Professor of Doom Scares Listeners at Davos
Stocks and bonds soared after Ben Bernanke decided to screw savers again and keep interest rates at record lows until 2014.The announcement by the Fed caused the dollar to dive, which resulted in a huge rise in commodity prices (i.e., silver and gold).
Any optimism contained in the Fed statement apparently didn't spread to New York University Professor Nouriel Roubini, who spoke at the World Economic Forum in Davos following the FOMC release. Roubini made his fame by calling for a bubble in housing and a crash that would wipe out our financial system. The professor is what I would describe as a “perma-bear” - his outlook is always gloomy.
This is what Roubini outlined in Davos:
· Our world population is connected by economic and financial security, the rise of wealth inequality (1% owns 40% of the wealth) and unemployment.
· The current policies will lead to explosion.
· One in three people are poor or unemployed.
· Social unrest is correlated to economic uncertainty.
· Wages are near an all-time low as a percent of GDP.
· Profits by corporations as a percent of GDP are at an all-time high.
Roubini is far more pessimistic than I am, but he brings up valid points. The world is filled with uncertainty and fear. And our policy makers have not properly addressed most economic ailments.
Despite this high degree of economic uncertainty the market has risen steadily over the past few months. Additionally, the market's own fear gauge - the CBOE Volatility Index (VIX) - fell from 47 to 17 over that time frame.
The last time the VIX was this low was in late July (just prior to the U.S. credit rating downgrade). Investors have once again become far too complacent. With that in mind, I recommend going long volatility in such ETFs as iPath S&P 500 VIX Short-term Futures ETN (NYSE:VXX) and iPath S&P 500 VIX Mid-term Futures ETN (NYSE: VXZ). For more aggressive traders, look at VelocityShares Daily 2x VIX Short Term ETN (NYSE: TVIX) and VelocityShares Daily 2x VIX Medium Term ETN (NYSE: TVIZ).
