To all:
"Where will that lead us?"
All that I see is that the SE Asian governments were able to borrow at a lower rate, say 6%, than the rate they have to now pay for their new borrowings. At a higher rate, say 8 to 9%, the WB/IMF will be happy to lend. Given the demand for bonds, a lot of private investors would also be happy to lend at such higher rates, directly, if these world financial institutions had a mechanism; they do not.
Thus, when you buy US Treasuries at 6%, the US Treasury takes the money and lends to World Bank at 7.5% and the WB lends to Korea at 8 to 9%. This is an excellent transfer of wealth from SE Asian countries to the US. But the US will now help create more jobs in SE Asia (because of the same skills and lower wages) who will pay more taxes to their governments to borrow at higher rates. This is why the SE Asian stock markets are sinking.
This transition to a new equilibrium will also imply that there will be more saving and less consumption in SE Asia (the lost wealth must be created again) and so the US companies will lose their profits, implying a down-turn in the US stock prices despite a stability in the US interest rate.
There are two main parameters for stock prices: corporate profits and interest rate. Take today's event. Despite AMAT beating the analysts' estimates, e.g., the Wall Street is seeing a decline in the future profit potential for all these companies doing business in Asia. This perception will put a downward pressure on US stock prices.
Recall that the gradual pull-back from 8200 to 7800 was not due to a realization that corporate profits would decline. The sudden fall in DJIA prices from 7800 to 7100 was, hwoever, due to a realization of this problem. This realization has not yet been fully assimilated because corporate profits have not yet down-trended. I now feel that the bounce from 7100 to 7800 was partly a DCB and partly due to optimism that the finances of Asian countries will be OK.
It seems reasonable to suppose that no one can revive the consumption pattern (which is bound to decline) in Asia due to the loss related to lower stock prices. A reduction in consumption in these countries will obviously lower US corporate profits. Even consumption in the US will dwindle due to a loss of wealth related to stock prices. This reduced consumption is good enough to pull down the stock market to 7000 or so amid volatility, IMHO.
Sankar |
