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Strategies & Market Trends : A.I.M Users Group Bulletin Board

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To: Bruce A. Bowman who wrote (5417)	8/25/1998 4:10:00 PM
From: JZGalt	Read Replies (1) of 18928

Bruce, I don't want to throw fuel on the fire, but you could see a significant meltdown in the Latin American economies if the devaluation "bug" spreads. These economies are much more sensitive to commodity based exports. As you might have noticed, these commodities (oil principly, but copper and other minerals) are in bear markets. Why are they in bear markets? They are the only means of getting hard currency these countries have, so as their dollar denominated prices fall, they export more and further compound their problems. Venezuela has in fact devalued except in the press releases, simply be expanding the trading bands on the currency. Mexico's currency is also moving down sharply as well as the Brazilian real. Why is this important to us in the US? Latin America is 21% of our export market. The last time they had a currency crisis triggered by the house of cards in Mexico (1995), we had Asia to export to. If you combine the problems in Asia with those in Latin America, you get about 1/3 of US exports. Couple that with high real interest rates and you get a situation where you could see any hopes of an economic expansion in the US fade significantly. Perhaps we could create a modify the old term stagflation to mean stagnant economic activity coupled with deflation. In any case, the US has problems with the solution of lowering interest rates in the near term which would help the worldwide situation because of the Japanese resistance to change. Japan still is going to apply the stimulus packages that have failed for the last 5 years to revive their economy when they should be printing money and reliquifying their banking system. The continued tight money situation in Japan, the tight money situation in Europe in the EMU countries and the high real interest rate environment in the US all point toward slower economic growth. Japan is the key, but is unwilling to act.

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