To The Thread:
Ike was away for the weekend and will be coming back to Paris later this evening. He dictated the following `views on the market' and asked me to post it on the thread:
Russia has widened the band and declared a moratorium on debt for 90 days. I think this will hurt speculators and help Russia a lot. Yeltsin came back from his holiday, although he vowed not to return, and the lower parliament will be meeting in emergency on Friday. But one has to be very focused and objective on Russia; Russia was behind the iron curtain and not even a part of the global markets. It has a bearing on Germany due to geographical reasons and it has bearing on German banks; markets are forward-looking and that has already been accounted. I have always been a proponent of the fact that new emerging markets cannot be subjected to the kind of speculation which mature markets can take. We have recently seen that boom and bust cycle in ASEA, the major cause has been that when the hot money comes in it is utilized in long-term projects, or, in other words, cost of the capital is lower than the returns of the capital employed.
All these emerging markets are going through the same phenomena, expecting too much out of them in a very short time. That is one reason the present sell-off in these markets is very welcome. I don't get worried with these big sell-offs; they are always exaggerated and represent a `herd' mentality - remember the October 10% drop in Brazilian equities? It was basically overdone and everyone expected Latin America would melt, but that was not the case.
One can keep arguing but the fact of the matter is that we see these extreme movements and, basically, these movements are failure of high expectations of returns. Emerging markets' meltdowns are fully priced in the market and the kind of productivity gains possible in these markets are well in excess of the total market capitalization.
Russian Rouble problem is associated with Nikkei, with China, and has its impact on Hong Kong, but, all said and done, the bottomline is that the dollar is bid. US dollar has gained 3 pits against Mark in trading at 1.8050 and 30-year bond yield has dropped to 5.51, so the US dollar and dollar assets are a refuge when there are problems world over. Naturally, the "Idea" thread is not read by the whole market and has limited impact, but I'd certainly assume that these are not the kind of conditions in which our US equity markets may melt down. These are not the kind of macro-economic conditions which are bad for the equity market like failing of banks, or for example, failing of institutions, non-proprietary production lines (making a car like Honda is not like making Windows 98 or routers), and they all depend on US ability to import from them.
Recent trading trends are indicative of higher deficits in US as a result of lower exports and higher imports; some used to think that such a scenario would lead to massive unemployment, but its a kind of blessing in disguise. NAFTA and all these global trade arrangements have proved that trade is a positive-sum game and not a zero-sum game. Under the present circumstances when unemployment is very low at 4.5% and all leading indicators point towards a strong economy, and even for my big guru Prof. Krugman and Alan Greenspan, the issue is inflation and not deflation. These deflationary fears in global markets only import price stability so, overall, the markets should not move in a trajectory of a rocket and this is the best thing bulls can expect, a gradual sell-down of the market, not the crash of 1987.
Don't forget, since October, ASEA is selling but look at the drying up of selling. Watch out for that! Its a very dried-up selling; even if China sold heavily last night, China has very low external indebtedness, has no capital account convertibility and, after Japan, has the largest reserves of nearly $140 billion, has low inflation, and the fears are that China will devalue and there will be a second round of devaluation, but in my opinion, China has more of political reasons not to devalue and since no-one can speculate against yuan, they will brave through this storm through domestic stimulus and trying to increase their exports. There is no synergy between exports of China and exports of Japan, but I will talk about this on a later day.
Today, I would expect the market to be very volatile. I wish I could say that there will be a 500 point drop in Dow; looking at the charts now I can always follow the market and talk about huge bearish approach, but this is not what my indicators tell me. Consistency is one thing which my model maintains and it is only the macro-economic conditions of the US - if they start changing and bonds start telling me something else, I will have a different view. With Treasury now settling at 5.51, equity markets and dollar assets can only be helped. Even if there is a huge fluctuation, I will be long at supports like 1030, or even lower at 1018 (if it ever comes to that which I doubt). This kind of extreme pessimism can result into wild fluctuations but these are unsustainable. |
