Tuesday, November 10, 2009

SocGen & Nouriel Roubini: Markets to Tank Very Soon

SocGen's Albert Edwards and economist Nouriel Roubini are sounding a warning that the recent rallies in asset markets are being driven by a liquidity bubble that is going to burst spectacularly, perhaps as soon as next year.

Reuters reports as follows:

SocGen's top analyst sees market lows next year
Mon Nov 9, 2009 11:54pm EST

HONG KONG (Reuters) - Albert Edwards, a top analyst with French bank Societe Generale, expects global markets to hit a new low in 2010, adding that he would not be surprised if the global economy enters another recession next year.

Edwards, one of the leading equities bears and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy response will safeguard the West against a repeat of Japan's lost decade of the 1990's.

Edwards said he expected that at some point China would go into recession, calling people's excessive faith in growth stories a "sick joke."

Japan would run into difficulty funding itself next year as demand for Japanese government bonds waned and bond yields rose further, he said.

The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.

Meanwhile, Nouriel Roubini, in this essay, warns of the effects of the 'mother of all carry trades'

"the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.


But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments."

Personally, i don't know exactly what is going to happen, but I certainly agree with these two analysts that the recent market rallies certainly seem to be fueled by exceptionally loose credit rather that proper market fundamentals. The US and European economies are still in the dumps, propped up only by record levels of government spending and record levels of liquidity as supplied by the central banks. Instead of taking the hard medicine of properly restructuring the economy, all we see is continued support of 'too-big-to-fail' sick giants and more and more borrowing.

Sooner or later a liquidity bubble is going to form (it probably already has) and sooner or later this bubble is going to burst... how big and how hard the burst and subsequent crash is going to be, I don't really know. But if SocGen and Roubini are right, then it looks like it's going to be a loooong way down from here.

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