Terrence, Back on 29th I said I had some info by a fellow named Armstrong, Princeton Economics. Well, I found a later post, here it is:
c October 31st, 1997
Princeton Economic Institute
Click Here for Charts pei-intl.com
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The sharp correction which has shaken the world stock markets is not over just yet. We see
that a minor reaction rally is possible into Monday/Tuesday of next week ( Nov 3/4 ) .
Nevertheless, some serious damage has been done. Major monthly sell signal have been
accomplished on the DAX in Germany, Nikkei in Japan and CAC40 in France while
resistance is now building at the 51380 level in the FT100 Futures, 13380 in Hang Seng and
96400 in S&P500 Futures. Overall, our computer is warning that the Crash of 1997 will start
to effect Japan and Europe with the US suffering the least on a percentage basis.
The root cause of this global increase in volatility is far more serious than most care to
entertain. The global nature of this sharp decline is similar to that of 1987 when capital
became quite concerned about the decline in the dollar at that time. In the case of 1997, the
concern about the value of currencies is once again setting off a vortex of volatility and serious
investment capital becomes comes about the future. Hong Kong's decline is largely due to the
fact that the currency has become much over-valued. Now that same concern is taking place
with respect to South America.
At the heart of this turmoil lies the ultimate question of value - the Euro and the fate of Europe
( see Understanding the Euro ) . Asia is merely the first victim since their currencies have been
linked to the dollar which has been driven higher by a flight of capital from Europe. One week
prior to the Crash of '97 the German government 30-year bond auction was
UNDERSCRIBED for the first time in modern history! This concern about Europe is being
relayed to us by all our clients worldwide and the fact that Germany was unable to sell all its
bonds for the first time in modern history is a reflection of that global concern.
With the convergence of Europe into EMU next year and politician's failure to understand that
capital needs to know one very basic piece of information - the value of money itself, we can
only expect volatility to rise in 1998. The convergence of the European currencies into
European Monetary Union next year is an option without a strike price when it comes to the
value question of the Euro. Will the Euro be a strong currency or a weak one? This will have a
very major impact upon capital globally as we have been witnessing in Hong Kong and Brazil
not to mention South East Asia.
Long-term investment capital is now being forced into acting like short-term speculators. This
EMU event is not being blamed by the media at this time. It is not even understood by the
politicans worldwide. Nevertheless, as we enter the new year, volatility will rise even further
and at some point the world will comes to realize that the turmoil is radiating outwards from
Europe itself. The strong advance in the dollar is being created by the fact that it is the only
currency that offers some sense of secure value over the next few years. The budget deficit of
the US has fallen below that of most countries and will most likely reach a surplus by the 2nd
quarter of 1998 allowing Greenspan to being retiring debt for the first time since 1837.
The stock markets are getting caught up in this currency crossfire. Stock markets are
overvalued due to their sharp advance between April-July and this sudden rise is
unsustainable. All such market rallies must make a normal correction, which is typically
10-15% from the high and on occasion as much as 23%-33% before building a base of
support.
A TEMPORARY LOW
The low established on Tuesday 28th of October should present ONLY a temporary low.
There is a potential to rally into the week of November 3rd, however, our models are warning
that a high next week could be followed by another disasterous decline thereafter moving into
year-end.
US GOVERNMENT MAKING PANIC WORSE
The circuit breakers system imposed in 1987 was politics at its worst. When the '87 Crash
came, Washington felt that it had to be seen as doing something to prevent such a collapse
from happening again. They therefore installed circuit breakers without taking into
consideration long-term asset inflation. 500 points was big back in 1987 as a percentage
movement. Today, it is a few percent. Forcing the NY stock exchange to close was the worst
possible effect for any free market. Washington has successfully transformed the biggest and
most liquid market in the world into a commodity or third world market where price
movement is often rigged for politicial purposes. The fact that the the NY stock exchange was
forced to close early was news and journalists around the world told of the shocking event.
TV camped out in front of the White House waiting for any comment. ABC news asked "Is
there anything the President can do?" "Yes" replied their journalist while standing in front of
the White House. "The President could close the stock exchange for 90 days." Despite
following this statement up with there is no intent of doing so at this time places Clinton in the
same classification as the crazy politicians in South East Asia calling for the ban on currency
markets globally.
The circuit breakers are causing chaos and confusion. As with all things politicial, today's
solution becomes tomorrow's problem.
This correction in the share markets is likely to result in major all-time highs for Europe, while
the US, Australia and South East Asia will eventually make new highs once again between
1998-2003. For now, the near-term low will be next week. Look for a recovery of up to
50% of the decline into January and a renewed decline, albeit moderate, into June/July time
period.
ULTIMATE IRONY
If enough US investors panic and take profits, they will then pay their taxes early next year.
The US will hit a balance budget and most likely a surplus for the first time in a long time. This
will shift the powers of international capital and we will see the dollar soar to new record highs
next year taking the market back up along with it. The US will be the ONLY western nation
who's debt could be retired.
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prepared by Martin A. Armstrong
October 31st, 1997 |
