Have just enough time before my first class to pass along Nouriel Roubini's dire warning to the Fed:

What is fueling the massive asset price rally across the board? "One important factor is the weakness of the US dollar, driven by the mother of all carry trades. Traders are borrowing at negative 20% 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." What makes the carry trade unravel? First, the dollar cannot go to zero and at some point the cost of borrowing in dollars stabilizes. Second, the Fed cannot suppress volatility forever. Third, the Fed may tighten sooner than expected. Fourth, political risk may spark flight to safety. "The longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating." [Emphasis added by LeRoy.] From The Financial Times.

Comments?

"... negative 20% rates ... "? Does he mean negative 2%?

I suspect it is a typo.

I don't dispute the rest of Roubini's statement, but I question the part you have highlighted. Why should we assume that the Fed (and treasury) would be unaware of the monster bubble they are creating? Why should we give them the benefit of any doubt? Because they didn't see the housing bubble pop and are generally incompetent? Or because they would never do such a dastardly thing as blow another bubble? Bill Fleckenstein has referred to Alan Greenspan as a serial bubble blower. The Fed's MO is to do nothing to prevent bubbles from occurring and then in the process of cleaning up the destruction a bubble makes, to create a new one. Some have said that Ben Bernanke has two functions: to adjust interest rates and to print money. He has been printing money for the last 18 months. He is using inflation in the money supply to juice the economy--just as Greenspan did in 2002-4. The dollar also lost a lot of value back then and gold nearly doubled. That's what Bernanke wants, apparently...for people to spend and get rid of dollars like hot potatoes. He wants velocity to rise. Bernanke is a mad scientist conducting an experiment. Eventually the economy will scream.

Roubini said 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.

That would seem to resolve the issue. However, it seems to me that assuming that the dollar will be worth 20% less a year from now rather than 20% more seems to me to be just another example of taking on additional risk for the purpose of profiting without the dreary penalty of having to produce anything.

Your last sentence seems to me just about a perfect description of what's going on. Govt. never seems willing to call an end to the era of speculation. So we get one bubble after another. The alternative would require too much work, apparently.

"The Fed and other policymakers seem unaware of the monster bubble they are creating."

I read recently that these guys work under the assumption that "IBGYBG" or "I'll Be Gone, You'll Be Gone."

Sort of reassuring huh?

I know this post is a bit old but I would just like to do the beat the dead horse thing a bit here and repeat myself since it demonstrates something I think about quite a bit.

What this illustrates so well is the disconnect between the investment community and the "real" economy. The powers that be have poured trillions of dollars into the economy but the economy is no where near overheating. That is because so little of that money gets to the streets. I suppose the investment community cannot be entirely blamed for this, they are just doing their job of chasing high returns, and in todays climate trying to maintain solvency. But those goals do not equate to domestic jobs or buying power in a world where the high returns may be in Thai junk bonds or derivatives.

The people who should be blamed for this are the policy makers, for not recognizing the disconnect and how counter productive it makes things, and for finding a way around a clearly flawed system.