Thursday, December 30, 2010

Stupidity Guarantees More Crises In Finance

Stupidity isn't just confined to high-school dropouts.  Think-tanks do it too.  I've never heard of the TaxPayers' Alliance or Legatum Institute, but their theorists probably smoke the same jumbo-sized crack rock as the folks from our own Cato Institute.  They claim global regulation causes global crises.  That's cute.  The problem I have with that stupidity is that the credit crunch occurred in the absence of global regulation.  What is it with Right-Libertarians?  I used to drift that way myself until I realized the real world was nothing like Ayn Rand's fiction.

More stupidity will like this will bring on another crisis.  We're already well on our way there.  Europe hasn't learned a thing from watching the PIIGS flirt with disaster.  U.S. policymakers haven't learned that housing prices need to drop further for market equilibrium to take hold.  Global investors haven't learned that their risk appetites are being stoked by the Federal Reserve's quantitative easing. 

Here's a learning point for the rest of us.  Europe and other established economies may be on the ropes for a while, depressing their equity markets.  The iShares MSCI EAFE ETF is trading at a P/E of about 12 thanks to European trouble.  That's a lot cheaper than some other index-based products right now. 

Full disclosure:  Short cash-covered puts under EFA.