Joe Battipaglia, Chairman of Investment Policy 1/12/98
We have entered what I believe is the last part of the second round of panic in the global financial markets. The issues continue to be both a currency and banking crisis primarily in the Asian region but whose effects have been felt globally. There have been some positive and correct decisions made over the last few weeks that will have positive implications over the next several months. First, the fact that the Chinese have decided to support the Hong Kong peg is a positive sign. The second proper decision was to allow Peregrine Ltd., one of their largest banks, to fail. Peregrine was formed during the "easy money" of the 1990's and much of their lending was to Indonesia. Most of these loans will more than likely not be repaid.
In Korea, they have decided to pursue an IMF bailout plan ranging from fiscal spending to negotiations concerning the labor movement. This has been viewed as a significant positive and has rallied the Korean financial markets of late. This is important because Korea is one of the major economies in the region. The Japanese, who are the largest lenders in the region, are directly engaged in the bailout efforts and have capital availability. Ironically, it seems that this would be a precipitous time for the Japanese to sell some of their U.S. treasuries and re-deploy the capital in the Asian region. I do not believe a sell-off of U.S. treasuries by the Japanese will effect U.S. interest rates significantly. This is due to the fact there is a scarcity of treasuries around and the U.S. government has not issued much new debt recently. If this should occur, it should not be viewed as a negative but more so as a net positive since the capital would be used to help the bailout plan in the Asian region.
In my opinion, interest rates in the U.S. are destined to move lower. I believe the Fed will cut the discount rate by 1/2 point in the first quarter. This action would help with the bailout in Asia and take some of the pressure off the dollar, which continues to rise against all currencies. Also, the Fed has accomplished everything they have set out to do so there is no reason to have a 5 1/2% discount rate nor for the U.S to have a flat yield curve.
In the end, I see a long running era of price stability for the developed world. This is a major net positive of all the restructuring of the 1980's, the economic expansion of the 90's, and now the restructuring of the financial order. U.S. companies will gain global market share against its competition, particularly Japan. Europe is in the midst of a decent recovery that has been largely ignored due to the events in Asia. My suspicion is that we are in the midst of a sell-off. Last year, we had 3 selloffs and this is the first of several for 1998. However, I continue to believe that we are on track for another good year for financial assets. The U.S. economy will turn in a strong performance and lower interest rates will benefit the financial markets. We believe we are poised properly with our investments in technology, health care, transportation, and real estate. We are not changing our expectations and will ride out this tumultuous time that we believe will rebound faster than most anticipate.
This report is only a summary of research reports published
by Gruntal & Co.,
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Thoughts, comments, observations---
CT |
