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Nouriel Roubini Agrees with Jeff Gundlach

Posted by Larry Doyle on October 27, 2009 11:18 AM |

Dr. Doom agrees with Wall Street’s top fixed income manger? Who are these individuals and on what do they agree?

Both these individuals are Economic All-Stars here at Sense on Cents (see left sidebar).  Nouriel Roubini (aka Dr. Doom) and Jeff Gundlach (aka Wall Street’s top fixed income manger) possess a contrarian view on the future of the U.S. dollar. While most analysts, economists, traders, investors, and speculators call for ongoing weakness in the greenback, Roubini and Gundlach believe the dollar will rebound and risk-based assets will retreat.

I addressed Gundlach’s views on this market driving principle on September 10th when I wrote “Jeff Gundlach of TCW Calling for Deflation and Dollar Rally”:

One of the few areas he’s bullish on is the U.S. dollar — but not for good reasons.

Gundlach sees such large debt defaults in coming years that he thinks the trend will cut the supply of dollars, pushing up the currency’s value.

“We’re standing on the edge of a major default wave,” he said. “Defaults are the elimination of dollars. You could eliminate so much actual wealth that this could be the source of a strong dollar rally.”

While Gundlach is clearly in the minority with this assessment, one individual who shares this outlook is Nouriel Roubini, the aforementioned Dr. Doom. While many analysts and active traders like to slam Roubini for having missed the market rebound this year, I focus on Roubini’s strength in assessing overall macroeconomic trends. What does Roubini see? Much of what Gundlach sees. Bloomberg provides interesting perspective in writing, Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble:

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 13 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.”

Appreciate that Roubini and Gundlach are addressing the ‘forest,’ while the day to day market activities — in which upwards of 70% of activity is connected to high frequency trading — are the ‘trees.’

Knowing the difference allows us to be most well prepared in navigating the economic landscape.


  • whoisjohngalt

    Here is a good way to cut the supply of dollars:

    have the US government (aka the labor union/socialists/redistribution of wealth to favored minorities coalition–looters)give more to GMAC. You know the thing that this coalition forgot was that people with money (producers) who can afford cars/trucks do not want to support Government Motors. WE are capitalists, not socialists.

    So more $ down the crapper and nothing is going to save these GM workers. Next the government will be bailing out GM pensioners since GM has no prayer of paying them from profits. Sad.

    • Larry Doyle

      Great minds thinking alike. Your comment came in as I was drafting my story on more bailing out of GMAC.

      • whoisjohngalt

        Larry, your story will be timely. The challenge now is to play chess & not checkers. Great minds need to be thinking moves ahead. Your wealth and your family’s wealth may depend on whether you are a grand master or not.

        • Larry Doyle

          You are totally correct. The economy is clearly in transition and the road forward is anything but defined. As such, your analogy to chess not checkers is appropriate.

          Hopefully Sense on Cents will help others think in a “master”ful manner as well. Thanks for adding to the ‘game.’

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