In his recent testimony before Congress, Ben Bernanke trimmed his growth forecast for the US economy and suggested that the recent good performance of core inflation did not mean that he should let his guard down. As for the problems in the sub-prime mortgage market, he acknowledged that conditions in the sector had deteriorated considerably.

Meanwhile, Bear Stearns announced that investors in one of its two hedge funds exposed to the sub-prime market had lost it all, while those with investments in the second fund would get very little back. However, most of the investors were institutions that are big enough to have figured out the risks of getting into this type of vehicle. And, of course, there is a silver lining in every cloud.

Some hedge funds had placed bets that the sub-prime market would fall apart and have made tremendous gains in recent months.

Global growth continues to be strong. We got confirmation of that from the world's third largest economy, China. There are some quibbles about how to do the rankings, but on the basis of purchasing power parity, the European Union is the biggest, followed by the US and then China.

One reason why the EU has grown so big is the increase in Union membership, not an impressive growth rate. China is, of course, the growth champ among the big boys. It added to an already remarkable record by growing at the fastest pace in twelve years in the second quarter.

Investment spending on factories and real estate has been picking up. And, evidently, attempts by the government to cool things down by increasing interest rates and imposing restrictions on bank lending hasn't worked, thus far.

One problem is that the currency is not allowed to appreciate much beyond narrow limits. And, in consequence, it is difficult to conduct a tight monetary policy.

They hiked interest rates again, last week, with the benchmark one-year lending rate rising by 27 basis points to the highest level in eight years.

It is clear from their actions that the authorities are keen to maintain a high growth rate for the economy while, simultaneously, aiming to curb any tendency towards an unsustainable speed. It is a careful balancing act that has worked so far.

A rapidly expanding economy allows for the absorption of excess workers from the old economy and rural regions into the new economy.

Seen from the upper echelons of power, this is a desirable outcome from both a political and an economic point of view.

The pace of growth has renewed talk about the economy overheating, but there is not much evidence of generalised bottlenecks occurring.

In addition, the high rate of headline inflation is largely driven by rising food prices for certain categories of foods. This does not suggest that China is facing the threat of a serious inflationary cycle taking hold

The stock market in the US has been cheered by a number of good earnings reports. At the same time, deal-making is far from dead, which should act as a source of support for equities. The main threat to the market comes from possible deterioration in credit market conditions, or a cloudier inflation outlook.

As for the Treasury bond market, it is being buffeted by a number of cross winds. On the one hand, there is safe-haven buying every time there is a scare about credit markets.

On the other hand, there is uncertainty about growth and inflation. In addition, there are a few concerns about the future strength of demand for Treasuries among foreign buyers.

On the geopolitical front there has been further cold-war-style sparring between Britain and Russia. A tit-for-tat expulsion of diplomats has already taken place regarding the British request for the extradition of a suspected murderer of an exiled Russian dissident in London, last year

Gordon Brown is keen to show that he is not soft and Putin isn't backing down either. But as we said before, the contention that a new cold war is developing isn't supported by the facts.

Western companies are eager to do business in Russia, even though some of them have suffered from rough handling by the Putin regime.

When Blair tried to warn corporations about doing business deals in Russia, he was met with considerable lack of sympathy from the corporate crowd.

But that was when Blair was still prime minister. Now he is the Middle East envoy for the Quartet (US, Russia, the EU and the UN). It is a role for which - as the former Conservative foreign secretary, Douglas Hurd, put it - he is uniquely unqualified. But, then, being George Bush's faithful poodle has its rewards.

Speaking of poodles, the Japanese Prime Minister Shinzo Abe also comes to mind. He is another one of Bush's favourites. In fact, many of Japan's recent premiers have been of a docile disposition. Japan has some of the characteristics of a client state and has been accorded a major role in American plans to contain China.

It is no surprise that the Chinese have worked hard to exclude Japan from any possible future membership of the UN Security Council as a permanent member.

The Bank of Japan's ultra-loose monetary policy is expected to be tightened a bit in August, but that would still leave it far from being normalised.

Arguments advanced in favour of maintaining easy monetary conditions aren't convincing. In the longer run, it could blunt the sharp edge of competitiveness in the corporate world. A cheap yen does not force firms to try harder to improve their efficiency.

As for households, low interest rates induce them to look for higher yield abroad, without hedging most of their currency risk.

The environment has been favourable for taking such risks but this may not last forever.

A major problem is that the longer the inducements exist, the more likely it is that households will ignore the risks. But, one day, a big storm may arrive unexpectedly and households will take a hit that will affect their spending and therefore the domestic economy.

Currently, the yen remains weak versus the euro and the greenback, and Mrs Watanabe continues to invest abroad.

The reference to Mrs Watanabe is common in the literature because in Japan the missus has a major role in handling household finances. She became famous during the bubble years of the 1980's when Nomura salesmen went from door to door flogging stocks to the ladies.

Unfortunately, Mrs Watanabe did not have good market-timing skills and when the bubble burst she was clobbered. The losses were so bad that, to this day, Japanese households are wary about buying stocks.

The carry-trade bubble isn't as bad as the 1980's phenomenon but that doesn't mean there aren't risks of a possible correction. A shock to the system could cause shivers of risk aversion and a sharply rebounding yen.

It hasn't been a good idea to bet against Mrs Watanabe, with her mounds of cash and hunger for foreign yield. But there are a number of risk factors out there that could be triggered and turn the tables on the lady and her streak of good luck.Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. For more information on LOM Asset Management please visit www.lomam.com