Investors do not seem to care about imbalances anymore: At Morgan Stanley’s MacroVision seminar last week, investors expressed no concerns over global imbalances and believed that any adjustment would be very gradual without overly affecting financial markets.

Imbalances reflect the Fed’s policy: The global imbalances – excessive consumption/large trade deficit in the US and excessive investment in Asia – reflect the Fed’s stimulus policy in a world with insufficient demand. The Fed policy has led to asset inflation-led demand growth. The US trade deficit is the spillover of the US demand surge into a global economy with insufficient demand.

Bubbles may pop in 2006: Asset inflation-led demand growth may run into trouble in 2006 as high oil prices, China’s overcapacity and an already low risk premium create headwinds for growth. This may trigger a risk reduction trade that could pop the bubbles.

Click here for the complete article

Posted by toughiee on Thursday, January 26, 2006 at 12:52 AM | Permalink