Greenspan Comments On US Asset Prices Pose Risk In Hong Kong Too.....

Through the currency board mechanism, the Hong Kong dollar essentially has adopted US monetary policy and excess liquidity in the US is translated into excess liquidity in Hong Kong. Therefore, asset prices have risen in both localities. Greenspan's comments assure that the Fed is aware of asset price rises that may be the result of loose monetary policy in the recent past and not through increased value. The Central Bank's job is take away the punch bowl just as the party is getting started and this is exactly what Greenspan and any other central banker worth his or her salt, would do.

Higher interest rates in the US and will lead to higher interest rates here and a tightening of liquidity will also lead to downward pressure on asset prices. As I wrote about earlier today, it is already being felt in the housing market as the demand for mortgages has decreased dramatically this year as Hong Kongers eschew new home purchases.

I think that it will get much worse before it gets any better.

The Federal Reserve is paying closer attention to the rising values of assets such as stocks and homes, as low interest rates encourage more risk-taking, Fed Chairman Alan Greenspan said.

At a Fed symposium in Jackson Hole, Wyoming, Greenspan said investors are willing to accept ever-lower compensation for risk, as a long period of economic stability leads to the belief that dangers to their investments have lessened.

While that has helped push asset prices higher and supported increased consumer and business spending, Greenspan warned market participants not to take such stability for granted. Should investors become more cautious, interest rates could rise and asset values could decline, posing a risk for the economy, he said.

``History has not dealt kindly with the aftermath of protracted periods of low risk premiums,'' Greenspan said in the text of his speech to the Kansas City Fed conference. ``Such an increase in market value is too often viewed by market participants as structural and permanent.''

I personally have been selling stocks and holding cash in both Hong Kong and the US and feel that we will see lower prices in both places before too long.