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Money and Understandingthe Wonders of Self-Delusion

Posted Sep 29 2008 1:03am

A few months ago, I took part in a financial forum sponsored by a well-respected stock brokerage. Message 1: America’s stock market growth will slow, but remain in positive territory. Message 2: Invest in Asia because its markets have decoupled from the United States and will continue growing regardless.

Although by the time of that phone conference I had taken all our money out of stocks, it was then I came to the conclusion that delusion had taken over the markets. I’ve long felt this was true of the housing market, but was less sure about equities, (a fancy term for stocks.)

But don’t take my word for it, read what they’re saying in The Star in India:

The myth that the Indian economy can be decoupled from the global markets lay shattered last week in the wake of a weeklong carnage on the share markets.

Buoyed by 9 percent growth on the trot over the last seven years, and a booming share market, economic pundits had advanced the thesis that the economy was strong enough to repulse global shocks.

In seven cataclysmic trading sessions, which saw more than 20% shaved off the values of shares, that self-serving theory was fully laid to rest. The meltdown triggered by fears of a full-blown U.S. recession hit world markets. India could not be an exception.

Oops.

I never really understood why economists and pundits – who constantly tout the interdependence of globalization – would ever think markets could become decoupled. How can markets be connected on the front end, and disconnected on the back end?

More from the Star:

The markets had been taught a bitter lesson, which was that there was no way of insulating the Indian markets from the global shocks. The decoupling argument, based essentially on the fact that the Indian economy was not overly dependent on exports, had been proved wrong. … Pundits of decoupling were, at long last, made to eat crow.

How could the pundits be so wrong? It seems self-delusion works in all walks of life when it comes to money. Nowhere is that more measurable than housing, which promised quick and unending riches.

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