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Buy fear, sell greed

The article  was in today's Business Times. There are many good articles in Business Times and it would be good to read. Gaining useful knowledge and information will make you more aware of what's happening and you are more prepared. With more awareness of the future, it can even help you move to the right path in your career......

 

I share the same sentiment as this article, Ig_6273 .... Great find!

Hmmm, your birthday on 06th Feb 1973? Coming leh ... Hehee!

 

Buy fear, sell greed Liquidity is flooding the markets, but as every easy money boom in history has shown, nothing lasts forever By MICHAEL PREISS Published January 17, 2007 WINSTON Churchill's tribute to the RAF pilots who dissed the Luftwaffe in the Battle of Britain could be an apt metaphor for the liquidity tsunami that has swept the global financial markets. Never have so many junk assets owed so much to the epic money pump of so few central bankers, who have now managed to reprice risk down to zero. My recommended anti-dollar money hedges? Norwegian kroners, Russian roubles, Singapore dollars. Especially Singapore, an AAA-rated small island state with no debt sitting in the middle of India and China. But financial markets invariably ambush the bold (gold?) and the beautiful, the leveraged princes of high beta risk. Bitter experience has taught me that nothing lasts forever. We both know risk appetites can change, that it's hard to hold a candle in the cold December Dubai rain. Murphy's Law, alas, works all too predictably on Wall Street. I am no Cassandra, quite the contrary, in fact. But, sadly, Cassandras can sometimes hit the bull's eye, as I did when I kept warning my friends that the financial markets of the Gulf Cooperation Council (GCC) were the mother of all asset bubbles in the summer of 2005. Strange, conventional wisdom today was downright heresy a mere 16 months ago. Had investors heeded my warnings and cut exposure to GCC shares then, billions of dollars would not have vanished and the lives of thousands of investors in the Middle East would not have been ruined. In the money game, the Cassandra syndrome defines the art of survival. No guts, no glory, sure, but all guts, no brains just ensures Jack gets gutted. The best and the brightest in finance are all optimists for 2007. And why not? The VIX index - the CBOE Volatility Index or greed-fear gauge - is at a decade low at 11. Goldilocks is alive and kicking. The entire world has gone ballistic for risk: Chinese banks at six times book value, Third World debt risk spreads the narrowest in history, 150 per cent returns in Ho Chi Minh City, Egyptian stocks triple the valuation of the S&P500, having risen 800 per cent in three years. But what if the music stops? Every boom contains the genesis of its own bust. Every easy money boom in world finance - Wall Street in the 1920s, Japan in the 1980s, South-east Asia in the 1990s, the Arab stock markets since 2002 - exhibit eerily similar phenomena. Rapid expansion of credit, go-go bankers, the irrational pricing of risk. In Dubai, for example, there is 95 per cent financing on speculative real estate deals, 120 brokers on the Dubai Financial Market to trade 30 shares (of which five actually trade) and extravagant, unreal projects full of hot air (US$50 billion cities in the Sinai desert). Bubbles spawn bubble gum financiers, a specie I know all too well as a money manager. No wonder Dubai lost 60 per cent of its value last year. This year, other emerging markets will be hit. Just look at how this year has started - with a lot of red on the screens. Financial markets are all about the calculus of risk in business cycles and neither Keynes nor the monetarists predicted the Great Depression. But the classical economists of the Austrian School did. Inflation in our times is not the CPI but the exponential rise in credit, monetary aggregates and asset prices. When the Federal Reserve under Alan Greenspan responded to the Silicon Valley tech bust and 9/11 with its epic monetary ease, it spawned the biggest credit bubble since the 1920s on Wall Street. The result? Rapid fixed investment growth, soaring stock markets, property bubbles fuelled by cheap debt, irrational pricing of risk, leveraged daisy chains of offshore capital, financial markets morphing into Vegas casinos. This was the identical zeitgeist in New York 1929, Tokyo 1989, Thailand/Asean 1997, Latin America 1994, and GCC Arab markets in 2005. What could derail the global business cycle in 2007? The household borrowing binge and property bubble have now ended. Like Internet shares and TMT (tech, media, telcos) in the 1990s, trillions of dollars invested in speculative real estate all over the world are now at grave risk as America slips into a housing recession. The surge in commodity prices has less to do with China than the Fed and the 45 per cent devaluation of the US dollar against the euro since 2002. Amazingly, central banks around the world now want to buy euros. Now? When the euro has risen 45 per cent against the US dollar in the last four years? Still, better late then never. My recommended anti-dollar money hedges? Norwegian kroners, Russian roubles, Singapore dollars. Especially Singapore, an AAA-rated small independent island state with no debt sitting in the middle of India and China. If all is hunky-dory in the US economy, why are the CEOs who run Corporate America so reluctant to boost capital expenditure (capex)? Instead of boosting capex, they'd rather pay themselves bonuses, in excess of US$50 million in some cases. The smart money and hedge funds who are already strongly positioned on the short side know that credit booms built on leverage and property speculation are destined to end in liquidity shocks and recession. The contagion in US housing will mean Black Death for asset markets all over the world. Property was Joe and June America's mega-ATM and a housing crash means recession as capex spending alone cannot hold up the economy. That will spell doom for the commodities boom. The trillion-dollar hot money hedge fund carnival, China's sizzling GDP growth, Russian and Arab petro-dollars, the parabolic rise in the CRB commodities index, the US$800 billion American trade deficit are all symptoms of the brave new world of international finance. The Fed cannot ease, as Wall Street naively expects, amid such monetary madness. The European Central Bank and the Bank of Japan have abandoned easy money. Watch the Treasury bond yield hit 5 per cent, gold and oil fall below US$400 and US$35 respectively and the CRB index plunge to 200. The bull is old, tired and vulnerable. There is a debt pyramid in the financial markets that makes credit contraction and a liquidity shock inevitable. Sometime next year, American housing will cause the global ATM machine to spew leprosy, not cash. Stock markets will crash. The next big emerging markets blow-up will be intercontinental and far reaching, with almost no place to hide. In this scenario, sell everything, sit on cash and go to the beach. The writer is director with the Asian Bond Market Forum and can be reached at: Michael@michaelpreiss.net