Stock markets in London, Hong Kong, Germany, USA, Japan
all down. As we move towards the end of the year, either
traders are getting out of the market so that they can go
enjoy the holidays without holding onto shares and worrying
about what will happen, or there are genuine concerns that
the problems in Asia are going to continue moving along.
Will take time for the structual problems in Asia to be sorted
out, and ultimately those problems will have a very negative
effect on the U.S. stock market and dollar. So much money is
being pumped into those countries, and as their currencies
fall, it makes it easier for the Asian countries to export goods
to the US and continues to hurt our trade deficit, which has
been drawing down enormously on the foreign exchange reserves of
the US. Makes it harder to export our goods, and will eventually
make it difficult for the dollar to remain strong. The US gov't
has apparently reduced its federal deficit. Looking closer, that
picture isn't quite true because what has happened is that the gov't has increased spending. Being at a high point in our economic cycle,
increased tax revenues have reduced the deficit. If we experience
a downturn in our economy and tax revenues decline, then the federal
deficit will rise. Between that and the trade deficit, the dollar
could get hammered. Some problems in Asia present some interesting
currency situations. The Yen has been falling, but the Korean Won
has been beaten down over 50% in the last 9 months. Japan has reduced
interest rates in an attempt to stimulate their economy. You can
borrow the Yen at around 1.625%. In Korea, because of their crisis,
interest rates have skyrocketed. Korean corporate bonds yield over 20%. Korean gov't bonds have a 5% spread over the US Dollar.
Both the Yen and Won are likely to remain fairly closely linked.
Both countries need that because if the Won falls too far, it will
make it difficult for Japan to compete against the Koreans. To
strengthen the Won, Korea has eliminated all foreign exchange controls, a very positive move because traders can get in
and out of the Won freely. A very agressive investment is to borrow
the Yen and invest it in either short term Korean deposits or the Won.
To reduce risk, invest in short term Hong Kong dollar deposits, where the 3 mo. interbank rate is over 11%.
Borrow below 2% and earn between 11-20% in currencies that are likely
to remain reasonally linked, and possibly see some foreign exchange
profits if the Yen remains under pressure and some of the oversold
S.E. Asian currencies start to correct. Very risky indeed.
We have been riding on an economic crest since 1985. The stock
market rise has created an enormous affluence and feel good factor.
But at the same time the Eurpoean and Japanese economies have not developed along their economic curve. Japan is no longer the
economic miracle. They have been in a recession/depression for
years and have been unable to pull themselves out of it. A great
deal of structual change has to take place throughout the world as
this global economy unfolds. Expect plenty of turmoil in 1998.
The US has been financing much by buying inexpensive goods from
Europe and Asia, making inflation appear to be far less than what
it might be because we are importing inexpensive goods from nations
whose currencies have fallen. We can't finance global growth forever.
President elect Kim Dae-jung of Korea has spent over 7 years in
jail or under house arrest, and 4 years in exile. He claims to have
been the target of assasination attempts 4 times and have been
beaten several times. Before the election he said that he would
attempt to re negotiate the IMF bailout. Will he yield to the IMF
economic demands of higher taxes, gov't spending cuts resulting in a
huge increase of unemployment? Or is this now his turn to get even? |
