In response to your post, FWIW, from today's Barron's, part of an article. (I have no idea of the capital controls in Malaysia that is referred to below, or its overall impact on SETO) -
" Nowhere to Hide From Asian Contagion
Looking ahead, William S. Kaye doesn't much care about one- or two-day rallies. The Hong Kong-based hedge-fund manager for Pacific Alliance Group is so bearish that, at a Grant's Asia conference in New York Thursday, his presentation was entitled "The Approaching Nuclear Winter for U.S. and Global Equities."
Kaye believes that we're in the third and final stage of an "Asian contagion" that began in July 1997. In his view, the virus was caused by overinvestment in Southeast Asia and too much domestic debt. This led to rapidly falling investment returns, competitive currency devaluations, a mass exodus of foreign capital and collapsing regional stock markets. In its wake, massive domestic and external debt can't be serviced, "creating enormous pressures to export deflationary problems to others."
The virus spread to other emerging markets, notably Latin America and Russia, "resulting in substantial defaults and impoverishing most of the world's people." Now, says Kaye, 80% of the global population faces "substantial wealth and income destruction" and 40% of world gross domestic product is "directly at risk of severe recession or depression."
The contagion was transmitted to the U.S. principally through trade and flight capital. The former brought lower prices, increased consumer spending and decreased household savings. The latter "initially exacerbated a U.S. bubble," with inflows of "cheap foreign capital" fueling a surge in domestic borrowing and foreign speculation in U.S. equities. In Kaye's opinion, this euphoria masked "a collapse in U.S. profit margins and rapidly falling profits, which are nonetheless overstated."
At the same time, the contagion reached Europe through its financial system, which is at risk from "speculative froth" linked to the launch of the euro in January 1999.
Next, the Asian virus infected the global banking system with the possibility of contract defaults. The upshot: Risk is being repriced sharply higher, money supply and credit availability are contracting abruptly, and U.S. and European equity bubbles are bursting. In reaction, consumption and investment spending are shrinking and U.S. and European central banks are engaged in.
In the third and final stage of this virus, the gains that global capitalism made in the 'Nineties are being reversed by capital controls (Malaysia), market intervention (Hong Kong) and default on domestic debt (Russia). In this climate, Kaye sees risk premiums for big multinationals remaining permanently higher, thereby depressing U.S. and European equity valuations.
In sum, he sees "a protracted period of intensive illness for the global economy," with low economic growth, curtailed trade and higher risks. In this scenario, lower multiples of lower earnings equal lower stock prices. " |
