CALM DOWN, THE WORST IS YET TO COME!
In terms of percentage declines, the 512.61 points Mr. Dow Jones gave up
on Monday only managed to secure a 25th place finish in the history of market
crashes. The 508-point drop of October 19th, 1987 still rates #1 with a 22.61%
drop compared to the measly 6.37% the Dow lost Monday.
Those half-wits comparing 1998 with 1929 fail to account for the percentage
drops the Dow Jones suffered on October 28th and 29th of that infamous year:
respectively 12.82% and 11.73%. Indeed, four of the worst 20 percentage-decline
trading days occurred within a 15-day period: November 6th, 1929 and November
11th, 1929 brought percentage losses of 9.92% and 6.82%, respectively.
A great deal was made, Monday evening, about August being the worst trading
month in the history of the U.S. financial markets. Poppycock! Percentage-wise,
more ground was lost on October 28th and 29th (1929) than during the entire
month of August 1998 by a full 23.36%! More ground was lost in one day, October
19th, 1987 than in August 1998, in percentage terms, by 13.6%.
A CNN Interactive Quick Vote, currently being conducted, asked: "After Monday's
500-point drop in the Dow, are you ready to bail out of your investments?" The
breakdown of more than 36,000 voters was as follows:
13% - I'm already out
5% - I'm selling now
7% - I'll wait a bit more
74% - I'm hanging on
Are you not comforted that more than 27,000 of those investors are still hanging
on? That's an overwhelming percentage and we believe it fairly gauges the
sentiment across the American landscape. This impromptu poll also measures the
level of complacency found in the typical US investor. Perhaps you are one of
those.
The problem is not that Americans have lost faith in their economy. Most
haven't. The fault lies with the overseas investors who now believe that an
embattled US President might have had something to do in creating a new era of
US prosperity. Moreso, this tragedy evolves as they continue believing that an
impeachment, or resignation, of the Arkansas Adulterer would wreck the now
stable US economy. In actuality, the Republican-led Congress, a strong Federal
Reserve board and a soon-to-be-legendary US Treasury Secretary were more apt to
draw kudos for this unprecedented affluence. But, we'll get to those nasty
foreigners shortly.
It was the strong US dollar, championed by Richard Rubin, which attracted flight
capital from Asia, Europe and Latin America. That prompted the buying spree
between February and April 1998. Low interest rates brought lower mortgage
rates, which led to a refinancing boom. The new Roth IRA brought in
unprecedented billions into the Dow Jones and NASDAQ, and excitement begat
greater enthusiasm for the fast buck to be made in the irrationally exuberant
financial markets.
As we noted in earlier issues of DR. DOOM, it was Japan's decisive weak-yen
policy that wrecked the Asian economies. After the hidden collapse of, and the
rampant insolvency that swept through, the rest of the Pacific Rim, the
contagion spread to its most vulnerable contact points: Russia, Hong Kong and
Latin America. Unnecessary victims were those resource-heavy nations, Australia
and Canada, that suffered as global commodity prices kept discovering a new
floor each week.
Urgencies by US banks to increase bottom-line profits, by taking shortcuts, such
as through derivatives trading, led to tumultuous speculation in Asian and
European currencies. You might say Citicorp, BankAmerica and others helped speed
up the collapse of Asia, as they bankrolled major currency speculators. These
powerful and wealthy syndicates placed bets: "Let's see how fast we can bring
down the British Pound or cause the HK dollar to unpeg from the US dollar." The
very rich got richer, at the expense of a few billion indigents.
When a nation, such as Japan spends $20 billion in two or three days to defend
its yen against hedge fund operators, you get the idea of how vast are the
resources behind such players. Hong Kong spent US $12.5 billion, last week, to
prop up its Hang Seng Index and defend its currency from speculators. After that
failed, they resorted to trading curbs. Malaysia joined the club on Tuesday by
closing its foreign exchange window, but not before suffering a 40% loss in its
ringgit.
What your stockbrokers and financial advisors failed to tell you when you bought
Amazon.com or Yahoo is that you walked into World War 3. This war isn't being
fought with bullets or nuclear weapons. Instead, a country's currencies are used
to destroy an enemy. A safe haven is no longer gold, but a US Treasury
Certificate. China's threat of devaluation prompted the US Federal Reserve to
assist Japan in stemming the depreciation of its yen. While not quite on par
with Hitler's invasion of Austria, in terms of ripple effect, their demands
created a greater global impact.
Just as gold, throughout Western Civilization, financed wars, carving out new
countries while destroying others, it is now the US dollar that bears this
responsibility. We are at a crossroads where Europeans, Asians and others must
sell their US equity positions in order to indirectly help defend their
currencies. Pity the poorer Canadian, whose currency has sunk by nearly one-half
its value since Richard Nixon was in office. The Canadian dollar lost about 10%
of its value over the past year.
During the first half of 1998, it made very good sense for Canadians, Brits,
Germans and others to invest in the US of A. They were getting a double-bonus.
While their currencies were going to hell in a handbasket, their investments in
the US financial markets were paying out eye-popping returns. But, the tide
turned, again forced upon their political leaders by currency speculators, to
bring back those francs, yen, marks and loonies home.
One could see Monday's crash in the making on Thursday and Friday, following
dramatic rises in the Swiss Franc, British Pound and Deutsche Mark, and to a
lesser degree the Australian dollar, Japanese Yen and Canadian Dollar. Now, that
the Japanese Yen is at a 6-week high against the US dollar, there may be more
Wall Street massacres, such as the one on August 31st.
Overwhelming flows into the US bond market has driven yields to unforeseen lows.
What would logically follow is a reduction in US interest rates. What happens to
the US dollar when it pays out less and less interest to those who hold dollars?
US holdings are quickly converted back into Yen, Pound Sterling and other
currencies, at the expense of the US equities market.
A collapse in the making, you say? That sums it up about right.
The billion-dollar margin calls on Wall Street, raining down upon those poor
hedge fund operators who had sunk far too much dough into Russia? That's hardly
a dent compared to what is coming down the pike. Imagine what how much panic
might ensue should there be a repeat of those heady days of late October 1929.
Percentage-wise, we might find ourselves looking at back-to-back days of
900-point drops in the Dow Jones.
In terms of the calendar, 14 of the worst 25 percentage declines occurred
between September 24th and December 18th. Nine of the 25 fell during October.
That CNN Interactive Quick Vote might not then show the resolute complacency we
now witness over the recent deterioration in the US financial markets. But then
again, someone's got to be left holding the bad. Just make sure you aren't the
one.
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