Bubble trading nets 50% + returns

[X5rolls]

Interesting article today about the Federal Reserve and their policy which continues to promote further monetary stimulus in the form of keeping benchmark interest rates at 0%.

Continuing, the article talks about this sparking week long rallies in financial markets. "The markets are on a sugar high" a major money manager says.

Moreover, the sharp and rapid rise of commodity prices are not being done by long term investors - rather by short term speculation by banks, hedge funds etc.

Bubbles are a dangerous thing as we know.

This is where the 50% returns come into view -

If you borrow dollars at near zero percent interest in the United States, exchange the dollars for Thai bhat, and invest the bhat in government bonds paying 4 or 5 percent, you not only get the benefit of the interest rate arbitrage but you also gain when you sell the bond and exchange the bhat back into dollars that have since depreciated. Roubini calls it "the mother of all carry trades," and in recent months he calculates that it has been generating annualized returns for investors of 50 to 70 percent.

I admit to being a novice economic armchair quarterback. But what does it mean?

There is a price to pay for all this free (0%) money, there is another bubble forming.

The Fed's monetary policy and reluctance to factor or at least acknowledge currency movements, asset prices and capital flow is dangerous.

Read the article from the Washington Post here -

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111210788.html