The hubbub here in HK is that the new trend (emerging markets outpacing USA market) will not only continue but accelerate, as 'excess' capital decamps from USA, enabled by the elite/smart (corporate insiders, hedge funds) money selling to the lumpen/dumb money, and saddling the lumps with the demographic-enhanced sell-down, further reinforced with decamping active and productive non-financial non-housing income; also after freeing the officialdom from social security obligations by privatization; and then obligating the lumps to pay gains tax on phantom gains, and then buy back USA at 5 borrowed cents on the dollar, at an interest of zero.
If so, diabolic.
If so, what to do besides accumulating gold and silver?
Buy USA big caps, Egypt, India, China? Now?
I know China is not cheap (obligation saddled ICBC is valued more than global HSBC), even if I suspect the rise will continue, perhaps even go parabolic.
I know USA share returns are negative relative to gold and purchasing power, even if the rise may continue.
I do not know Egypt.
I suspect that 1929, in comparison to what awaits us, will seem like a quiet sunday picnic on a grassy nook beside a babbling stream surrounded by cool forest and blessed with warm sun ... because the weight of financial is so much larger now than 1929, relative to the real economy, especially since the real economy is decamping due to same smart money doing the globalization thing.
recommendation: accumulate gold, put away purchasing power, and watch the fun; nibble here and there, just to keep in practice; jump in big only for the sure sure thing, and then not even jump in all - certainly do not touch the gold.
online.wsj.com
Investors Riding The 'Cash' Rapids
Plenty of Money Available,
Much of It in Riskier Markets
By HENNY SENDER
January 2, 2007; Page C1
A world awash in cash helped drive share prices higher and fueled frenetic merger activity in 2006. But the river of money sloshing through the system is having other, sometimes distorting, effects in financial markets.
Riskier assets, such as emerging-market debt, are priced at only a small margin above much safer Treasurys. The same goes for junk-rated corporate debt. Corporate debt defaults in the U.S. are at record lows -- just $1.2 billion in 2006, one-fifth the already low level of just one year ago, according to Standard & Poor's Leveraged Commentary & Data.
IN SUMMARY
• The Issue: Financial markets have plenty of cash. This "liquidity boom" has driven merger deals and benefited riskier investments.
• What's Next: Most experts see little hint that the cash will dry up soon.
• Bottom Line: The benign conditions will one day come undone. But for now, nobody can see how or why.
The balm of cash has also quieted the stock market. Market volatility is exceedingly low. Emerging market stock markets are roaring, up 230% as a group from lows reached in 2003, according to data from HSBC PLC.
The riskiest markets are leading the pack: Egyptian stocks are up 14 fold since 2003. Meanwhile, money in alternative investments -- hedge funds, private-equity funds and the like -- now totals $3 trillion, according to data from J.P. Morgan Securities.
All that liquidity, or cash, available has pushed financial assets to heights world-wide and driven investors into riskier corners of the market in search of better returns.
And even the most pessimistic economists and central bankers see little sign that the liquidity boom, and the benign financial environment it has fostered, will disappear soon, barring some major shock to the system.
To have so much money moving around the globe is unusual at a time when global economic growth expectations are uneven and major central banks have raised short-term interest rates.
"The most remarkable aspect of the contemporary economic recovery is the magnitude and persistence of liquidity," notes James Paulsen in a report from Wells Fargo's Wells Capital Management in Minneapolis. "Although the current recovery is seven years old, the Fed has been tightening for almost 2½ years and short-term interest rates have increased 17 times, there is still very little evidence that liquidity has diminished."
Much of that confidence in the current environment stems from financial innovations and new financial players that have helped disperse risk more quickly and more broadly than ever before. But even as market confidence grows, some market participants express concern that the new financial technologies have not been substantially tested.
"There is a lower probability of a crisis," says Dominic Wilson, director of global macro and markets research at Goldman Sachs Group. "But if a crisis were to happen, it may be harder to sort out." In other words, the very complacency about risk is rising to become a new risk itself.
Central banks and the monetary policies they adopt play a big part in flooding markets with money. It used to be that only a few central banks -- the Fed, the Bank of Japan and the European Central Bank -- really mattered. Now the Peoples' Bank of China, with $1 trillion in reserves (expected to double to $2 trillion by 2010), and other Asian central banks contribute to that flood of cash.
Thrifty Asians continue to keep their currencies tied to a weak dollar, printing lots of yuan, yen and other local currencies in the process to feed their export-led growth. They then save much of that surplus.
Today, their excess savings are joined by those of the oil exporters. The cash reserves of oil producers in the Middle East, Russia and Norway, which collectively produced a current-account surplus of about $500 billion this year, also matter. While Asia gets a lot of attention, the petrodollar surplus will be even bigger this year. And half of it came just from the small countries of the Gulf Cooperation Council, according to data from UBS AG.
Relatively low interest rates are one indication of how much money is around. Another is how easy it is to borrow money.
Today, it is arguably easier for the less creditworthy, whether individuals, companies or countries, to borrow than ever before. Not that many need to. American companies are no longer net savers as they have been for the past few years. But U.S. companies still have enough net cash to "drive abnormally large stock buyback programs, announce widespread dividend hikes and pursue cash heavy mergers and acquisitions," Mr. Paulsen of Wells Fargo notes.
While the argument that things are different has always been dangerous, many economists now subscribe to what Goldman's Mr. Wilson calls the brave new cycle, or a cycle in which the ups and downs have become much more muted, largely thanks to the stabilizing influence of new financial technology.
Part of the reason there is such easy access to credit for troubled companies or cash-strapped households is thanks to financial innovations. For instance, securitization takes lots of individual debt, combines it and then chops it up into small, manageable chunks that are then distributed far and wide, so no single holder has significant exposures. Derivatives, particularly in the oddly named credit default swap market which essentially insures the holders of debt against losses, also play a big role in reducing the risk from lending money.
Additionally, there is a far more diverse universe of holders of debt now, both at home and abroad. Banks matter less than they used to. In the past, banks tightening lending standards as their troubled loans increased often served to trigger a recession. But now, the biggest banks don't hold much debt, having sold it on to others.
That leaves banks less likely to contribute to choking off the credit which drives economic growth.
As long as economic growth continues in the U.S., the prospect of market disruption is modest. One area that persists as a concern, however, is the currency markets, in particular the weakness of the dollar. A surprising slowdown in the U.S. economy could lead the Fed to cut interest rates, undermining the value of holding dollars. If other parts of the global economy continue to grow in the face of U.S. weakness, and their central banks raise rates, that could further damage the dollar.
The dollar also could fall victim to political pressures. Some market participants fret about rising protectionist sentiments in the U.S., something that could discourage foreign investors from holding dollars. It is a slow-burning issue but one that is giving rise to more concern.
"The time may well come when countries engage in capital transactions that divert flows away from financing the U.S. deficit," George Magnus, senior economic adviser for UBS, notes in a recent report. "This could occur not only as a result of rate of return considerations but as a result of policy decisions to shift asset composition away from US dollars."
In 2006, the Persian Gulf countries sent only 35% of their surplus abroad, half the amount they sent in the past. Partly that is a reflection of more domestic investment opportunities, but it is also partly due to such measures as the U.S. Patriot Act which acts as a disincentive to hold dollar assets, according to UBS.
But for now, the river of cash seems unlikely to suffer a dollar-related drying up. Indeed, it can be very hard to figure out what will end the flood of liquidity.
"What you really worry about is what you can't predict and therefore can't take measures to prevent," adds Mr. Wilson
|
