CNBC — Roubini on Carry Trade (Click for VIDEO) [9:05]

CNBC — The mother of all carry trades faces an inevitable bust, Nouriel Roubini, chairman of RGEMonitor.com, told CNBC.

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CNBC –  ‘Mother of Carry Trades’ Leading to ‘Asset Bust’: Roubini

By: Jeff Cox

The “mother of all carry trades” that Nouriel Roubini warned of
recently is growing and threatening to cause a global implosion, the
economist warned in a CNBC interview.

For the second time in as many weeks, Roubini
cautioned that investors using cheap US dollars to embrace risk will
quickly reverse course once the greenback strengthens.

But
he intensified his prediction, saying that the likelihood of the Fed
keeping interest rates low and thus weakening the dollar will prolong
the carry trade and make it all the more painful when it starts to
unwind. Roubini is an economist at New York University and chairman of
RGE Monitor.

“Eventually
there’s going to be an end to this carry trade,” he said in an
interview. “When that snapback of the dollar is going occur it’s not
going to be 2 percent or 3 percent, it’s going to be more like 25 or 20
percent. And then everybody will have to close their shorts on the
dollar, they’ll have to sell these risky assets across the world and
you could have this huge asset bubble going into an asset bust.”

With
the Fed unlikely to change its monetary stance following the close of
its Open Market Committee meeting today, the dollar carry trade will
grow through next year and continue to boost the prices of commodities
and global equities, he said.

“It’s going to eventually occur but it’s going
to be six months from now, a year from now,” Roubini said. “In the
meanwhile the bubble’s going to become bigger globally and the bigger
the bubble the bigger is going to be the crash.”

Another
problem he cited was the market’s pricing in of a V-shaped recovery,
which would see the economy improve sharply without a significant
additional decline.

Instead,
Roubini predicted the bounceback will look more like a U-shaped move,
with the expiration of the dollar carry trade and the subsequent
popping of the asset bubble exacerbating the slowness.

“It’s
like a rush to the exits. When everybody tries to go at the same time
there will be a stampede,” he said. “Risky assets are going to
collapse, the dollar’s going to snap back. So the risk is that there’s
not an orderly way of doing it unless you more aggressively signal (a
change in monetary policy). That’s not what the Fed is telling us,
that’s not what the other central banks are telling us.”

Yet
Roubini conceded that at least part of the seven-month stocks rally has
been based on fundamentals, but they’re not strong enough to justify
all of the growth.

“Part
of that increase in price is fundamentals, but it’s become so rapid and
so perfectly correlated around the world,” he said. “Price (to)
earnings ratios are out of hand. So there’s a signal of a bubble and
that’s what many policy makers in this country are worried out.”

Central banks will be looking at the issue of asset bubbles more closely in the months to come, Roubini predicted.

“It’s
not just Roubini’s worried about it,” he said. “Globally, people are
starting to worry about it because it’s getting out of control. That’s
the reality of it.”