The last two years have taught investors that so-called once in a generation events can happen far more often.
If you had predicted in late 2006 and early 2007 that the wholesale markets where about to dry up and titans of the financial services industry like Lehman , AIG and Bear Stearns would have been gone by the end of 2008 you would have been laughed out of the room.
At the 2007 World Economic Forum meeting in Davos, something similar happened to a then low-profile economist called Nouriel Roubini. He was berated by a number of big name CEOs who believed his Dr. Doom predictions where simply wrong.
Nearly 3 years later and some of those CEOs are out of work while Roubini is coveted as one of the world’s leading economists for calling the credit crisis when so many others had been found wanting.
Mention the name Roubini now though and many in the market will groan. He missed the recent rally and even a broken clock is correct twice a day is the type of criticism you hear.
It is true that being a bear has been an expensive game since March, but Roubini has not been advising to stay out of stocks, instead warning that when the current rally comes to an end there will be a far bigger, more aggressive crash than we saw in the wake of the Lehman crisis.
He did though call the credit crisis and if you had traded on his advice in 2007 and 2008, you could have made once-in-a-lifetime profits if you got your timing right.
So when Dr Doom says the dollar carry trade is about to come to an end and the greenback will soar as equities crash you have to, at the very least, take his predictions seriously. His view is based on the assumption that there is a so-called ‘Wall of Money’ driving recent equity gains and other assets like gold and oil.
What is a ‘Wall of Money’?
This term refers to the belief that low borrowing costs around the world are allowing traders to borrow at low rates, gear up and then buy higher yielding assets. Recent earnings from the likes of Goldman Sachs and Barclays indicate the ‘Wall of Money’ theory is more than just a theory.
As George Soros put it last week, the banks are being gifted huge profits by central banks pumping billions into the system, which the banks simply put to work in stocks, emerging market debt, gold etc.