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Francis Cianfrocca joins Ben Domenech for the Wednesday, November 4th edition of Coffee & Markets, a series of brief morning podcasts on politics and the marketplace, now appearing as well on WashingtonTimes.com.
Today’s podcast focuses on Nouriel Roubini’s controversial arguments on the state of the marketplace, the ramifications of the Federal Reserve’s meetings today in Washington, and the fallout for Democrats after Republicans swept key gubernatorial races by wide margins in Virginia and healthy ones in New Jersey.
Items discussed include:
FT: Mother of all carry trades faces an inevitable bust
TNLSince March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
The dollar and the sterling have weakened against a host of other currencies since the summer, promoting speculation that they could become the next carry trade currencies and supplant the yen as the ‘funding currency’ of choice.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.