We are both also very concerned about the divergence of the markets from the underlying economy at this point, a short year after the meltdown of the markets. With the DJIA climbing back over 10,000 and the IBOVESPA reaching 67,000, despite sluggish economic performance, we are both concerned that we are setting the stage for a second market crash that will again attempt to bring market prices back down to a level that reflects real economic performance.
We are not alone in this concern. Daniel Gross, in his terrific Slate column, Moneybox, published on October 14, highlighted the recent, quiet withdrawal of private equity money from the businesses they had bet on. The New York Times' Breakingviews.com column has also highlighted the bubble prospect in the last week. In an interview with São Paulo's O Estado newspaper, Columbia University economist Jeffrey Sachs has emphasized that the current condition of the world economy is worse than it was a year ago and that predictions of a rapid recovery are misplaced.
I should also note that more American homeowners are still losing their houses with the arrival of every readjustment period on their adjustable rate mortgages. The bleeding in the housing sector has not been staunched in the US, despite the bland assurances of the government and the financial industry.
Will the bubble in the markets again burst? I believe the underlying conditions that could cause such a break are in place. It is up our policy wizards to carry out the actions they know are needed (in both countries, Brazil and the United States) to help us avoid the possibility. Obviously, the behavior of the Wall Street wizards is based on following their normal rules and programs. They failed us last year and will fail us again if they are not effectively checked.
