(James Saft is a Reuters columnist. The opinions expressed are his own)

With just a few short weeks until the end of the year, look for many fund managers to take on more risk in an effort to salvage their annual return figures.

This is not about fundamentals, this is about something far more important: career risk.

Hedge Fund Research's Global Hedge Fund index, which is broadly representative of the industry, is up just 11.9 percent year to date, while its Equity Hedge index is scarcely doing better, up 12.6 percent. The HFR Macro Fund index is actually down 8 percent, indicating the best paid minds in the business did not see the astounding emerging markets rally and dollar fall coming.

Given that global emerging markets are up something on the order of 60 percent this year, that all global shares are up 30 percent and even the S&P 500 is up 22 percent, we can conclude that a lot of managers are heading into the year-end reporting season with a lot of ground to make up.

There are also lifeboats full of institutional fund managers and mutual fund managers in the same position.

What all who have missed the rally have in common is not a common failure of analysis -- there are lots of different ways to get it wrong -- but a collective vulnerability to finding themselves waving their clients goodbye. Letters detailing 2009 performance will have to be posted, ranking lists of funds will be published and there will be consequences.

It must be hugely tempting for managers who are behind -- and remember a lot of these people are not committed bears -- to pile in and hope the momentum trade can bring their returns back to respectability.

It all adds up to a supportive background for risky assets through the new year. There can be no assurances that fundamentals, which are pretty poor, won't reassert themselves. There is no telling too that policy makers might put a foot wrong and scare the markets, though I doubt it. They have a very large interest in a merry year end. Even if they didn't, inflation is not an issue and unemployment is, so don't look for any telegraphs from Washington, London or Frankfurt bearing tidings of rising rates.

COME BACK CHUCK PRINCE, ALL IS FORGIVEN
Individual investors who missed the rally are less likely to pile in right now. Their temptation will be to pass over the business headlines and go straight to sports. And besides, the holidays provide distractions of their own and you are highly unlikely to be fired by yourself as your own investment manager, now matter how richly you deserve the boot.

Professionals however are usually not so lucky as to be related to the client.

Of course, there must be many managers who are ahead of the market. Why won't they trim their sails and protect their gains? I don't know the answer to that but in my experience it just doesn't work that way. People tend to think of gifts as entitlements and it's a rare, and valuable, manager who having been aggressive when most were timid now gives up the habits of a lifetime.

It is all very reminiscent of good old Charles Prince, the former Citigroup chief who said about the leveraged buyout market, "As long as the music is playing, you've got to get up and dance," just as the world began to unravel. Prince wasn't a fool, he was expressing a core truth. If you are head of a bank or a mutual fund and you sit out a boom which you see as too risky you are taking on another, perhaps more persuasive risk; that the very clients you seek to protect will call you a stick-in-the-mud and take their business elsewhere.

This is not a specious argument about "cash on the sidelines" or money market funds. Numbers showing huge cash in money market funds are misleading; most of it will never end up in equity markets. This is simply about the self-fulfilling psychology and mechanics of rallies, especially rallies with official support.

The authorities, in their wisdom, have broken the circuit of a crash by flooding the market with enough money to drive up asset prices. This is intended to bring money out from under mattresses and force people to take risks again, to make them dance even if they feel like a fool.

That is unlikely to last forever or to work forever, but a reversal is less likely before January 1 than after.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

(Editing by James Dalgleish)

-- Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former chief economist at the United States International Trade Commission. The views expressed are his own. --

From Berlin to Bangkok, governments are screaming about the falling dollar, because they can no longer rely on reckless American consumers to power their economies.

From the late 1980s to 2007, the global economy enjoyed The Great Moderation-low inflation and sustained growth interrupted by brief recessions. Driving global growth was an eight fold increase in the U.S. trade deficit, facilitated by a doubling of the value of the dollar against other currencies from 1989 to 2002.

Deregulation and new technologies powered U.S. growth, and Americans flush with success bought whatever the world had to sell. However, when imports substantially exceed exports, Americans must consume more than they earn producing good and services, or demand for what they make is inadequate, inventories pile up, and layoffs and recession follow.

