These morons make Greenspan sound like Abby Cohen:
September 8, 1999
Dow Jones Newswires
IMF Says U.S. Stock Prices Vulnerable To "Shocks"
By Damian Milverton
WASHINGTON -- The growing risk that the U.S. stock market bubble will burst represents the single biggest risk to the world's financial markets in the months ahead, according to a new report by the International Monetary Fund issued Wednesday.
According to the IMF's latest International Capital Markets report, three key factors that have underpinned the tripling in U.S. stock values since 1995 are now signaling a possible reversal of fortunes.
Firstly, official interest rates have bottomed out and a cycle of U.S. monetary policy tightenings appears to have begun, the IMF reported. Secondly, and as a result, corporate earnings are likely to come under pressure going forward and, lastly, mutual fund investment flows have slowed in 1999 from the deluge seen last year.
"The weakening of these supporting factors implies an increased vulnerability of U.S. equity prices to shocks, including a sharper-than-expected tightening of monetary policy, weaken-than-expected growth in earnings and a worsening of investor sentiment," the IMF said in the report.
As a result, the much-anticipated cooling of U.S. stock prices could force up world interest rates, strangling promising signs of growth among other industrialized nations and bruised emerging markets.
"It is difficult to gauge how far such an adjustment might go," the IMF said of such a global shudder.
The IMF also repeated earlier concerns that the dollar is likely to weaken in the medium term, with the only doubt being how severe such an adjustment might be.
Signs of resurgent growth in Europe and Japan's persistent and enormous trade surplus with the U.S., the Fund argues, point to a strengthening of their respective currencies and a natural decline in the dollar.
If the euro, the yen and the dollar all adjust to fundamentals gradually, there should be no shocks to the global economy, the Fund said. However, should technical glitches in the world financial system accelerate or magnify this "process of realignment," there could be greater volatility.
The chances of volatility in equity, debt and currency markets have increased with recent developments, the Fund said. Faced with a decline in their return on equity in 1998, U.S. banks have taken on greater risk in the pursuit of better profits, it observed.
Japan's banks remain anemic and face "years of low profitability" as they cope with write-downs and low credit demand.
"Banks in these countries may be vulnerable to shocks, including shocks to capital markets, a deterioration of credit quality stemming from weaker-than-expected economic activity and...renewed turbulence in emerging markets," the IMF said.
Also, little has been done so far to address the risks posed by so-called highly-leveraged institutions - particularly hedge funds. The Fund added few understand what might happen to the global financial system if a downturn in U.S. markets and the economy spawned not one, but several, Long-Term Capital Managements.
Adding a by-now familiar touch of uncertainty to the global market outlook is the threat posed by the Year 2000 computer glitch, which has been addressed by some - but by no means all - of the world's financial institutions, the Fund said.
Gary Schinasi, a division chief within the IMF research department, told reporters that there are already signs of a "liquidity concern" in global debt markets. Schinasi said benchmark rates have climbed around 50 basis points in recent weeks on concerns that debt issuers may rush to tap the market before the end of the year, as insurance against Y2K-related problems at the beginning to 2000.
Schinasi concluded that global equity price valuations, the chances of currency instability and the Y2K dilemma are three most prominent risks to international markets.
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