From Bloomberg:

Oct. 27 (Bloomberg) — Investors worldwide are borrowing
dollars to buy assets including equities and commodities,
fueling “huge” bubbles that may spark another financial
crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who
predicted the banking crisis that spurred more than $1.6
trillion of asset writedowns and credit losses at financial
companies worldwide since 2007, said via satellite to a
conference in Cape Town, South Africa. “Everybody’s playing the
same game and this game is becoming dangerous.”

The dollar has dropped 12 percent in the past year against a
basket of six major currencies as the Federal Reserve, led by
Chairman Ben S. Bernanke, cut interest rates to near zero in an
effort to lift the U.S. economy out of its worst recession since
the 1930s. Roubini said the dollar will eventually “bottom out”
as the Fed raises borrowing costs and withdraws stimulus measures
including purchases of government debt. That may force investors
to reverse carry trades and “rush to the exit,” he said.

“The risk is that we are planting the seeds of the next
financial crisis,” said Roubini, chairman of New York-based
research and advisory service Roubini Global Economics. “This
asset bubble is totally inconsistent with a weaker recovery of
economic and financial fundamentals.”

‘Wall of Liquidity’

The MSCI World Index of advanced-nation equities has surged
65 percent from this year’s low on March 9, while the MSCI
Emerging Markets Index has jumped 96 percent. The
Reuters/Jefferies CRB Index of 19 commodities has added 33
percent.

Roubini said he sees a bubble in emerging-market equities
and that gains in some developing-nation currencies are becoming
“excessive.” The rally in oil “is not justified by the
fundamentals,” he said.

An asset “bust” may not occur for another year or two as
a “wall of liquidity” pushes prices higher, Roubini said. In a
carry trade, investors borrow in countries with low interest
rates to invest in higher-yielding assets.

Roubini said the U.S. recession seems to be over, though
the economic recovery in advanced nations will be “anemic.”
He’s “more optimistic” on the outlook for emerging-nation
growth.

The U.S. economy probably expanded at a 3.2 percent pace
from July through September after shrinking the previous four
quarters, according to the median estimate of 65 economists
surveyed by Bloomberg News before the Commerce Department’s
report on gross domestic product due Oct. 29.

Roubini on Stocks

The economy shrank 3.8 percent in the 12 months to June,
the worst performance in seven decades.

Roubini’s July 2006 warning about the financial crisis
protected investors from losses in the Standard & Poor’s 500
Index’s worst annual tumble in seven decades. The U.S. equity
benchmark has surged 58 percent from a 12-year low in March even
as Roubini said that month the advance was a “dead-cat
bounce,” that it may “fizzle” in May and warned in July that
the economy is “not out of the woods.”

The S&P 500 gained was little changed at 1,067.30 as of
12:44 p.m. in New York, while the MSCI emerging markets index
lost 1.8 percent. South Africa’s rand dropped 0.9 percent
against the dollar as developing-nation currencies weakened.
Crude oil for December delivery added 1.2 percent to $79.60 a
barrel.

To contact the reporter on this story:
Michael Patterson in London at
mpatterson10@bloomberg.net.