Peter:
Quite frankly I am not sure that the US financial markets have recognized yet the effect of credit crunch that will ensue the current upheavals -- the Asian flu. When Asian authorities will force banks to apply stricter lending standards (e.g., reduce debt:equity from 3:1 to that in the US of 1:1), the borrowing companies in Asia will be squeezed vary hard, dampening the demand for US exports considerably. US financial markets have recognized a lower demand from the Asians due to their financial problems. But, no one, including Asians, has yet experienced the wrenching blow that the credit crunch will give the business community in Asia and its effects in US stock markets.
The serious effect of credit crunch in the USA was not felt until after the facts (even in the Board room of the Board of Gov of Fed Res System where I had participated through my research) that took US into a deep recession and AG was accused of not anticipating it. This started in the wake of the S&L crises and everyone felt that it was a localized prblem since the economy was still growing prior to 1989. US had to introduce stricter bank capital standards, forcing banks to cut loan supply, hold safer assets, etc. In fact, at the Fed, linking the recession to credit crunch, openly, was considered a sin, although privately everyone knew what it was after the enconmy had gone two years into recession.
In Asia, many companies borrowed heavily to invest (buy shares) in high-tech companies like YHOO. Asian banks will now be forced to make "margin calls" as per new regulatory standards to improve the banking system and to lend less to corporations. Imagine that companies will be forced to reduce leverage from 3:1 to 1:1. The effect of this will have to materialize in Asian companies for the US stock markets to respond. Most Asian companies will be forced to liquidate their US holdings. This has not been factored into US stock prices because such liquidation has not taken place. Markets have simply responded to reduced corporate earnings, not the selling pressure due to margin calls on Asian companies, IMHO.
Sankar
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