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Strategies & Market Trends : Waiting for the big Kahuna

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To: Lazarus_Long who wrote (10568)	11/28/1997 11:39:00 PM
From: Staff	Read Replies (4) of 94695

>>Yeah, I know, Asia is going to h**l in a handbasket. They're a long way away, and a minor part of US prosperity. << >>Can anyone make the case that a serious collapse (a) has already started? (b) will start soon (in the next month)? (c) will start in the next 6 months?<< Very probuble and yes to all the above. I'll give you a very probable scenario that is in the process of unfolding right now. #1) Well Japan over the past 3 years has accounted for 35% of the governments debt financing.. You know.. Money our government routinely borrows to keep the country afloat. Each week they routinly have purchased on average 35% of our paper. Our governments promise to . pay you back in X years plus interest if you loan us the money to fund our programs today.. #2)The 10 largest banks in the world( net assets) are all in Japan. The largest US bank is #12. #3) The a large portion of the loan portfolio's of these Japanese banks are tied to assets that are Nikkei performance related as per real estate and other such holdings. It is a well-documented fact that a Nikkei below 16,000 will drastically effect the liquidity of these loans.A downgrade of these portfolio's will cause these banks to reclassify the loans thus people like Moodys to downgrade the bank and thus bad things happen as we have seen this week. The governemt to avoid this mess will need to to add liquidity to the system . Lieterally flood the market with it to keep calm and add stability. How is this done? Well... One very talked about and most probuble scenario is that if the Nikkei falls and stays below 16,000 for any length of time, these banks will do something about their loan portfolio's which are not in good shape at this point in time. Rumors begin to fly and people begin to panic.. The governement will likely as stated flood the market with liquidity in order to make funds available to these bank's to calm the market but thats just a band aid fix that will be short lived. bvottom line is they made loans that are bad and they need to reclasify or call the loans. The assets used for colateraol have fallen in value and thus the funds are no longer there to pay them off if called. . They are not going to call them because it might take the bank under by doing so. Its a nasty situation and a real double edged sword. A quick fix is to add liquidity to the system. They can either get it from the private sector ( which is very unpopular) or bring it back from the US by liquidating our paper and bring the money home for the Japaneese to use themselves.. If this scenario unfolds.. it would devastate our market stock markets literally overnight and likely cause our rates to soar. Mr. Rubin at the treasurly sure had this on his mind it would seem. Word had it that last week he personally informed the japaneese ministry that ou government indeed was willing to loan Japan up to 100 billion( yes that's 100 billion gang)if need be to keep them from taking home money they have loaned us by purchasing government bonds and bills. You call that sound fiscal ? Sounds like voodoo economics to me! We will loan them money so they won't ask for the money back that they loaned to us. You forget that our US economy is the largest debtor nation in the world. We borrow more money than anyone. If Japan cuts us off we have a problem. Rates would sky rocket in order to try to pull new blood into the market to replace the Japan void. A rising guaranteed rate would make a guaranteed return on 30 year paper very attractive compared to the 12% historically gained via the stocks peddled on wall street with no guarantee. It boils down to supply and demand. If Japan eliminates the supply of cash available and our debt appetite keep s the demand the same something has to give. The US is living on the edge right now praying that Japan does not panic by dumping there bond portfoloio's and bring that moeny home. It if does. You would have a massive exodus of cash in a matter of days out of stocks and into bonds and bills that would be so unprecedented it would make the 500 point down day look like a kindergarden recess. All just a bunch of dribble? Keep the Nekkei under 16,000 level for a week and tell me you see.

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