From 2003 to 2007, the U.S. trade deficit averaged $665 billion, and Americans massively borrowed from abroad to keep the U.S. economy going. They posted as collateral overvalued homes financed on shaky mortgages. When mortgages failed, banks failed, home prices dropped, and retail sales tanked. The U.S. economy was thrust into the worst recession in 70 years and pulled the rest of the world into crisis.

Imports of oil and consumer goods from China account for the lion share of the U.S. trade deficit. Americans drive big cars powered by thirsty engines. They sit on vast untapped deposits of natural gas but burn too much heating oil in the winter. Simply, conservatives in Congress are unwilling to submit to genuine energy conservation, and liberals teach developing domestic fossil fuels resources is evil.

For nearly two decades, China has maintained an undervalued currency. The Chinese government tightly regulates private trading in the yuan, and each year, purchases more than 400 billion U.S. dollars with newly printed currency to keep the yuan artificially cheap against the dollar. That is 10 percent of China's GDP and 20 percent of exports to make Chinese goods artificially inexpensive on U.S. store shelves and juice Chinese exports.

China amasses huge trade surpluses that power its impressive growth, and the rest of the world suffers slower growth to compensate. An economic miracle sold to the world as policy genius but really built on currency mercantilism and beggar-thy-neighbor protectionism.

Japan has propped up its economy by purchasing dollars and permitting private investors to borrow yen at near zero interest rates and trade those for dollars-denominated Treasury securities. Now, Tokyo signals it will not let the yen drop much below 90 per dollar when a market equilibrium value would be closer to 80.

Other Asian export powerhouses have practiced variants of the Chinese and Japanese currency model too. It is no wonder the dollar was so strong for so long.

In recent years, private investors have grown wary of massive American borrowing. They have turned to the best substitutes available for the dollar-the euro, yen and gold-and driven up their values and pushed the dollar down against every major currency but the Beijing regulated yuan.

Now, with Americans no longer able to borrow madly to prop up global growth, protests are shouted around the world about a "cheap U.S. dollar."

The hard facts are the dollar became overvalued earlier in this decade, in no small measure thanks to the currency policies of China and other Asian governments. Now, as private traders flee the dollar, its average value has fallen near the middle of its trading range for the 1990s.

The dollar has fallen too much against the euro and some other currencies, because China, Japan and other Asian exporters have been unwilling, in varying measures, to abandon currency mercantilism and let their currencies rise in value as free markets would require.

If China and others ceased subverting currency markets, the yuan would rise at least 40 percent, other Asian currencies would appreciate too, the U.S. trade deficit would shrink dramatically, and the new demand for American goods would rocket the U.S. economy.

With higher incomes, Americans would need to borrow less, and the global economy could go forward, embracing free trade in goods and currency.

--  Bernd Debusmann is a Reuters columnist. The opinions expressed are his own. --

Prophetic words they were not. "By God, we've kicked the Vietnam syndrome once and for all...The specter of Vietnam has been buried forever in the desert sands of the Arabian Peninsula."

Thus spoke a euphoric President George H.W.Bush early in March, 1991, shortly after the 100-hour ground war that chased Iraqi forces out of Kuwait, the oil-rich U.S. ally they had invaded and occupied in the summer of 1990.

The specter of Vietnam, far from being buried in the Arabian sands, has risen again as President Barack Obama and his advisers are considering the course of the war in Afghanistan, now in its ninth year, increasingly unpopular, and considered unwinnable even by America's senior soldiers if it is fought alongside a corrupt government that lacks legitimacy in the eyes of the population.

That the Vietnam syndrome is alive and well is obvious by the proliferation of analyses and commentaries drawing parallels, or dismissing them as nonsense, since Obama declared Afghanistan a war of necessity. (Type "Is Afghanistan Obama's Vietnam" into the Google search box and you get more than nine million references).

The cover of the latest edition of Newsweek magazine is taken up by an iconic photograph of the Vietnam war, people clambering up a ladder to a U.S. helicopter waiting to evacuate them off the roof of a Saigon building the day before the city fell to communist forces on April 30, 1975. The story inside: what to learn from the lessons of Vietnam.

