Bubble Mania

by Larry Levin


http://www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111210788.html

Excerpt:

"For many investors, in fact, the cost of money is effectively less than zero, as economist Nouriel Roubini likes to point out. If you borrow dollars at near zero percent interest in the United States, exchange the dollars for Thai bhat, and invest the bhat in government bonds paying 4 or 5 percent, you not only get the benefit of the interest rate arbitrage but you also gain when you sell the bond and exchange the bhat back into dollars that have since depreciated. Roubini calls it "the mother of all carry trades," and in recent months he calculates that it has been generating annualized returns for investors of 50 to 70 percent.

This carry trade is now so widespread that it has become a major factor driving down the value of the dollar against many other currencies and driving up the flow of hot money into a number of developing countries. Not only has it spawned stock, bond, or real estate bubbles in those countries, but it's also driven up the value of their currencies to the point that their exports are less competitive relative to countries, including China, that peg their currencies to the U.S. dollar. To counteract these trends, central banks in Thailand , South Korea , Russia and the Philippines have intervened in currency markets, buying up dollars and selling their own currencies. Hong Kong has tightened up on lending rules, while Brazil has put a 2 percent tax on capital inflows. Taiwan has banned foreigners from making certain types of bank deposits.

There's no way to know how long all this can continue before one of these bubbles finally bursts, the dollar spikes upward and investors all rush to unwind their trades at the same time. But it is a good guess that it will last as long as the Fed and other central banks indicate there is no end in sight for the current cheap-money regime. The longer they wait, the bigger the bubbles, and the bigger the mess to clean up."




Previous Day's Trading Room Results:

Trade Date: 11/17/09

E-Mini S&P Trades*
(before fees and commissions):



1) 80% buy @ 11:54am at 1104.75 = b/e (1 lot)

2) Engf sell @ 1:35pm at 1105.75 = b/e & -.75 (2 lot)

3) Algorithm positions (4)

4) "Reading the Tape" positions (8) ...combined Secret's, Algo, & "Reading the Tape" total...-0.75



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