Tuesday, February 9, 2010

Roubini right in long run.... but in the long run...

... were all dead.

Roubini's recent comments that "The USD will devalue by 15% - 20% over the next few years" makes sense, assuming China keeps it's stimulus in place and consequently emerging market commodity providers continue to grow. But in the more visible and short run, the USD looks much more fierce than that long term assessment.

The Greek drama is just the prelude to a string of sovereign financing crisises. The risk premiums will return and the spreads will widen as countries compete with each other for funds to borrow. During these bond auction charades, the US will look safe and secure. Remember, the treasury issued the most debt between the 3yr and 7yr maturities, so the bulk of US massive stimulus funding does not start to come due for a couple more years. Moreover with the unwind of programs for QE using treasuries, mortgage backed securities, asset backed securities, bank debt guarantees, foreclosure moratoriums and whatever else by this March, deflationary forces will come back in force in the US.

So although monetary stimulus has set the stage for inflation when price support is found, the immediate drama in the Eurozone guarantees that the USD will stay strong for a while. In this market, a while is a mighty long time.

1 comment:


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