Monday, November 2, 2009

De-bunking Nouriel Roubini

Someone asked an excellent question in the comment section of my previous post regarding Nouriel Roubini's shoot-from-the-hip comment getting headlines today that the unwinding of the dollar carry-trade will cause the dollar to spike.  The short answer is that any spikes in the U.S. dollar index will be short-lived and shallow, as the dollar has a long way to go before it finds a spot to land which reflects the reality behind the U.S. financial system and the ever-increasing supply of dollars being produced by Bernanke.

Having said that, here are my thoughts:  The dollar carry-trade is a relatively new development fueled by zero percent Fed Funds and a rapidly expanding supply of dollars. Before we speculate on the effects of the dollar carry trade unwinding, let's figure out what events would precipitate the unwinding of the dollar carry trade. The yen carry trade lasted for several years. In fact, to a degree, its still going on relative to other currencies, just not dollars, since both the U.S. and Japan have zero interest policies implemented by their respective central banks.

When do you think the Fed will raise rates to a level which exceeds the rates in other countries? My bet is that it will be a lot longer than anyone realizes. Based on this, I think the more interesting question is "how insane will the dollar carry-trade get?" The yen carry trade financed a multi-trillion dollar bubbles in hedge funds, derivatives, the real estate/mortgage market, and the Treasury bond market. Using that as your measuring tape relative to the dollar, the starting pitchers for the dollar carry trade have yet to finish warming up and take the mound.

When do you think the Fed will stop expanding the money supply (the real money supply, not MZM or M2)? I would suggest that if the Fed starts to withdraw liquidity and raise rates, the U.S. financial system will fold up faster than a circus tent in a hurricane and Bernanke will lose his job - as will Obama and the current stable of bank-financed Congressmen.

I think Roubini says a lot of outrageous things either to grab attention or because he doesn't fully understand finance. Probably a bit of both.  I don't really pay attention to his commentary because I believe it's nothing more than superficial analysis cloaked in headline-grabbing hype and an accent that makes him sound well-educated.


  1. He doesn't sound well-educated-- he sounds like a vampire from Transylvania when he speaks. Half the time I can't even make out wtf he is saying. He's full of crap, like most other "gurus" out there.

  2. @Rodd: couldn't have said it better myself

  3. Dave do you follow Robert Wenzel's website ( Essentially he makes the argument that Bennie hans't been "printing" money since Feb. of this year. And that this lack of liquidity will casue a spike in dollar and corresponding correction in other asset classes. Not quite sure what to make of it since everyone knows the FED has been surreptitiously monetizing the treasury auctions, so as not to have a failure.

    This is what he said in his Friday column, "For the record, the up dollar, down stock market (and yes down gold) is becasue of the lack of Fed money printing which is causing increasing demand for dollars in terms of foreign exchange, stocks and hard assets. It's about basic supply and demand." I'm sorry, but when I read this it didn't make an ounce of sense. How is not printing causing an increase in the demand for dollars? He then says demand for hard assets will go up. Well I'm sorry isn't gold and other pm classified as hard assets?

    I guess what he means is companies like CIT aren't able to raise liquidity to keep operations going and this will cause demand for dollar to go up? I addressed these questions to him but he never responded... Go figure.

  4. Dave,
    tell us how you really feel!

    Roubini was pretty good at seeing the problems the banks had, but I think he mellowed his message after getting so much attention.

  5. Larry Summers was on RGE's board and is also believed to have owned an equity position before joining O's adminstration.

    Roubini is an administartion "designated" doom and gloomer. He's a team player.

  6. @anliu:

    I use to check in on the website to which you refer and found it to be of no value added. I no longer have it bookmarked.

    As for making comments that can be backed up with actual data, there's nothing like going to the source. Here are two charts on the money supply which can be found at the St. Louis Fed website:

    Here's MZM, which a lot of people use as gospel now that M3 is no longer reported:

    Here's M2:

    As you can see, Mr. Wenzel is clearly wrong about the money supply.

    The fact of the matter is that, if we could audit the Fed with a bona fide audit, not a Mel Watts castrated special, I am positive that we would be able to prove that M2/MZM understate the REAL money supply.

    Here is commentary backed by data from my good friend "Jesse" explaining why the dollar got a bid on "demand" for dollars earlier this year and why this "demand" will not materialize this year:

    Jesse is meticulous about finding data to back his assertions.

