Monday, June 12, 2006

Yet Another Reason to Love the Journal

As stock markets around the world contiune to decline, you can expect to see hundreds of articles and other news reports that purport to explain what's happening and why. But you may never come across an explanation as clear as this one, which appeared in the Wall Street Journal last Monday. It’s one more reminder of how the Journal somehow manages to speak to both Wall Street and Main Street, illuminating both.

The problems roiling the world’s financial markets lately can be summarized in a simple sentence: Central bankers are draining away some of the easy money that has made investors’ lives comfortable for years. Whether once-hot investments such as Florida condos, developing-country stocks, gold and copper recover or continue to cool could depend on how serious the central bankers decide to be. If they keep mopping up the excess liquid cash they had helped pour into the markets, they will eventually slake the world’s thirst for speculative investments, forcing investors toward established stocks, government bonds and other safe investments. If they decide to go easy, as Japanese officials recently have been doing, then maybe some of the speculative investments can hang. on…The situation stems from the painful 2000-2002 bear market. Fearing price deflation that would cause a recession or even depression, central bankers slashed rates and pumped money into the world’s financial system by buying bonds, funneling deposits into commercial banks and generally tossing money at the problem. They avoided economic disaster. But the side effect was an eruption of questionable investments. Companies couldn’t use all that cash to build businesses, so a lot wound up in the financial markets. Speculators borrowed at tiny interest rates in Asia and profited by buying higher-yielding bonds in the U.S. Americans loaded up on cheap mortgages, plasma television sets and real estate. With the world economy booming, the speculative money flowed not only into copper and zinc, but also into gold, silver –even timberland. Many investment pros think those speculative days are gone.


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