[KevO]

$this->bbcode_second_pass_quote('', 'D')elay is the deadliest form of denial

—C. Northcote Parkinson

In More Like A Depression Every Day, I described strong deflationary pressures in the American economy despite the Shock & Awe fiscal & monetary stimulus being applied. The flow of free money is supposed to counter deflation by boosting both asset values and government spending. Economist Nouriel Roubini, otherwise known as “Dr. Doom”, notes that this “wall of liquidity” is inflating asset values, not just in the United States, but all over the world.

The BEA’s advance estimate showed real GDP growth of 3.5% in the third quarter (July-September) just passed. So Shock & Awe appears to be “working” if you go by real GDP. Don’t you believe it. I warned you about a “statistical” recovery last week. Get ready for another round of nonsense announcing that the recession is over. In absolute (2005 chained dollars) terms, real GDP is down 9% year-over-year, even after you throw in the “cash-for clunkers” program which gave an artificial boost to personal consumption expenditures.

One important consequence of the Fed keeping interest rates low and its quantitative easing has been a weaker dollar. The world’s reserve currency has depreciated 14.6% relative to a basket of other currencies since March 5, 2009 as measured by the U.S. Dollar Index (DXY). The depreciating dollar, combined with the Fed’s stated intention to keep interest rates low for an extended period to come, has prompted investors to short the dollar—bet that the value of the dollar will continue to fall. Investors short the dollar via what is called the carry trade (and Figure 1).

Critics focus on the fact that low U.S. interest rates enable investors around the globe to borrow dollars for next to nothing and invest them elsewhere at higher rates.

This bet — known as the dollar carry trade — appears to be one of the forces pushing down value of the dollar. Though there are few reliable figures on the size of the carry trade, the dollar’s trend has clearly been down since stock and bond markets revived.



Figure 1 — The Fed has frozen short-term interest rates at 0-0.25% (left) as the dollar declines(right). This allows investors to borrow dollars a little cost and re-invest them in assets that return higher yields.

Roubini believes that continued low interest rates are inflating asset values beyond what the fundamentals dictate all over the world—a new global bubble. He argues that when the Fed finally does raise rates and the dollar strengthens, as it eventually must, there will be another resounding crash in the global economy. Readers here may not be familiar with this kind of material, so I have summarized Roubini’s argument as he presented it in this interview with Index Universe and in a guest appearance on CNBC.

There is a “wall of [excess] liquidity” inflating asset values (in equities, real estate, commodities, credit, gold, in emerging markets) all over the world.
The Fed has fixed short-term rates at zero (0-0.25%) and is expected to keep them there for the time being. The Fed has also set investor expectations by “controlling and reducing volatility” in the long-term by indicating that they will keep rates low for some time to come.
Investors borrow at near-zero percent interest rates and get a capital gain by investing elsewhere in assets that yield a higher rate, so “we’re in the mother of all carry trades.” The carry trade makes the bubble global as investors borrow dollars and invest in foreign assets (for example, in Australian dollars, Brazilian reals, and so on).
Because the dollar is falling, investors are effectively shorting the dollar and borrowing at negative real interest rates. The carry trade itself results in a dollar sell-off, which causes further weakening. Investors are going long on global assets based on expectations set by the Fed about future interest rates (#2 above).
The dollar can not keep on falling forever, i.e. the Fed must raise interest rates at some point.
When the dollar suddenly stops falling and reverses, investors will have to close their dollar shorts, and dump their assets.

The strengthened dollar will cause a market crash all over the world as assets deflate.

[sittinguy]

I wish the crash would hurry up, I am sick of drudgeing through this economic mud. I think I will be happier after the collapse and I can be unemployed with dignity. I'm still working, But I am sick of no raises, less people, much more work load. And they know they have me by thee balls so I get no appriciation, and treated like crap, because they know I could not find another job. It could be years away but I will get the last laugh,., one day

[eXpat]

Second round is coming, the magic printing solution, has failed to produce jobs and to reactivate the economy, countries are openly talking about ditching the dollar. The only question is when.

[TheAntiDoomer]

$this->bbcode_second_pass_quote('sittinguy', 'I') wish the crash would hurry up, I am sick of drudgeing through this economic mud. I think I will be happier after the collapse and I can be unemployed with dignity. I'm still working, But I am sick of no raises, less people, much more work load. And they know they have me by thee balls so I get no appriciation, and treated like crap, because they know I could not find another job. It could be years away but I will get the last laugh,., one day

[deMolay]

Shouldn't be too long the devalued dollar is playing hell with EU/Japan trade balances, Euro trade is non existant. Canada is negative as well.

[JJ]

$this->bbcode_second_pass_quote('TheAntiDoomer', '')$this->bbcode_second_pass_quote('sittinguy', 'I') wish the crash would hurry up, I am sick of drudgeing through this economic mud. I think I will be happier after the collapse and I can be unemployed with dignity. I'm still working, But I am sick of no raises, less people, much more work load. And they know they have me by thee balls so I get no appriciation, and treated like crap, because they know I could not find another job. It could be years away but I will get the last laugh,., one day

[Novus]

$this->bbcode_second_pass_quote('sittinguy', 'I') wish the crash would hurry up, I am sick of drudgeing through this economic mud. I think I will be happier after the collapse and I can be unemployed with dignity. I'm still working, But I am sick of no raises, less people, much more work load. And they know they have me by thee balls so I get no appriciation, and treated like crap, because they know I could not find another job. It could be years away but I will get the last laugh,., one day

[sittinguy]

Simple answer.

