundamentals. With global demand for oil at 2005 levels and inventories at all-time highs, Roubini believes oil prices have formed a bubble.
The danger today is precariously high oil prices, which he said are driven by speculators and option traders. “If oil reaches $100 – not based on fundamentals – it will have the same impact on the global economy as oil did at $140 last year,” he said. Global economies are just getting back on their feet, and oil at $100, if driven by speculative factors, would be highly destabilizing, Roubini believes.
Although he generally does not favor such regulation, Roubini recommends market controls for the oil futures markets to limit price movements caused by speculative trading.
The dangers of the dollar carry trade
While oil prices pose the greatest threat to economic growth, Roubini said, the dollar carry trade imperils the stability of financial markets.Hedge funds, banks, private equity firms and other institutional investors have been able to borrow at near-zero interest rates in US dollars and take long positions in risky assets, including those denominated in other currencies. Those risky assets include global equities, commodities, and bonds. Because the dollar has depreciated at an annualized rate of 20% over the last six months, he said, “the game is obvious” and “every investor looks like a genius.”
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