Overnight, the US market rose. The mainstream news media reported that ?fresh concerns over the sub-prime lender market failed to lead to heavy losses and a batch of big mergers helped to give investors an upbeat tone.? (U.S. stocks rise get a lift from spate of mergers).

This morning, after hearing a market commentary broadcast, we were flabbergasted at the level of complacency from the commentator. We guess his attitude is representative of most in the market. His reasoning goes like this:

1. Despite the sub-prime crisis in the US, US Treasuries bond rose (i.e. its yield fell).
2. So, it means the problems in the sub-prime market are not ?spreading elsewhere.?
3. Someone from Macquarie Bank pointed out that we can thank the ?extraordinary liquidity? for this.
4. This is because China?s massive US$23.8 billion trade surplus this month means that all the money has to go somewhere.
5. It is the foreigners who buy US mortgage securities (because they need to invest the trade surplus somewhere) that allowed the market to absorb the shock.
6. If not for foreign demand, we could indeed have a problem, but we don’t, which is good.

Taken individually, each of the points in his reasoning may be true. But string them together and you will find they lack substance. Let us tackle each of the points one by one:

1. Why should the sub-prime crisis make it more likely for US Treasuries to fall? Are we missing any direct cause and effect connections between these two events?
2. The link from point 1 to point 2 does not make sense to us.
3. This is true.
4. Where does China?s trade surplus come from? The fact that it has its origins from the US current account deficit, which in turn has its origins from the US money printing press were never mentioned.
5. See our article, Awash with cash?what to do with it?.
6. This is unbelievable! The status quo is unsustainable in the long run. It is only a matter of time before this becomes a problem. See Will the US dollar collapse?

The market reminds us of Alfred E. Neuman?s signature phrase, ?What, me worry?? The wise, however sees trouble ahead and takes step today to avoid it in the future.

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This entry was posted on Tuesday, March 13th, 2007 at 9:32 pm and is filed under Market Observations. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.