I have kids

Believe me if I didn't have kids I probably would have quit a long time ago. My home life is blessed, but my work life is deteriorating. I know the trap I'm in, but there is not alot I can do about it at this point. To be honest I didn't wake up till I was in my early 30s. Now I'm 37. So for now I have to stay the course. And at least I have spent the last few years getting prepared for what I believe is coming. I'm debt free, but broke.

[BigTex]

$this->bbcode_second_pass_quote('sittinguy', 'S')imple answer.

I have kids

Believe me if I didn't have kids I probably would have quit a long time ago. My home life is blessed, but my work life is deteriorating. I know the trap I'm in, but there is not alot I can do about it at this point. To be honest I didn't wake up till I was in my early 30s. Now I'm 37. So for now I have to stay the course. And at least I have spent the last few years getting prepared for what I believe is coming. I'm debt free, but broke.

[Cloud9]

I'm hiding and watching. The only thing that bugs me is that strategy did not work out well for the Indians.

[POAlex]

Its messy out there.

Alex

[VZR1800]

$this->bbcode_second_pass_quote('sittinguy', 'S')imple answer.

I have kids

Believe me if I didn't have kids I probably would have quit a long time ago. My home life is blessed, but my work life is deteriorating. I know the trap I'm in, but there is not alot I can do about it at this point. To be honest I didn't wake up till I was in my early 30s. Now I'm 37. So for now I have to stay the course. And at least I have spent the last few years getting prepared for what I believe is coming. I'm debt free, but broke.

[eastbay]

$this->bbcode_second_pass_quote('BigTex', '')$this->bbcode_second_pass_quote('sittinguy', 'S')imple answer.

I have kids

Believe me if I didn't have kids I probably would have quit a long time ago. My home life is blessed, but my work life is deteriorating. I know the trap I'm in, but there is not alot I can do about it at this point. To be honest I didn't wake up till I was in my early 30s. Now I'm 37. So for now I have to stay the course. And at least I have spent the last few years getting prepared for what I believe is coming. I'm debt free, but broke.

[pup55]

$this->bbcode_second_pass_quote('', 't')his “wall of liquidity” is inflating asset values

[evilgenius]

$this->bbcode_second_pass_quote('sittinguy', 'I') wish the crash would hurry up, I am sick of drudgeing through this economic mud. I think I will be happier after the collapse and I can be unemployed with dignity. I'm still working, But I am sick of no raises, less people, much more work load. And they know they have me by thee balls so I get no appriciation, and treated like crap, because they know I could not find another job. It could be years away but I will get the last laugh,., one day

[sittinguy]

Thanks, I used to bike alot. I have been trying to go to the gym lately. It seems to last about 2 weeks. And then I punk out. Its so much easier to come home and have a drink.

I know my physical fitness is a important part of being prepared, Its just hard in these times to stay focused, and block out all that is going on, especially when you are broke all the time. I used to have alot more fun before I was turned into a doomer. Now the weather is cooling off and I will be making another big push to get back in shape.

But tonight its Halloween and I plan on haveing a few drinks and go trick or treating with the kids. So next week. Its always next week

[patience]

Stocks are way over priced, looks to me like. Some say the Fed (who has been supporting stocks by loaning money for near nothing to GS, JPM, et al, will have to start propping the T bond market soon, or become the only buyer of them. That could let stocks go down, and everyone would think the "invisible hand" of the market was telling them that stocks aren't worth as much. They never were worth as much as the P/E ratios are now. Just a rigged game. Not a good idea to play, IMHO. Yeah, it's gonna crash, to some degree, probably soon. The ones to worry about, I think, are the dollar index and the US T bond market, not stocks.

If (WHEN) the T bond market goes blooey, we got a problem.

[jbrovont]

My understanding is that the Fed has already admitted to buying roughly half of the US Ts auctioned lately, so we're already a ways down this road.

$this->bbcode_second_pass_quote('patience', 'S')tocks are way over priced, looks to me like. Some say the Fed (who has been supporting stocks by loaning money for near nothing to GS, JPM, et al, will have to start propping the T bond market soon, or become the only buyer of them. That could let stocks go down, and everyone would think the "invisible hand" of the market was telling them that stocks aren't worth as much. They never were worth as much as the P/E ratios are now. Just a rigged game. Not a good idea to play, IMHO. Yeah, it's gonna crash, to some degree, probably soon. The ones to worry about, I think, are the dollar index and the US T bond market, not stocks.

If (WHEN) the T bond market goes blooey, we got a problem.

[mcgowanjm]

Somebody mention CRE?


The model assumes investors could recover 40 cents on the dollar in a bankruptcy proceeding. CIT dropped 23 cents, or 24 percent, to 72 cents in New York ...

Too bad CIT ain't GS or they could get 100 cents on the $.

OR maybe they could do the pretend game some more,
like Insolvent Regions loaning to BK Jefferson Co AL.

[eXpat]

I´m over symplifing, but the first wave of the crisis was about the price of oil and the subprime crisis, after a brief period of calm, (helped by inyecting huge amounts of money), finally is coming subprime part2, oil is going up again and the new guest is the commercial real estate crash. Thet (TPTB) may hold it for a couple of months, till 2010, but after that...