Will foreign money leave US markets because of the Presidential mess? A falling dollar would tie the Feds hands from cutting interest rates.
nypostonline.com
VOTE DISPUTE MAY
DRAIN FOREIGN $
FROM BOND MARKET
Friday,November 10,2000
By JOHN CRUDELE
--------------------------------------------------------------------------------
KEEP an eye on foreigners.
That's what American investors should be concerned about in this presidential mess.
The American financial markets have handled the contested election quite well. Share prices have been down moderately since the choice of the next president was thrown into dispute on Tuesday.
In fact, Wall Street has re acted much worse recently to any number of disap pointing corporate profits or world events.
But this calm reaction doesn’t mean that the elec tion snafu is unimportant to investors. In fact, the vote recount that went on yester day in Florida and any sub sequent lawsuits could be a very, very big problem for American markets.
The situation is quite com plicated, but the bottom line is that foreigners invest lots of their money in U.S. mar kets. The bulk of that dough goes into the bond market. And over the years a good deal of America’s more than $5 trillion in national debt has been bought by people who don’t live in our coun try.
In fact, the American bond market, stock market and currency were boosted re cently by tensions in the Mideast. Foreigners, that proved, still viewed America as an attractive, safe haven during troubling times.
That gets us to the election.
News reports from over seas show that foreigners are puzzled by what hap pened on Tuesday.
Puzzled is OK. But if that puzzlement turns into fear and concern — especially concern that the American political system is shaky — then enough investors could pull money out of our markets to cause trouble. James Baker, former secretary of state, nibbled around the edges of the problem yester day when he said, “We can not argue that this is good” for the country. He said that around the world, America is seen as a place where “we resolve our disputes in a peaceful way.”
Baker, who is overseeing the Florida recount for the Republicans, said right out front that he was afraid that the position of the U.S. would be hurt around the world.
Few people in this country expect the disputed election will cause our political sys tem to topple. Change — maybe. Topple — no.
But if the voting crisis con tinues much longer, that sort of fear might start to in crease in countries that don’t have our form of de mocracy, and where inci dents like the one this week would cause governments to topple. While what foreign ers are thinking is impor tant, what they are doing is even more vital.
If the election starts caus ing trouble here, how will it first be manifested in the financial markets?
The dollar will probably be the first to go. So far the value of the U.S. currency remains stable and was even up a little yesterday. But if foreigners start put ting their money into other currencies, Washington won’t easily be able to stop the buck from tumbling.
The bond market will be next.
If foreigners suddenly de velop an aversion to our debt, interest rates will rise. The Federal Reserve and U.S. Treasury have more control over fixed-income markets like bonds and Treasury bills and notes than currency, but any siz able trouble will be hard to fix.
Thankfully, yesterday’s re port from Washington that producer prices rose 0.4 per cent in October for an an nual increase of 3.6 percent was taken as good news by investors.
But Wall Street won’t al ways have that good for tune. Fickle investors could just as easily have pulver ized the markets yesterday by focusing on the fact that year-to-year inflation is up from 3.3 percent.
Stocks did go down yester day, but that appeared to be more over a concern for cor porate profits. And equities aren’t likely to be directly affected by the election quandary.
But if our political trou bles start to hurt bonds and the dollar, the pain will probably roll over into the stock market.
Our political problems come at a very bad time. With inflation rising, the economy slowing, corpora tions reporting profit prob lems and the stock market weak but still too high, what is going on in Florida right now couldn’t come at a worse time. |