The answers to that question differ widely and the Vietnam analogy has come up routinely whenever the United States resorted to military action in the past three decades, from Lebanon and Somalia to Bosnia, Kosovo and Iraq.  Obama himself has dismissed the parallel.

"You never step into the same river twice," he said in October, "and so, Afghanistan is not Vietnam. But the danger of overreach and not having clear goals and not having strong support from the American people, those are all issues I think about all the time."

Both in scale and geopolitical context the difference between the two conflicts is vast: at the height of its involvement in Vietnam, the United States had more than half a million troops there, fighting both Viet Cong insurgents and North Vietnamese army regulars who could count on aid from China and the Soviet Union.

In Afghanistan, the United States has some 68,000 soldiers, a number that is likely to grow to 100,000 or more (depending on what decision on reinforcement is taken) by the end of Obama's term. Neither the Taliban insurgents nor al-Qaeda can count on the kind of outside support America's antagonists in Vietnam commanded. In Vietnam, more than 58,000 soldiers died. The U.S. death toll in Afghanistan stood at 916 in the first week of November.

VIETNAM SYNDROME AND FLAGGING SUPPORT

But there are also parallels, and the Vietnam syndrome the elder President Bush had declared kicked is doubtless one of the reasons why public support for the war in Afghanistan has been declining steadily, despite Obama's assertion that the American commitment would not be open-ended. The latest poll, by CNN, showed that 58 percent of those questioned were opposed to war.

And the parallels? In the words of Senator John Kerry, a Vietnam veteran who turned into a war critic after his deployment, "Once again, our enemy blends in with the local population and finds sanctuary in a neighboring country. Once again, the danger of being perceived as an occupying force by a war-weary population remains perilous.

"With Afghanistan, as with Vietnam, we have a president facing pressure from the military."
President Lyndon Johnson, Kerry wrote, failed to stand up to his military commanders when they warned that the U.S. was facing defeat without additional forces - the argument that the U.S. and NATO commander in Afghanistan, General Stanley McChrystal made when he put forward options to Obama, including up to 40,000 more troops.

History does not repeat itself but the similarities between Obama in 2009 and Johnson in 1963 are striking. Both inherited a war that became their own at a time when they were pushing far-reaching and costly domestic reforms. Johnson's Great Society programs ranged from reducing poverty to improving medical care. Obama's key project is universal health care.

Most of Johnson's reforms were enacted in the first two years of his presidency, with Democratic majorities in both houses of Congress. By 1968, the war in Vietnam had eroded his popularity to such an extent that he decided not to run for re-election.

The House of Representatives passed Obama's health care bill this month, the Senate is expected to vote on its version soon. Polls show Obama's popularity has been slipping, though his approval rate is still above 50%. Where it will be in a year's time, halfway through his term when the U.S. goes to the polls for mid-term elections, will partly depend on how the war in Afghanistan is going.

The ghost of Vietnam hangs over the White House.

You can contact the author at Debusmann@Reuters.com.

(James Saft is a Reuters columnist. The opinions expressed are his own)

Stocks and other risky assets are rallying around the world this week because the Group of 20 nations said on the weekend they would keep the economic stimulus flowing, a state of events which illustrates where we are and what a very strange place it is.

The G20, the only group of big hitters that matters because it is the only group which includes the Chinese, met in Scotland over the weekend and, as is the way of these things, did very little with immediate consequences for anybody.

In the communique they issued, the Group of 20 finance ministers, after congratulating themselves on the recovery, more or less admitted that the measures we once thought of as heroic are in the process of becoming commonplace.

"However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern," the statement said. "To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured."

Let me put that in human terms for you:

"We've spent untold trillions saving the economy, but, er, we've really only saved the financial system and that only to the extent that we keep on saving it. Jobs, well, not so much. We therefore pledge to continue doing this thing that may or may not be working until we are sure that it is."

Global stock markets then went off on a stonking rally on Monday, which major media attributed to the pledge of continued stimulus. I suppose we shouldn't dismiss the possibility that the financial media was, as we often do, mistaking coincidence for causation, but professionals were citing it too.

So, what are they promising to do? Will they be able to do it? And why do the risk markets like it so much?

