A Merrill Lynch chart that I cannot reproduce because it's a PDF shows us that the price-earnings ratio of emerging stock markets has fallen so far that it is now equal to that of developed markets. Translation: You're now paying as much for a dollar of earnings in countries such as Germany and the United States as you are in countries such as Bulgaria and Indonesia. Great, you say. The economies of Bulgaria and Indonesia are growing faster than those in Germany & the USA, so stocks there will keep going up! However: Bulgaria and Indonesia do not have the same securities laws as Germany & USA. Bulgaria and Indonesia do not have the same property rights, court systems, accounting standards, political systems etc.

Merrill Lynch, however, is not especially cautious about this. Emerging market stocks, it says "have reached valuation parity with developed market equities but can certainly keep going due to superior earnings growth." And: "We are bullish on EM equities for 2008."

But there was a reason why, as recently as 2002, a dollar's worth of emerging-market earnings cost more than twice what it took to buy a dollar's worth of developed-country earnings. The risk was greater. Sometimes emerging countries go through coups d'etat. Sometimes corporate assets in emerging countries get nationalized. Sometimes investors in emerging countries get ripped off by other investors, and the securities cops leave something to be desired. Sometimes emerging stock markets crater for a decade or more. That's what they did after 1996 -- the last time P/E ratios in developed markets and emerging markets were the same. I agree that emerging market stocks will probably do well next year. Huge foreign reserves held by developing nations will prevent the kind of currency collapses we saw a decade ago. But eventually something will cause them to reverse in a huge, painful way. Maybe inflation in China. Maybe a U.S. recession. Maybe a war. And boy, emerging stocks are already really expensive, based on historical valuations.