The Problem With Risk

By: Kevin_George

As the U.S. dollar carry trade continues unabated, it would be wise to look at the last instances of such biased positioning. The price of ‘risk’ assets, which include currencies, commodities and stocks, continue to rise inversely to the dollar’s decline almost tick for tick. The flood of cheap money taking advantage of near-zero interest rates continues to chase positive returns in any risky asset class, which is rising in the honeymoon period of stimulus and quantitative easing.

Technical studies continue to creep into overbought territory and speculative futures positions are becoming ever more distorted, with gold and WTI Crude at record levels. This is the risk that Nouriel Roubini called “The mother of all carry trades”. The potential for a correction is joined by the risk of a full blown speculative unwind.

The chart below shows how the other carry trade whipping boy- the Japanese Yen,  recovered in mid-2008 in spectacular fashion, when market risks finally overpowered alpha hungry traders and investors.

Another crowded trade we cannot forget is WTI Crude:

The frenzied rush for gold is very reminiscent of oil’s move to $147 per barrel. As gold bugs call for $2000 and 4000, they should remember that peak oil theorists had convincing tales of $300 and 400 per barrel. As we hear that gold will never again trade below $1000, we should remember that we were told oil would never again be below $100. The calls for a new gold standard and the dollar demise are similar to the calls for peak oil. They may be real, but they may also be early. As the oil chart highlights, the real risk in pricing fundamentals and events too far ahead, is the gap which exists in between.

As Roubini highlighted: “This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.”

By Kevin George

I am an independent financial analyst and trader.

© 2009 Copyright Kevin George - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.