Monday, March 07, 2005

What's going on in the US Markets?

Most investors and speculators pay close attention to managing risk. A good money manager needs to know how much they could lose if a particular company and/or industry goes bad. A great money manager will also look at systemic risk or the durability of global financial networks. One of my favorite traders said, “If you don’t understand why the market is behaving in a particular way get out.”

Greenspan warns, in his testimony to Congress, about record budget deficits. An OPEC oil minister says a barrel of crude will hit $80.00 within two years and gas goes up 10% in a weekend. The US$ is at 1.3182 to the Euro, US non-farm payrolls go up 262,000, and the Dow is almost at 11,000. Why with energy prices and budget deficits increasing are we seeing a rise in the Dow? My guess would be that the rise in the Dow is basically a move to the positive before a collapse. Complex dynamic systems often behave this way before a major shift. However, predicting the direction of any particular market is very difficult. However, looking at relative risk is easier.

This is a very risky environment and there are a lot of things that point to a potential market collapse. What surprises me is that the relative risk does not seem to be priced into the price of US treasuries, stocks or even the US$. Capital costs should be high, and they are not. They are especially low in the US housing market and bond markets. Here is link to a graph of the 10 year T-Bill.

I don’t get it why the price, while volatile is remaining in a tight range. Why are the foreigners still buying our paper? Where is the US getting the money to support our markets? The change in the US$ is making it cheaper for foreigners to invest in the US, but as the US$ continues to fall they are losing money? It’s just a guess, but the answer to the question may just lie across the pacific in China. Risk is high and the US markets are overvalued.


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