Chan Akya: The thief and the scorpion

[stillcool]

Jan 13, 2007

The thief and the scorpion
By Chan Aky
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The emperor has no clothes, darling
Eloquence can be defined as the ability to describe the balloon-smuggling star of Baywatch, Pamela Anderson, without using one's hands. In much the same way, watching a number of financial news channels, I am struck by the inability of any commentators to explain the low returns in US financial markets without using their hands to draw elaborate castles in the air. Seeing as most of these channels are US-owned, perhaps they are not permitted to utter the obvious truth, which is that US bonds and stock values are inflated.

With even ill-tempered minnows such as Venezuela thumbing their noses at American officials, it is almost surreal to observe the continued stability of financial markets, which observation brings into focus the role of the biggest holders of US debt. Rather than being beholden to the stability of the US economy, countries such as China and those in the Middle East are merely withdrawing air from the bubble ever so slowly.

The expected rise in bond yields this year, and concomitant expectations for a decline in US stock valuations, are already being reflected in financial markets, which currently show surging enthusiasm for all things non-American. There has been no need thus far to effect a "zero-sum" approach of selling one group of financial assets to buy another, because of ample global liquidity. The decline in oil prices of late is actually negative for that liquidity as it reduces the surpluses.

Smart money, though, is chasing returns away from the US and even the European Union. While that strategy by itself leaves much to be desired, at least it proves more defensible than the air of resignation that surrounds anyone forced to invest in the US economy.

If the sting of a scorpion surprises a burglar, he is caught between the need to scream, risking capture, or silently bearing the pain before gingerly withdrawing into the night. Much the same logic rules the financial markets these days, where the poor returns to be had in the US markets have driven many investors to search for alternatives, even if these appear overvalued themselves.

This global epidemic of pseudo-logic will end in tears for many investors, but at least the people with the real savings have the ability to recover, which the US economy appears to lack.

http://www.atimes.com/atimes/Global_Economy/IA13Dj02.html