There was a pretty gloomy market story on yesterday's Financial Post about a potential "Black Monday" scenario.  Well known and respected Morgan Stanley economist Stephen Roach identified a scary parallel between the official foreign purchases (by central banks and monetary authorities abroad) of U.S. securities in 1987 and right now.  From January to September 1987, official purchases reached 47% of total net foreign acquisitions (about four times the 1986 share of 13%).  Fast forwarding to today, we are currently experiencing a dramatic increase of that ratio to 35% (from September 2003 to June 2004), which represents double the long-term average and more than four times the 2000-2002 average of 7.6%.  The reasoning behind this buying (particularly by Asian investors) is that it keeps the U.S. dollar strong, while keeping goods from other countries competitively priced.

The implication of these statistics being that if this foreign buying stops,  the consequences can be quite calamitous.  The halting of foreign US stock investment can be a distinct possibility, given that people living abroad might reasess their return expectations of U.S. securities bearing in mind the very slow pace of market growth and the currency exchange rate risk. 

What could be the implications of such a correction to VCs, startups and the high tech industry at large?  That would depend on the amount of time the recovery would take, and other external macroeconomic factors, including oil prices.  Higher oil cause inflationary pressures, which can in turn make the Fed rise interest rates, a measure that potentially can crowd out investment.  A double shock caused by rising oil prices and the above imbalance could cause a prolonged market slump, which can potentially dry up investment for a while.  But this is certainly a thought-provoking paper that entails a lot of "what-if" scenarios.