by Eddie Current
Hi, I'm Eddy Current. I'm here to talk about a phenominon, not a threat.
The Asian Wall Street Journal and The Economist have been reporting for several months on how investors have become willing to invest in riskier deals. This is interesting because it means that how people are thinking about risk is changing.
Basically, a change such as this can occur for three reasons:
These influences can work together, and usually do. The consequences of the three are different.
If there has been a beneficial change in the risk equation, then the migration to riskier investments is likely to be a long-lived phenominon. Historic examples of beneficial changes to the risk equation are numerous. A couple of big ones were the development of the insurance and stock market industries back in the late 1700's. Recent smaller changes have been the rise of mutual funds and hedge funds in the 1990's and 2000's.
If the change is due to inflation, it is a harbinger of a more pervasive rise in prices. The US government has been spending heavily for years on Iraq and Afghanistan and Anti-Terror. I am surprised there hasn't been more tangible inflationary pressure on the dollar already.
If the change is due to a new, inexperienced investor cohort, and new technology, politics or legal have not changed the risk equation, the effect is likely to be short-lived, and it will lead to a crisis and blunders. In the words of the old hands at this investing game, "The old lessons have to be learned again... the hard way." As of now, the new investors are arguing that "the new's" will make a difference.
This is a situation with a lot of threat potential. I will be watching it closely.
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