There are at least two aspects to the stimulus - continued easy money from central banks and actual government spending.

The easy money part - low interest rates and unconventional measures - clearly will continue. It will be politically very difficult to raise interest rates while unemployment is still so high, and given the wan nature of the recovery, unemployment will take a long time to fall.

The actual government spending part is a lot harder to bank on, as it were. One reading of the Japanese experience in the 1990s is that their stimulative measures worked but they lost heart and withdrew them for mostly political reasons, thereby bringing on a relapse from which they never really properly recovered.

The politics of another stimulative spending binge will not be easy, especially in the U.S. and especially given populist backlash. That's not to say more stimulus won't be needed, it very likely will, but you can't count on it arriving. Deleveraging takes a long time and we very likely would have been better off just writing the debt down in the first place.

MARKETS LOVE CERTAINTY

Investors have decided, and I think they are probably right, that so long as the authorities are hell bent on reflation it is foolish to get in the way.

As analyst David Merkel has pointed out, the statement of the Federal Reserve meeting, released last week, characterized financial markets as "roughly unchanged" since they last met in September, revealing that they pay far more attention to equity markets than debt markets.

Because of course equity markets were going more or less sideways in October but many of the riskier parts of the debt markets were rallying strongly. Wasn't this whole crisis, and its expensive fix, supposed to be about "unfreezing credit markets"? Not anymore, apparently.

That is because the Fed realize that they have got to keep equity markets up, indeed have got to force them to rise. It is the only way to float the equity above the debt, make the banks and the holders of debt whole, and allow the financial system to weather the crisis.

There were other options - default, temporary nationalization - but that is not the route we went down. So, within this context the rally makes great sense.

Notice how equity markets have been on a huge tear since last week, going up on news that implied that the Fed would remain on hold for a long time, going up on unemployment rising through 10 percent in the U.S. and, funnily enough, going up on faith that the G20 would stick with stimulus measures.

This brings us to the crazy part. While it may be individually rational for everyone to hitch a ride on the policy train and follow asset prices higher, I would argue that the project is collective folly.

The risks are inflation and a rapidly falling U.S. dollar which leave banks and debtors solvent in nominal terms but not better off. Those risks are best observed now through the dollar, which is falling, and gold, which is at record highs.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

In the protracted Washington debate over the war in Afghanistan, the most concise analysis so far has come from America's top soldier: "If we don't get a level of legitimacy and governance (there), then all the troops in the world aren't going to make any difference."

Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, was speaking two days after Hamid Karzai was declared the winner, by default, in August elections so massively rigged that a U.N.-backed electoral complaints committee threw out about a million Karzai votes. That forced a run-off from which his challenger, former foreign minister Abdullah Abdullah withdrew, saying the second round would be just as fraudulent as the first.

So much for an exercise in democracy President Barack Obama had used as his rationale for escalating the war a few months after he took office. "I did order 21,000 additional troops there to make sure that we could secure the election, because I thought that was important."

It was. It showed that the United States and its NATO allies are fighting on the side of a corrupt and discredited government in a war, now in its ninth year, for which, according to Defense Secretary Robert Gates, there can be no purely military solution.

An angry assessment of the Afghan leader last year by Thomas Schweich, a former top anti-narcotics official in Afghanistan, has proved prophetic. Karzai, he said, had been playing the Americans like a fiddle ever since he came to power. "The U.S. would spend billions of dollars on infrastructure improvement; the U.S. and its allies would fight the Taliban; Karzai's friends would get rich off the drug trade; he could blame the West for his problems; and in 2009 he would be elected to a new term."

U.S. officials, including Admiral Mullen, are now calling on Karzai to purge Afghanistan of corrupt officials by arresting and prosecuting them. This is an unlikely prospect. In his victory speech, Karzai said he would work to wipe off "the stain of corruption" but said that could not be done simply by removing corrupt officials.

The implicit notice that there would be no major house-cleaning followed a telephone call Obama made to Karzai to say it was time for "a new chapter based on improved governance (and) a much more serious effort to eradicate corruption..." If previous promises from Karzai are any guide, the new chapter will remain unwritten.

