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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Alias Shrugged who wrote (547)	9/3/1998 9:36:00 AM
From: Henry Volquardsen	Read Replies (3) of 3536

To any and all I don't think the problems in Asia and other emerging markets is going to cause as severe a long term problem for the US as many think. This is of course a personal opinion but I have been closely watching the developments in Japan for over a decade and have been trying to put what is happening in a longer term context. I am coming to think of what is happening in many of these economies is in effect a write off of excess capacity. One of the root causes of this problem was the massive over investment in real estate and fixed plant and equipment in the 80s. This was fueled by very cheap yen borrowing costs at the time. Yen interest rates were much higher than now but the extraordinary strength of the Nikkei at the time allowed Japanese companies to issue debt with attached equity warrants that generated, in many cases, negative interest rates. In other words they were paid to borrow. This free money fueled massive speculative investment throughout Asia. It was the Bank of Japan's effort ot pierce this asset bubble in the late 80s that start this process. For most of the 90s the problem was contained to Japan but as we all know it spread to the rest of Asia the last few years. Will this contagion spread to the US? Well the US did not experience the same massive over investment during that period. In fact we had our own deflated asset bubble at the time in real estate (remember the S&L crisis?) and oil and gas properties that in fact depressed investment levels in the US. So we do not have over investment in these asset classes. So there is not the same excess capacity problem. This doesn't mean that US equities are not over-valued and can come down in price. But it does indicate that the US is unlikely to see the same severe deflationary and depressive asset write offs as Asia. How does this translate to currencies? As I have posted before I am not a gold bug. I believe a currency is backed by the productive power and tax generating capacity of the economy. In addition the currency's value vis a vis other currencies is a function of investors interest in holding investments in those assets. As significant portions of the Asian asset base prove to have been misguided investments and are written off the market is reassessing the value of the productive power of those currencies. Since the US is unlikely to be writing off assets to anywhere near the same degree the dollar is likely to remain better supported. Just a theory. Any comments? Henry

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