A Real Market Correction Is Unlikely

03/13/2007 12:00 am EST

Focus:

Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor of MSN Money, explains why the market needs a big correction—and why he doesn’t think it’s going to happen soon.

If I'm right about the nature of the global financial markets right now, we aren't going to get [a] 10% correction. The flood of cash sloshing around in the financial markets will stop the retreat somewhere near the recent 5% marker. The stock market rally will resume. In the debt market, the flight to safety from risky trades will reverse, and investors, traders and speculators will go back to their search for the highest leveraged return, no matter the risk. Emerging stock markets in China, Russia and India, to name just three, will resume zooming. The derivative market will continue to grow by leaps and bounds as investors snap up Wall Street products that promise to pass the risk onto someone else.

And we'll put off the day of reckoning for another day.

Which leaves me in a quandary: How in a world of increasing financial risk to get a reasonable return on my money--since I need that return for retirement, saving for college, a down payment, whatever--without taking on so much risk that I jeopardize my chances of reaching the goals I'm working toward?

I believe that the risk of something bad happening in this market, something worse than the customary 10% correction, is rising. It's higher than it was three months ago, and if we don't get a 10% correction now, the risk of something truly bad happening will be even greater in three months. I believe that the longer this tide of risk flows higher without a correction, the more likely the eventual reversal will result in a flood sweeping over all asset classes.

But the amount of excess liquidity in the world's financial markets makes it likely that the day of reckoning is still a way off. The recent sell-offs in the Shanghai stock market, the reduction in the number of traders borrowing cheap yen, the bankruptcies of several subprime mortgage lenders in the United States and the move toward the safety of Treasury bonds doesn't significantly reduce global supplies of investment cash. A day of reckoning, therefore, could come this year. But it's more likely to take place in 2008 or 2009--or even later, say in 2012, when an aging world starts devouring savings rather than generating them.

In the shorter term, however, I think this global liquidity keeps the asset market in bullish mode. There's just too much money chasing too few real investment opportunities for asset prices to head south in the shorter run. The current setbacks to the world's rush to risk are very temporary, I believe. The excesses are likely to be considered tame a year from now, and asset prices are likely to be even higher than they were at the start of the year.

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