Nouriel Roubini thinks that commodities and equities have gotten ahead of their fundamentals – now pricing in a “V-shaped” recovery, which Roubini thinks is unlikely (I agree).
Well, in my view, commodity prices have increased since the beginning of the year too much, too fast, when compared to the improvement in economic fundamentals. Some of that increase is justified. But if the global economy were to have a more anemic, subpar recovery—if instead of a V-shaped recovery, there’s going to be a U-shaped recovery—then I actually think demand for commodities would be weak compared to supply, and there could be a correction in commodity prices in 2010.
Take oil prices: They have gone up from $30/barrel to over $80, at a time when demand is back to 2005 levels, and oil inventory is at all-time highs. Part of the increase is justified by fundamentals. But part of it is essentially this wall of liquidity chasing assets, and the effect of carry trade on the U.S. dollar, driving further higher these commodity prices.
So these nonfundamental factors can push oil and commodity prices higher, especially if there’s going to be an increase in expected inflation. But the fundamentals of supply and demand actually suggest that, from now on, oil and other commodity prices should be lower, rather than higher.
Also Roubini was also on CNBC, where he described the reversal of the dollar carry trade that he is anticipating at some point in the future. The results are similar to the “All the same markets” theory that Robert Prechter
coined, in which the dollar will rally and all other asset markets will tank.
Here’s the CNBC interview, which runs about 8 minutes: