International Investing

FT reports:

Worries about US credit-market losses spreading to the Asia Pacific region flavoured trading Tuesday. Shares generally fell or rose only weakly, with Bangkok, Jakarta, Sydney and Seoul leading the drop.
…
On currency markets, the US dollar hit a two-month high against the South Korean won as investors worried about credit and foreigners continued to sell shares. The Kospi ended the day down 1.7 per cent at 1,817.89. Some investors sold shares to avoid exposure to volatility elsewhere as Seoul will be closed Thursday for a national holiday. The dollar rose to 932.10 won.

This short term dollar rise isn’t surprising.  The market’s knee-jerk reaction during periods of uncertainty is a flight to safety  and for a very long time safety has been the US.  But how can the US simultaneously be the cause and the solution to market uncertainty? In the long term it can’t be. Expect the 2nd wave of retreats safety to the Euro or gold.

We’ll soon see one of the most overlooked consequences of globalization - the dearth of diversity. When everything, stocks, bonds, commodities, etc. moves in the same direction, the models can’t tell you the best way to manage risk. There isn’t any historical data that covers this situation. What the models will tell you is that the more you lose, the more “mis-priced” the market is and to double down. Imagine thousands of hedge funds with the same basic ideas, running substantially the same models and not realizing that the fundamental situation has now changed.

The music has stopped, the flood of credit has been cut off and not everyone has a chair. Expect to hear the Mises term, “crack-up boom” a lot more in the next year.