Economy & Investment I

With the ECB's recent lending to European banks and the continuous low interest policy by Fed, the world seems glut with liquidity, and the money is seeking for good parking spaces. Many investors believe the spaces will be the emerging markets. KOSPI, the Korean stock index, has recently pushed up through 2000, and Korean stock market analysts say that has nothing to do with the prospect of the Korean economy; the rising KOSPI has largely been propelled by foreign purchases of Korean equities, and the majority of the foreign investors are Europeans. They further warn that jumping into the bandwagon is risky as the inflation of the equity market is not based on economic fundamentals. In other words, at any moment when the global financial conditions change, the recent gains in stocks will evaporate.

Gains in stocks are not just an experience of the Korean stock investors. DJIA is now 3-year high, and NASDAQ is 11-year high. Better-than-expected earnings reports and the recent employment data seem to have provided the momentum for the stocks. Considering the flurry of positive news, the Fed's position to maintain the near-zero interest rate policy through the end of 2014 is a big question. To that, Mr. Bernanke, the chairman of FOMC, already answered with a reaffirmation of the policy. He said the economic recovery is not robust enough to change the policy. Another Board member, the President of Federal Reserve Bank of San Francisco, even spoke of the necessity of opening an option of conducting a QE3. I could sense that the voices for raising interest rates as oppose to conducting a QE3 or maintaining the low interest rate policy are minority. This gives me a different look at the US economic future; it is still a far cry that our economy is recovering at a solid pace. The fundamentals are still weak, and that means the economy may fall back into recession. Although the possibility of that is far slimmer than the opposite, the skeptical assessment of the economy will soon translate into the stock markets.

Coupled with the looming European debt crisis, which is yet to unfold, I should say it will be safe to avoid investments in equities. If you are a savvy investor, you may want to short on high-flying stocks now.