    Thanks for your inquiry, because there is a lot of mediocre analysis and commentary out there, but nothing drives me more insane than bloggers who don't back up their assertions with real data. My guess is that Mr. Wenzel is part of the small camp of folks who think O.J. Simpson is innocent LOL.

  7. @gyc, hey dude. Actually, I have found Roubini to be quite superficial in his analysis. Two-three years ago, when I was calling for a 40-50% drop in housing prices and very severe, long-lasting recession, Roubini was calling for 10-20% drop in housing, maximum, and a "V" or "U" shaped economic path.

    As for his views on the banks, he is a complete lightweight. In fact, have you ever seen numerical work published by him? Before I started this blog, I did intenstive work on several banks, starting with Lehman about 6 months before Lehman blew, and suggested that that the top 20 banks (including GS and JPM) are hopelessly insolvent if you apply bona fide mark to market accounting. They still all are. And my work only superficially touched on the derivatives quagmire, becasue we can get superficial data, by design, from financial statement footnotes. You might be able to find some of my work on the banks in old Midas reports, starting in early 2008.

    Back when I did my work on Lehman, I said they were at least $200 billion underwater, not counting their derivatives. Even my work was low, but I was many multiples above the next closest analyst.

    Roubini is a complete lightweight when it comes to his characterization of just how bad things really are.

  8. @JR - I agree. He's angling for a spot on Obama's economic council.

    Ravens were in a big swarm yesterday. Even Edgar Allen Poe would have run away.

  9. Dave do you follow John Williams of shadowstats? Love the guy, a real straight shooter... And he doesn not paint a pretty picture comming up for our country: a hyperinflationary, depression is what he is calling for.

  10. Dave,
    Roubini has always been more of a macro type. Where he lost me was when he piled on the Keynesian bandwagon and called for bailouts and backstops. I mean, is there not even one other way to handle an insolvent banking system?

  11. @anonymous: Someone used to send me Williams' report for free. His subscription lapsed and I don't see his work regularly, but he's the best when it comes to presenting real data. I did see his most recent statement about where we're headed and I agree 100%.

    The thing is, if the Fed stops liquifying everything, we collapse. On the other hand, in order to keep the gerbil running in place on the treadmill, the Fed has to keep increasing its liquidity injections at a geometric rate. The money supply has reached its point of diminishing marginal returns for every dollar added to the monetary base. This is exactly what happened in Weimar Germany. Bernanke must have skipped that segment when he studied economic history.

  12. @gyc. Like I said, I think Roubini has been spending the better part of the last 18 months angling to get invited onto Obama's economic team.

    I think his macro views as he presents them are superficial, lack any kind of value-added insight.

    I think he vacillates between spewing his bailout Keynesian garbage to appeal to the Obama people and then spewing out statements that are closer to reality when they ignore him.

  13. "I think he vacillates between spewing his bailout Keynesian garbage to appeal to the Obama people and then spewing out statements that are closer to reality when they ignore him."

    Agree 100%, spot on.

  14. Your analysis of Roubini is spot on. Couldn't have written it better. Kudos to you.
    Michel de C-O

  15. I'm glad that folks are starting to expose the essential, much ado about nothing quality that is Nouriel Roubini. As someone pointed out here, though not in the following words, Roubini is the officially sanctioned doom and gloomer. All he really offers is an outlook where the "recession" lasts a bit longer, and is a bit deeper than the consensus view. There's nothing daring, or insightful in that. And I have not heard any interesting prescriptions from him for what ails us. And finally, on an aesthetic note, he does sound like a vampire from Transylvania, albeit one who enunciates poorly.

  16. @Edwardo: ROFLMAO...Count Roubini...

  17. So Mr Denver Dave, If I need to issue as much paper as possible and not pay the debt service on it, don't I allow my Treasuries to be the basis for the biggest carry trade ever?

    If SuperNovaHedge Fund shorts a billion dollars of traesuries, to put on the carry trade, he is then resposnsible for the debt service as he is short the bond...

    If the question is "Does the dollar survive?" the answer is "Did the yen?" when Japan blazed this trail and whored its currency so they could paper over their stock and real estate bubbles.

    This is not good for the dollar or the US consumer. This is all good for gold holders and gold assets. I just think the gamble is to remake the world's reliance on the US dollar. I doubt it will matter if the US dollar remains the wrold's reserve currency. I doubt the US dollar can retain hedgemony. I think the hope is just to let it survive, trade around it, slip the inside info to the chosen few, and extend the game.