BOXED IN BY RHETORIC

Obama is close to making a decision on a request by General Stanley McChrystal, the U.S. commander in Afghanistan for as many as 40,000 additional troops. If the president followed the logic of Admiral Mullen's analysis, he would send none. But he will, because he is boxed in by his own portrayal of Afghanistan as the "good war" (as opposed to the war in Iraq) and his definition of why the U.S. must be in Afghanistan.

"This is not a war of choice," he said in a speech in August. "This is a war of necessity. Those who attacked America on 9/11 are plotting to do so again. If left unchecked, the Taliban insurgency will mean an even larger safe haven from which al-Qaeda would plot to kill more Americans. So this is not only a war worth fighting. This is fundamental to the defense of our people."

One of the most passionate arguments against this reasoning has come from Matthew Hoh, the first State Department official to resign in protest over the war. Hoh, a former Marine Corps captain, said in his letter of resignation that if the U.S. strategy really was to prevent al-Qaeda from regrouping in Afghanistan, then America should also invade and occupy western Pakistan, Somalia, Sudan and Yemen - all countries with an al-Qaeda presence.

"Our presence in Afghanistan has only increased destabilization and insurgency in Pakistan where we rightly fear a toppled or weakened Pakistani government may lose control of its nuclear weapons. To...follow the logic of our stated goals we should garrison Pakistan, not Afghanistan."

Instead, he wrote, the U.S. was following the example of the Soviet Union, a previous and unsuccessful occupier, by bolstering a failing state.

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

China has finally given a green light for Disneyland to build a theme park in Shanghai. Negotiations that started when Bill Clinton was in the White House have concluded just before President Barack Obama is due to visit. The approval looks like a coup for Walt Disney Co, but it will take all of Mickey's magic to prevent the park from becoming another government-financed loss maker.

Disney's last theme park in the region was anything but a hit. Hong Kong Disneyland was created in 2005 in an effort to boost employment in the epidemic-stricken region, but attendance numbers have fallen short of target. This hits the Hong Kong government harder than Disney, because the former not only took an initial 57 percent equity stake in the venture, but also spent $1.75 billion building related infrastructure like a metro line and ferry piers.

Shanghai Disneyland is likely to be financed in the same way. Estimates for the park's price tag are around $4 billion. The government and a group of Chinese companies will contribute about 60 percent of equity, with Disney paying for the rest. The Shanghai government is also likely to pay for the roads leading to the park.

The Hong Kong park has been a disappointment for a number of reasons, some of which might equally be relevant in Shanghai. It is the smallest Disneyland in the world, so it is crowded and not worth visiting for a second day. Culturally, locals identify more with the Ocean Park, which features pandas and sharks and is cheaper. Hong Kong Disneyland's public image has also taken a hit from a bout of food poisoning and accusations that it has exaggerated visitor numbers.

The Shanghai park will be 3-4 times bigger than the one in Hong Kong, making space for more visitors. But this will also increase the cost of relocating current residents. Some locals are busy adding a second floor to their homes so they can demand more compensation when they move out.

Shanghai has twice Hong Kong's population, but average income is only about a quarter that of its wealthier neighbour, so it's far from clear how many visitors will be able to afford a ticket that will cost the equivalent of two days of earnings for a college graduate. Then there is the possibility that the Shanghai park will divert visitors from Hong Kong.

There is also a risk of a culture backlash. Chinese children are less familiar with Disney characters than their counterparts in, say, Japan, home to Disney's most successful overseas theme park. That said, the Chinese have so far appeared to be receptive to the American cultural icon: Mickey Mouse Clubhouse appears on national TVs and Disney has opened a chain of language schools in Shanghai.

China's decision to relent after ten years says a lot about its changed priorities. Before, the government was concerned about the economy overheating, but now growth has become the top priority. While it is probably better to build a theme park than more empty highways, a second Disneyland might prove to be one too many.

-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. --

(John Kemp is a Reuters columnist. The views expressed are his own)

Warren Buffett's acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe (BNSF) railroad his Berkshire Hathaway does not already own looks like a strategic bet that America's future energy needs will be met, in large part, through a massive expansion in coal-fired power generation coupled with carbon capture and storage (CCS).

