Low in the Water

While Amaranth was registering the largest single loss in history, housing registered the first nationwide decline in 11 years, and for the first time in 90 years, the United States turned into a debtor nation. The whole world rocked, too. In Mexico, millions protested the presidential elections and teachers in Oaxaca threatened revolution. Thailand's elected government was replaced in a military coup. In Hungary, citizens rioted. Hugo Chavez told the UN that the United States of America was run by the “devil.” This same US of A is now widely thought to be preparing a military strike against Iran. Yet these remarkable events have been greeted by the market with such a comalike indifference that we feel like holding a mirror under its nose and taking its pulse.

Venezuela may be run by a fox or a fool, but what kind of investor buys its bonds at only 2.3 percent over U.S. Treasuries? And Thailand may have nice beaches, but investors who lend money to the Thai government for barely a single percentage point more than to the U.S. government may have had too much sun. It is as if someone has put lithium into the Manhattan water supply. And now, the Zen‐like calm threatens the entire world financial system. Even institutional analysts are enjoying a tranquility normally available only to the brain‐dead: “The results suggest that the important drivers of volatility reduction seem to be structural, and may therefore have a permanent effect on volatility …” said a study ...

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