When Dr. Doom says borrowed money is creating new bubbles in stocks, commodities and emerging-market assets, people pay attention. After all, Nouriel Roubini's gravelly-voiced warnings could be heard in the distance long before this credit crisis hit in earnest last year.
But even so, analysts at UBS AG found his assertions, contained in a Financial Times column with the headline "Mother of all carry trades faces inevitable bust," a bit much.
Mr. Roubini's argument was that investors are borrowing money from countries such as the United States, and using that money to invest in higher yielding assets in other countries. The MSCI AC world index of developed and emerging-market stocks has gained 71 per cent since March, while the CRB index of commodities has gained 34 per cent.
He argued that the gains are pushing these indexes and others to unsustainable highs as investors borrow heavily to get in on the action. Not so, said UBS global head of asset allocation Larry Hatheway.
"The assertion that asset prices have been mainly driven by leverage, 'carry trades,' and liquidity is not supported by the data," he wrote in a report released yesterday.
If investors were loading up on leverage, he said, the data should indicate that margin debt has increased at U.S. brokers. However, outstanding margin debt has slipped by about $175-billion (U.S.) since mid-2008 to about $200-billion, UBS estimated.
You'd also expect greater volumes on key stock exchanges, the report suggested.
"If a 'speculative bubble' were driving equity prices higher, presumably volumes would reflect the exuberance," Mr. Hatheway said. "Yet average daily trading volume on the New York Stock Exchange has been declining since 2005, reversing the strong trend growth over the previous decade."
There is one bubble that is worth noting, UBS suggested. As the price of gold has increased, so too has derivative volumes.
"There, soaring prices have coincided with an increase in derivatives volumes. That squares with our view that what is driving gold prices is not a supply-demand imbalance in the physical market, but rather an increase in financial demand, he said.
"Gold prices and derivatives activity, in other words, show signs of a market driven by financial demand, either for hedging or speculative purposes. But what's notable is that gold is unique - equity, credit and even government bond markets do not show evidence of a similar pick up in derivatives activity."