Coal is the most important item moved on BNSF's railroads. It accounted for almost half the tonnage moved by BNSF in the first nine months of the 2009 (214 billion revenue ton miles out of a total of 444 billion) and a quarter of the company's revenues ($2.7 billion out of a total of $10.4 billion).

BNSF's track and rights of way are perfectly positioned to benefit from a massive expansion of the country's coal-fired output in the next 20 years, coupled with CCS technology to curb the carbon-dioxide emissions.

BNSF controls the crucial rails linking the massive domestic reserves of the Powder River Basin, the Northern Great Plains, the Western Interior Basin and the Illinois Basin east to the main industrial centres of the Midwest and west to the major electricity demand centres in southern California.

* http://pubs.usgs.gov/of/1996/of96-092/Comp/main.gif
* http://www.eia.doe.gov/cneaf/coal/reserves/chapter1.html#fig1
* http://www.bnsf.com/tools/reference/division_maps/?menu=5&submenu=0
* http://graphics.thomsonreuters.com/109/US_ENRGY1009.gif

(James Saft is a Reuters columnist. The opinions expressed are his own)

So it can be done after all.

Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.

It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.

Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.

Britain took over Northern Rock after a run on the bank and its rescue of Lloyds and RBS left it with stakes of 43 and 70 percent, respectively.

It is worth noting that if anything Britain is more dependent on its financial services sector than the United States.

Could it be that Britain has determined that a level playing field, strong competition and a lower risk of a crisis might actually make it more competitive internationally? I certainly think so.

It will without doubt improve the situation for the small businesses and individuals that can't access international capital markets and depend on the banks for access to credit and other financial services.

Before we get all excited and expect the United States to follow suit with Citibank and Bank of America, it is important to recall that Britain's Labour government is more or less on its death bed and faces an election in 2010 which the bookies and almost everyone else think it is highly unlikely to win.

There is also the matter of the European Union, which has a say over subsidies such as the ones Britain has showered on the banks. RBS said on Monday that it may be forced by the EU to sell more assets than it had planned. Lloyds is also seen likely to raise additional new capital to allow it to stay outside of an asset insurance scheme Britain is running for the banks and which would involve the government taking yet more equity in the participants.

OH WHAT A CONTRAST

The fact remains that Britain and the EU are saying that more competition is needed and taking steps to ensure that the banks which ended up needing state care are broken up. This must have an impact on how other big banks are ultimately treated, even if they did not receive the same level of direct state aid.

The equity buffer that is being required is also remarkable; the banks should end up with core tier one equity of about 10 percent, four times what they were expected to hold before the crisis.

Contrast all of this with the hopefully named Financial Stability Improvement Act of 2009, now wending its way through Congress. As Harvard Business School professor David Moss points out, as currently drafted this bill won't even allow the systemically important banks it is designed to control be named, a real Monty Python-esque touch.

Think about it: we won't even be allowed to know the identities of the firms we are potentially on the hook for. Moss points out that this neatly side-steps the idea of taxing too-whatever-to-fail status as a means of encouraging the behemoths to sell up and avoid the costs. The costs remain with the taxpayer, or potentially with a group of big firms after the fact.

The argument the U.S. administration is making, more or less, is that our complex global economy somehow demands that we have complex huge banks. If we don't allow huge banks to persist, we'll choke off growth. If we think we can go back to mom and pop banking, we are simply kidding ourselves. And anyway, if the U.S. doesn't allow it, foreign banks will just scoop up the cream. With Britain and the European Union taking strong steps, that argument is losing traction. And as for complexity, well I'd have to say that the record of complexity in banking is mixed, to be kind, as far as the deal it gives to taxpayers and consumers of banking services. It would be one thing to argue for huge economies of scale for plain vanilla banking processes like clearing, but it is hard to see why that needs to be combined with derivatives and trading.

It would be nice to think the winds are blowing west across the Atlantic, but this is not usually the case.

(Editing by James Dalgleish)

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

-- Bernd Debusmann is a Reuters columnist. The opinions expressed are his own --

Message to Israelis disgruntled with President Barack Obama's Middle East policies: you've got used to U.S. presidents pouring affection on you. Forget that. Obama is not "a lovey-dovey kind of guy".

