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Nouriel Roubini (Reuters)
Nouriel Roubini (Reuters)

Nouriel Roubini warns of bubble Add to ...

Now that Nouriel Roubini has dispensed with the current slump, it's time to move on to the next global calamity.

The New York University professor, nicknamed Dr. Doom for his famously grim but accurate prediction of the financial meltdown that flattened economies around the world, said Thursday the U.S. recession appears to be over. But he warned that a new asset bubble fuelled by rock-bottom interest rates and a falling U.S. dollar could trigger another financial disaster.

"This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals," Dr. Roubini told a conference in Cape Town, South Africa, by satellite, reported by Bloomberg News.

"The risk is that we are planting the seeds of the next financial crisis."

The culprit: Investors around the world borrowing cheap U.S dollars and using them to snap up equities, corporate bonds, commodities and other assets, driving up prices far beyond what could be justified by economic fundamentals or growth prospects.

What has happened is that our 'paper asset' economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them. Bill Gross, Pimco

"We have the mother of all carry trades," Dr. Roubini said, referring to the practice of borrowing in one currency at low interest rates and investing the money in another currency or asset at higher rates of returns.

"He's right that if everybody piles into any sort of carry trade, we will see a bubble," said Arthur Heinmaa, managing partner with Toron Capital Markets in Toronto.

But it's not just the U.S. dollar. Every major central bank is essentially making money available interest-free, paving the way for opportunistic profits.

The only thing reining them in is the tighter availability of credit and demands for much more collateral in today's environment, Mr. Heinmaa said.

"When you can borrow at zero and buy government bonds at 3 [per cent] you're making an absolute fortune."

But where Dr. Roubini sees bubbles, others see the necessary groundwork being laid for a recovery.

One of the consequences of aggressive monetary easing is that the value of financial and other assets has shot up, said Avery Shenfeld, chief economist at CIBC World Markets.

"But at times like this, that's a plus. You can't really complain that a consequence of low interest rates is to revitalize the equity market and the housing market worldwide, because that's what you're counting on to help the economy out of its misery."

Meanwhile, another influential voice in the investment community said the U.S. rally that has driven up the value of stocks, bonds and other assets since March has nowhere further to run without a return to normal economic growth.

"What has happened is that our 'paper asset' economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them," famed bond fund manager Bill Gross wrote on the Web site of his money management firm, Pacific Investment Management Co. (Pimco) of Newport Beach, Cal.

"Investors must recognize that if assets appreciate with nominal gross domestic product, a 4-5 per cent return is about all they can expect even with abnormally low policy rates," Mr. Gross said. "Rage, rage against this conclusion if you wish, but the six-month rally in risk assets … is likely at its pinnacle."

Mr. Gross and his Pimco colleagues dismiss the prospects for a traditional V-shaped recovery and warn that the U.S. is facing a "new normal" of tight credit, higher inflation, slow growth and elevated unemployment levels.

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