Up is down. Left is right. Good is evil. Risky is safe.

That’s what we take from the financial world this week.

One commentator says the United States is entering a glorious new period of growth and stability, thanks to the entry of Asia into the world economy.

The Dow must see it coming; it’s hitting one new record after another. Not since just before the Great Crash of ‘29 has the Dow behaved in such a manner. One increase follows the next with no correction. What could be safer than buying an index that almost always goes up?

Investors may think they are getting rich, but as we noticed yesterday...even if Abby Joseph Cohen is right and the Dow goes to 13,500 this year, it will leave investors with a real gain of only about 2%.

An investor has to weigh his anticipated reward against his estimation of the risk involved. Anyone who stops to think about it would have to conclude that a gain of 2% ain’t worth the risk. But apparently few people do think at all. They feel they are being conservative by buying U.S. stocks; after all, if they really wanted to take some risks and make some money they’d be in Chinese stocks (up 75% so far this year).

The New York Fed warned this week that hedge funds pose the biggest threat to investors since the LTCM crisis of ‘98. Back then the Fed organized a $3.6 billion bailout. But that kind of money is peanuts today. Another $60 billion was raised by the funds last year alone. Today, they are a $1.6 trillion industry; and they are much more leveraged than they were 10 years ago. Practically every one of them is walking around with dynamite taped to its belt.

What makes the situation especially dangerous is that they all tend to show up in the same places at the same time. “Returns are increasingly correlated,” says the Fed, which is the Fed’s way of saying they are all doing the same thing. So, when one blows up...they might all blow up. And when they all blow up...it’s likely to send a cloud of smoke and debris over the entire world’s financial markets.

But right is left, now. Up is down. In the minds of most investors, hedge funds are what help to make the economy so buoyant...so robust...so safe. They’re throwing money this way and that. And money is what makes the world go ‘round, no?

It’s a market for idiots, we conclude. If you are foolish enough, you can make a lot. But if you have any sense at all, you’ll be content with comfy poverty.

Only a moron could invest in China’s go-go market today. Only a dumbbell would put money in most of today’s hedge funds. Only a mental defective would lend to most of these high-profile private equity deals.

Which is why the morons, dumbbells and mental defectives are making so much money!

And we know what you’re thinking, dear reader - that we’re just jealous. Not at all. We’re just flabbergasted and amazed...and amused. There is something thrilling about the whole spectacle...(more below).

Meanwhile, imagine all those investors who bought shares in General Motors
(NYSE:GM) and held onto them for years. What could be safer? What could be surer? GM made cars and trucks. It was the world’s largest and most successful automaker. And for most of the 20th century, it had a long lead over its competitors. Grandparents gave their grandchildren GM stock, with this advice: “Hold on to this. Don’t ever sell it. Stock in GM is stock in America. It can only go up.”

But poor ol’ GM couldn’t seem to do anything right. It couldn’t compete with the Asians - or the Germans - when it came to making cars. Too many ‘legacy’ costs for retired employees; too many legal, environmental, and labor regulations; too many tired factories and worn-out machines. So, GM became a big moneylender, first advancing money to finance cars, later houses.

In the first quarter of ‘06, it made a profit of $602 million - thanks to its GMAC finance unit. But that business too has fallen on hard times. GMAC lost $305 million in the first quarter of ‘07...and the poor automaker’s profits fell 90% - to $62 million.

And now poor ol’ GM is yesterday’s news. It was go-go in the ‘20s, ‘30s, ‘40s, ‘50s, ‘60s, and ‘70s. And now it’s almost gone.

Now the go-go moneymakers are hedge funds, private equity, Chinese stocks...even the Dow!

In an upside down world, the riskiest deals are said to be the safest.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.