That assessment came from an old Middle East hand, former U.S. ambassador to Israel Martin Indyk, in an exchange in the closing minutes of the inaugural national conference of J Street, a new pro-Israel lobby for the liberal majority of American Jews (78 percent voted for Obama) who do not feel represented by traditional pro-Israel advocacy groups, chief of them the American Israel Public Affairs Committee (AIPAC).

The conference, in the words of J Street executive director Jeremy Ben-Ami, marked "the birth of a movement, a coming-out party for those who want to widen the tent and are not stuck in the mindset that because we are pro-Israel, we must be anti- somebody else".

Now director of the foreign policy program at the Brookings Institution, a Washington think tank, Indyk was on a panel entitled "Why Two States? Why Now?" He responded to a question from the audience on the advisability of American presidents getting personally involved in Middle East peace-making. They shouldn't get involved in procedural detail, he said, but for Obama it would be "really important" to go to Israel. Why?

His approval rating, according to Israeli polls, hovers around five percent, a sharp contrast to the 88 percent drawn by George W. Bush, a man thoroughly disliked almost everywhere else. The majority of Israelis think Obama is pro-Palestinian and see his visits to Egypt and Saudi Arabia as evidence that he wants to distance himself from Israel and curry favour with the Arabs. Unless he can dispel that public perception, the Israeli government is unlikely to make concessions.

Without major concessions, both from the Israelis and the Palestinians, there is no chance that Obama will succeed where other American presidents have failed. As far as concessions from Israel are concerned, J Street expects to help the Obama administration convince Congress that questioning Israeli policies is not tantamount to being anti-Israel.

Thanks largely to the enormous influence of AIPAC, which calls itself "America's pro-Israel lobby," criticism of Israel has been rare in Congress; debate of U.S. policies towards the largest recipient of U.S. economic and military aid even rarer. In a controversial 2006 essay, two prominent political scientists, John Mearsheimer and Stephen Walt, concluded that AIPAC had a "stranglehold" on Congress.

It's too early to tell whether this will change, now that there is another lobby that calls itself pro-Israel but does not shy away from questioning Israeli policies. J Street reacted to last December's Israeli attack on Gaza by criticising Hamas for raining rockets on Israeli civilians and Israel for punishing 1.5 million Gazans for the actions of extremists.

OUT OF TOUCH?
That stand drew furious responses both from the political right and the center. Rabbi Eric Yoffie, the president of the Union of Reform Judaism, the largest Jewish religious organisation in America, called J Street's position "morally deficient" and "profoundly out of touch with Jewish sentiment".

On the right, the Gaza statement transformed J Street into an anti-Israeli, pro-Hamas organisation. One right-wing blogger called the group's conference, in the last week of October, an "anti-Israel hate fest".

(J Street, by the way, takes its name from a gap in the Washington street grid. There's an I Street and a K Street, home to most lobby firms in the capital, but no J Street. Missing street, missing voice).

Despite his disagreement with J Street over Gaza, Yoffie attended the conference and took part in a debate over what it means to be pro-Israel. There was agreement on a theme that ran through much of the meeting --  Jewish settlements in the heart of the West Bank make it impossible to establish a Palestinian state. Time is running out for a two-state solution. The alternative is worse.

That would be living together in one country in which Jews would be outnumbered (Palestinian birth rates are higher) and faced with the choice of abandoning democracy by exerting apartheid-style minority rule or giving up the idea of Israel as a homeland for all Jews.

The establishment of a Palestinian state alongside Israel, a cornerstone of the Obama administration's Middle East policy, has been reluctantly embraced by Israeli Prime Minister Benjamin Netanyahu but prospects look very bleak for soon resuming the peace talks that stalled last December.

Still, the mood at J Street was upbeat. One of the reasons: an attendance that convincingly ended arguments whether there was an appetite for a left-wing organisation that shuns the reflexive Israel-right-or-wrong attitude of the established lobbies.

