Friday, November 6, 2009

When Academics And Investors Disagree

Academics and investors don't always see eye to eye. New York University professor Nouriel Roubini who warned of the financial crisis in 2006, is predicting a bubble in gold and stocks while successful investor Jim Rogers strongly disagrees and argues that the real bubble is in US bonds. See the following post from Expected Returns.

From Bloomberg, Rogers says Roubini wrong on bubbles as gold, stocks rally:
Jim Rogers, the investor who predicted the start of the commodities rally in 1999, said that Nouriel Roubini is wrong about the threat of bubbles in gold and emerging-market stocks.

Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.
The only slight disagreement I have with Rogers has to do with timing. I believe gold will spike to $2,000 in the next 2-5 years, and here's why. You have to think about what the likely drivers will be to the price of gold. One driver is the value of the dollar. A move to $2,000 in gold implies an orderly decline in the dollar, which is unlikely based on the degree of monetary stimulus we're pumping into the system. To add, the number of dollars outside the U.S. is staggering, and there is a clear move to diversify (read:dump dollars) foreign currency reserves. China has been dumping dollars for gold, and India just made noise by buying 200 metric tons of gold. Remember, Central Banks are conservative institutions, meaning they are not selling their gold anytime soon.
Gold and Commodities Bubble?
Roubini, the New York University professor who warned in 2006 about the coming financial crisis, said on Oct. 27 that investors are borrowing dollars to buy assets and creating “huge” asset bubbles. Rogers said that he’s not buying stocks now, though he may buy more gold.

“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”

Roubini told a conference in South Africa last month that investors were doing “the mother of all carry trades” by buying assets with borrowed dollars. He said emerging-market equities are showing a bubble, that gains in some developing- nation currencies are becoming “excessive” and that the rally in oil is “not justified by the fundamentals.”
The burden of proof is on Roubini to demonstrate that the dollar carry trade is going to unwind in the near future. As long as the dollar exchange rate is depressed and interest rates in America remain low, there is absolutely no incentive for investors to unwind their trades. I know the consensus is for the Fed to raise rates sometime next year, but with the underlying weakness in our economy, I don't think that's a viable option.
Rogers Bearish on U.S. Treasuries
In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds.

“I cannot conceive of lending money to the U.S. for 30 years,” he said. “Other than that, I don’t see any bubbles going on, unless he knows something the rest of us don’t know.”
The standard line is that investors will flee to the perceived safety of U.S. government bonds if we were to be hit by another shock to our system. I don't see that historic pattern holding this time around. You are starting to see stocks and bonds getting sold off simultaneously while gold rises. I believe these are three secular trends to look for in the future.

Why would you buy government bonds with virtually no yield when you can buy gold? In a no yield environment, gold is the smart play here, not U.S. bonds. Keep in mind that persistent debt issuance results in an exponential growth in servicing costs. In other words, there will come a time when a critical mass of the population realizes our debt is untenable. When that happens look for Treasuries to tank while gold rises parabolically.

This post has been republished from Moses Kim's blog, Expected Returns.

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