Nouriel Roubini worries about the most dangerous trade


Headlines bearing Nouriel Roubini’s name can be triggering for those still traumatized by the 2008 Lehman Brothers crisis. He was among the very few economists who saw that collapse coming and warned of its many negative effects. ‘coaching.

More recently, New York University’s Roubini has been a rock in the shoes of cryptocurrency devotees. For years, he kept saying that the price of Bitcoin, what he called “the biggest bubble in human history”, would drop to zero. As the floor now falls below crypto assets, Roubini tweeted, “This Ponzi house of cards is collapsing.”

So, it’s sobering to see “Dr. Doom,” as he’s known, turns his gaze on the swooning Japanese yen. Its nearly 19% drop against the dollar has caught the attention of many economic thinkers who described the major megatrends of the past 20 years.

This includes former Goldman Sachs bigwig Jim O’Neill, who invented the BRICs – Brazil, Russia, India, China. He fears that the yen heading towards 150 to the dollar – down from around 136 currently – could prompt China to devalue the yuan. Few moves in 2022 would put global markets in check more than that.

Another early predictor of the subprime lending meltdown when he was chief economist of the International Monetary Fund, Raghuram Rajan, is watching Japan closely. Specifically, Rajan thinks global investors should be on the lookout for any signs that “bond market pressure is building” in Tokyo.

And then there’s hedge fund manager Kyle Bass, founder of Dallas-based Hayman Capital. About 10 years ago, Bass bowed to pull a George Soros by shorting Japanese government bonds. Just as Soros “broke” the Bank of England in 1992, Bass hoped to gain the upper hand over the Bank of Japan. The short failed, but Bass talks Japanese debt again.

Bass again warns against the yen. Japan’s government debt, he says, is seeing “discontinuous” moves that constitute a “very worrying event that telegraphs to investors a loss of confidence” in the central bank’s “and BOJ’s yield curve control policy.” in general”.

Along comes Roubini, who warns that a weakening of the yen by just 3% more could trigger a change in BOJ policies that is rocking already choppy global markets. “If you get way above 140, the BOJ will have to change policy and the first policy change will be yield curve control,” Roubini told Bloomberg recently. A further fall in the yen, he concludes, “will imply a change in policy”.

Large swings in the yen tend not to be good for the global financial system. From the late 1990s to the early 2000s to the global crisis of 2008-2009 to 2011, there are myriad well-documented examples of sharp moves in the yen that slammed markets and diverted hedge funds.

The risk is what is called the “yen-carry trade”. Extremely low interest rates since the late 1990s have turned Japan into the world’s largest creditor. Zero rates have made Japan the funding source of choice for financiers around the world. They would then shift those yen borrowings into higher yielding assets: US Treasury securities, New Zealand corporate debt, Indian equities, Thai real estate, Indonesian infrastructure, UK derivatives, South African futures, cryptocurrencies , etc.

When the yen suddenly zigzags and investors have to zigzag, markets around the world feel the shock waves. Big moves in the yen are really the financial equivalent of a rug being pulled out from under assets and sectors everywhere.

The U-turn Roubini refers to could be more dangerous than traders from New York to Singapore can appreciate. There’s a reason BOJ Governor Haruhiko Kuroda’s team in Tokyo is keeping the monetary tap wide open indefinitely: until now, they had no choice.

This policy dates back long before Kuroda took the reins of the BOJ in 2013. Because a revolving door of Japanese governments opposed to change did nothing to remedy the bad debts of the 1980s and the deflation that followed, the BOJ had to step in to support a $5 loan. savings of billions of dollars.

The BOJ first cut rates to zero in 1999. Since then, it has tried to push them into negative territory via what is known as “quantitative easing”. But like any addiction problem, the body — or the economy — can only handle so much. First, it takes larger and larger doses to stay calm. Then the negative side effects force you to consider sobriety.

The turmoil in the yen and Japanese bond yields puts the BOJ on the precipice of the monetary equivalent of a 12-step program. And the global financial system won’t look much like its most trusted punch bowl being ripped off.

The ripple effects will be as unpredictable as they are unwelcome. In 2022, after all, investors are navigating the worst US inflation in 40 years, China’s “zero Covid” obsession sabotaging the No. 2 economy, Russian aggression in Ukraine causing dueling energy and food crises and overvalued stock markets hoping for soft landings.

The yen’s loss of liquidity would mean that the background music of global finance stops, leaving virtually everyone, everywhere scrambling for a chair. This does not mean another 2008 or a “Black Swan” event. But with disaster seers like Roubini looking towards Tokyo, it’s hard not to see this as a dangerous time to buckle your seatbelts.


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