Nouriel Roubini (aka Dr. Doom) is making the case for another bubble in financial markets (he is one of the few economists who predicted the 2008 crash). Read the article and the following questions
1) What is behind the massive rally in the prices of risky assets?
2) Why is the fed holding interest rates at zero?
3) How does the fed policy affect carry trades? Given an example of a trade and highlight why it is so attractive
4) Why does the current carry trade dynamics affect the value of the dollar?
5) Does a dollar depreciation make carry trades more or less attractive?
6) How can trader get a negative 20 percent interest rate? Someone is PAYING the trader to take the money?What does Roubini mean?
7) As the zero interest policy in the US led to the vast expansion of carry trades, what was the response of other foreign central banks in Asia and Latin America?Why and how did they act?
8) At some point in the article Roubini switches back to the US and – despite carry trade opportunities –indicates that the fed policy may have also created an asset bubble in the US. Outline hisreasoning.
9) How will the bubble burst and why? Be specific. How likely are these events?
Here is a picture that drives home the attraction of carry trading...
source and updated chart here (link