As Global Finance went to press this month, the worlds financial markets were engulfed in a wave of nervousness. It began with the late-February equity slump in China, continued with a growing realization that the much-talked-about yen carry trade could be about to unwind in a most disorderly manner and intensified in mid-March with the near-universal acknowledgement that all those worries about the stability of the US sub-prime mortgage market were indeed well founded.
Whatever the eventual resultand there is, by the way, still a very real possibility that all this anxiety will trigger a global financial crisisthere is a common thread running through all these recent events. Observing the panic over the yen carry trade and the sub-prime mortgage crisis was a little like watching a pair of slow-motion train crashes. After months of warnings, predictions of imminent doom and hints by the Japanese authorities that they would soon be raising interest rates, they did just that. Just as everyone had predicted it would, the yen rose sharply against most other major currencies, leaving investors with heavy borrowings in the yen facing the potential for equally heavy losses.
At the same time, the bottom was gradually falling out of the sub-prime mortgage lending market. Again, the debacle was preceded by months of warnings, but investors just couldnt resist the siren call of high returns, even though they knew there was a very real risk that theyd be dashed on the rocks of their own greed.
There are plenty of reasons to be worried about these twin train wrecks, but more disturbing still is the question of how they could even happen. In previous financial crises, it has been only with hindsight that we have been able to see clearly how the crises developed. In this case, investors could have read about them in the newspapers long before they started to unfold. That they still did nothing is testament to how blas investors have become about risk.
Perhaps in the end, though, it will be this very fact that saves us from global panic: At least a few investors who are seeing their portfolios bleeding red ink will simply shrug and accept that pain is the flip side of gain. We can only hope.
Until next month,