2.10.2007

Bill Gross on the asset bubble

A year and a half ago, I commented on the Chinese acquisition of IBM's PC division and the attempted acquisition of Unocal. I expected to see more Chinese acquisitions of U.S. companies, as they had to do something with all of the dollars we send them for Chinese goods.

We haven't seen a surge in outright acquisitions, perhaps because of the political backlash over Unocal and Dubai Ports, but it seems clear that our trade deficit is funding a more subtle foreign acquisition of U.S. assets: Treasury bonds and publicly traded equities.

Bill Gross explains it well. Our trade deficit finances an asset bubble, pushing interest rates down and causing the housing bubble:
...my critical point is that asset prices are no longer entirely a function of the real economy: it can be just the reverse. The real economy is being driven by asset prices, which in turn are influenced by financial flows of non-historic origin, composition, and uncertain longevity.

How might it all unwind? I'd guess a U.S. domestic economic slowdown from the housing bubble, combined with a weaker U.S. dollar, will eventually moderate the trade deficit, slowing the foreign flows that sustain the asset bubble. Until then, stay in stocks. Or better yet, gold, which is will benefit pretty much any way this bubble plays out.

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