Commentary

The “Carry-Trade” Concern

Cheap credit has eased pressures on the market in the short-term, but what are the long-term ramifications? As it stands, with the markets in a rough patch, investors are looking for any potentially successful strategy to gain some kind of a return. In that search, a problem might be emerging. Nouriel Roubini has a piece in the Financial Times arguing that investor’s ability to borrow money at low rates and invest in assets with long-term value is creating another bubble. Robert Samuelson breaks this down:

Here is Roubini’s argument: The Fed is holding short-term interest rates near zero. Investors and speculators borrow dollars cheaply and use them to buy various assets — stocks, bonds, gold, oil, minerals, foreign currencies. Prices rise. Huge profits can be made.

But this can’t last, Roubini warns. The Fed will eventually raise interest rates. Or outside events (a confrontation with Iran, fear of a double-dip recession) will change market psychology. Then investors will rush to lock in profits, and the sell-off will trigger a crash. Stock, bond and commodity prices will plunge. Losses will mount, confidence will fall and the real economy will suffer.

If this is true, it would be just as devastating of the housing bubble’s pop. The debate is whether the current rise in asset prices are similar to the speculative level of pricing on housing from 2002 to 2007.