PRINT THIS OUT AND READ it everyday. China Enjoys Ben-Carry Trade Thanks to Bernanke: William Pesek By William Pesek Enlarge Image/Details Oct. 5 (Bloomberg) -- Investors in China aren't making money this week. The reason: Stock markets are closed. That's how easy it has become to ride China's stock boom; if the market is open, you can make money. It has long been known mainland shares are driven more by momentum than fundamentals -- more Ponzi scheme than market. With each passing day, though, things are becoming frothier and more surreal. Macau can't be happy. The island's proliferating casino business had designs on tapping a 1.3 billion-person market of gambling enthusiasts. These days, the real action isn't at Macau's baccarat tables, but in Shanghai and Shenzhen. What's happening in China is a transformation event. Rarely before, if ever, have investors been able to make so much money so quickly with so little knowledge of what they are buying. It's too late to call Chinese stocks a bubble, when Asia's No. 2 economy is experiencing a bubble in bubbles -- stocks, real estate, pollution, diplomatic crisis from Sudan to Myanmar, you name it. The plot is thickening as Chinese euphoria spills over into Hong Kong. Undeterred by holidays halting mainland trading, people are finding ways to bet on Hong Kong shares. International investors also are piling into Hong Kong in anticipation of even bigger gains once more mainland money is allowed to flow into the city's markets. Hong Kong's Bubble The tactic is working. The Hang Seng Index not only rose above 28,000 for the first time this week, but broke records for trading volume and market value. William Barbour, who helps oversee $32 billion at Deutsche Asset Management in Sydney, is among those calling Hong Kong's rally a ``bubble.'' What else can one say when the market of a first-world economy jumps 25 percent since Aug. 20? The stock price of Hong Kong Exchanges and Clearing Ltd., which manages the city's stock bourse, has climbed 167 percent this year. The Standard newspaper captured the mood this week with the headline: ``Market Madness.'' The ``can't-lose'' attitude coursing across the Pearl River Delta is courtesy of Ben Bernanke. Far from just calming global markets, the Federal Reserve chairman's 50 basis-point rate cut on Sept. 18 made it safe again for investors to bet on the most bubble-plagued shares and companies they can find in Asia. ``The U.S. Federal Reserve's interest rate cut was wrong,'' Axel Merk, head of Merk Investments LLC in Palo Alto, California, wrote in a note to clients. ``Forget about the moral hazard of whether the cut would plant the seeds for further bubbles. Lowering interest rates is wrong because it will do few any good, but cause harm to many.'' Ben-Carry Trade That's a longer-term view, but one many investors don't seem to be considering. You know something's amiss when bad news is a sign to buy more stocks. In more rational times, news that UBS AG, Deutsche Bank AG and others are taking significant writedowns amid global credit-market turmoil would be a warning signal. The same is true of more troubles in the U.S. housing market. Instead, such disclosures are considered bullish. And why not, when you have the ``Bernanke Put'' on which to rely? It used to be the ``Greenspan Put,'' a reference to former Fed Chairman Alan Greenspan's weakness for bailing out markets and investors when things get dicey. Forget the global credit crunch; Bernanke is ready to cut rates again. U.S. consumers drowning in debt? No problem. Subprime fallout? The Fed is on it. What about the dollar's slide unnerving all those investors who borrowed cheaply in yen and invested the money overseas? Ben will carry you. The yen- carry trade is being replaced by the Ben-carry trade. Irresponsible Investors Perhaps the biggest hypocrisy is how the U.S. is doing what it chastised Asia for doing in 1997. The Fed is pumping monetary largess into markets at a time when irresponsible investors, lenders and rating companies deserve to pay a price for their actions. Much of that liquidity is heading to Asia. During the Asian crisis, the White House told the region's leaders not to be afraid of a recession. It would cleanse the region of past excesses and offer a fresh start. And here you have the Fed re-inflating asset bubbles and ignoring inflation risks to avoid what's probably a necessary recession. Recessions happen. A few quarters of contraction may be needed to stop this dangerous cycle of rate cut after rate cut shielding the U.S. from the shakeout it so badly needs. Also, it could help China avoid overheating and trim its unsightly trade surplus, leaving its economy better off in the long run. It would seem policy makers learned nothing from the events of 1998, when they rescued John Meriwether's Long-Term Capital Management. Since then, the Fed has bailed out excessive risk- takers countless times, encouraging more of the same behavior. While Asian markets have been along for the ride for some time now, things are accelerating thanks to the Fed. Why should investors worry when they know Bernanke aims to keep the merry- go-round turning?