"We planned for 1,000 delegates and when I first mentioned this figure, my staff thought I needed psychiatric treatment," Ben-Ami said. "We got 1,500." The under-estimate made for conference rooms so tightly packed that many delegates had to sit on floors and debates were frequently simulcast to spillover rooms.

A second reason for high spirits: Obama's decision to send his National Security Advisor, James Jones, to make the keynote speech. It broke no new ground but ended with a promise that the Obama administration would be represented at all future J Street conferences.

What better sign that the neophyte group has arrived as a serious participant in the foreign policy debate?

(You can contact the author at Debusmann@reuters.com)

(James Saft is a Reuters columnist. The opinions expressed are his own)

Don't expect the year-long rally in risky assets to be undermined any time soon by the Federal Reserve becoming concerned about inflation.

The old metaphor -- that the Fed's job is to take away the punchbowl just when the party starts getting good -- just doesn't apply in the current circumstances. That's not to say inflation isn't a threat in the medium term -- it is virtually a promise.

But punchbowl thinking dates from a time when firstly the Fed was presumed to have a degree of control over events we now know is not true and secondly to an era when asset prices were the caboose rather than the engine of the economic train.

Even with an economy that is now growing, the risk of a self-reinforcing de-leveraging spiral is enough to ensure that the Fed will not pull the trigger on tightening any time soon.

"Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don't go up, economies don't do well, and when they go down, the economy can be horrid," Pimco bond chief Bill Gross writes in his most recent letter to investors.

Gross argues that leverage inflated the price of assets even as investment in the U.S. real economy flagged. As this happened the U.S. economy became ever more dependent on asset prices and on the sectors, such as finance, which intermediated the borrowing. When the debt and asset bubble is pinched, the whole edifice is threatened, leading to a response like the one we've seen: massive and overwhelming aid trained on markets irrespective of the costs.

Pimco data shows that the prices of assets in the United States over the past 50 years have gone up 1.3 percent a year more than would have been expected given nominal growth in the economy, leading to a putative 100 percent overvaluation if you reason that the assets which depend on the economy for income shouldn't outgrow it.

Unsurprisingly, the real outperformance of asset prices against economic growth has come in the past 30 years, since when debt growth has accelerated.

There are other explanations for why asset prices have outpaced economic growth. For one thing, off-shoring and outsourcing have both suppressed wages in the United States, leading to higher returns on capital, and increased the income that U.S. assets receive from overseas.

It's obvious that the past 25 years have not been kind to labor, and as its share of GDP has declined the share going to asset owners has increased. In that sense increasing asset prices make economic sense, though there seems to be every chance that workers start to recapture some of what they have lost.

GROWTH, DEFAULT OR INFLATION?

Taxes on capital and profits have also fallen in the United States, and, like wages, this is a trend that could easily be reversed in coming years, especially given the huge amount of public debt that will have to be paid back.

This brings us to the other very strong reason the Fed may have for not pulling away the punchbowl -- or water bowl as perhaps we had better see it -- even when the party turns inflationary: public debt.

Since the United States have taken a decision to not allow too much of the private debt to default, it has taken on a corresponding increase in public debt which will have to be repaid ultimately. U.S. debt as a percentage of GDP will exceed 60 percent, a level not seen since World War II.

But unlike the post-war period, Europe doesn't need  rebuilding and though Asia will grow hugely those profits won't flow to U.S. coffers.

So, if growth doesn't allow the United States to repay debts, there are two options, neither pretty; default or inflation.

"No policymaker in the developed world -- and, by now, few in the developing world -- would want to countenance default as an option," writes economist Spyros Andreopoulos of Morgan Stanley in London in a note to clients.

"This leaves inflation."

To be sure, the Federal Reserve takes its mandate to control inflation and its independence seriously, but it is going to find itself in a very difficult squeeze, partly of its own making. The debt is high, growth will be poor and the time for private defaults is past. Threats to its independence will only grow.

Given that, and the dependence of the economy on asset prices, it's not hard to bet that the evil we will be left with is inflation. Whether it is engineered or just kind of happens is less interesting than the reasonably high likelihood that it will happen at all.

For a time at least, that would argue that risky assets, particularly real assets and emerging markets, do well.

Longer term, things get stickier and stickier.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)