MB:
Has Greenspan painted himself into a 12 inch square corner?
The Street thinks that Alan is a stock market insurance plan,....any problems and he'll just print more money and/or drop rates. Unfortunately, this appears improbable from our perspective.
The U.S. current account deficit and trade imbalance (love those polite words that describe unfolding calamities) require huge foreign flow of funds (say about a minimum of $2.0 billion per DAY of net foreign capital inflows).
Last year, the flow of funds to U.S. based equity mutual funds was well DOWN from 1997 from domestic sources.. The difference was provided to our markets by the foreign buyers, especially the Japanese savers following "Big Bang". Those new-comers had their heads handed to them on both a currency and stock price decline basis, that probably ran about minus 40%. They appear to be a bit less enthusiastic now.
Foreign central banks that bought $100.0 billion or more of treasuries throughout each of 1995, 1996, and 1997, ended up very large net sellers (say $120.0 billion) in 1998. That's a huge swing to make up one way or another, and will test even Alan's ability to "monetise".
With the Euro now a competitive alternate reserve currency, Alan appears to have a nasty choice,....save the stock market through a continuance of current policies, or save an endangered dollar through INCREASED rates. He can't have both.
A falling dollar is guaranteed to frighten prospective foreign investors,...why buy U.S. denominated assets just to get whacked by a currency crunch?
A bond market lock-up triggered Alan's desperate act in the late Fall, and he successfully got the bonds moving again, but look at the long term bond action already,....this must be a minor nightmare for big Al.
European rates (roughly 3%) already imply a U.S. "borrowing premium" of 1.75%, which is huge. Europe now becomes the borrowing arena of choice. Any further U.S.rate decreases without a similar decrease in Europe just makes things worse.
I'd bet a dozen Tim Horton donuts that Alan can't "cut it" anymore. To do so would ensure that foreign currencies stopped flowing in, which would ensure a nasty crunch for the U.S. (especially the markets).
I talk to many foreign nationals. This view is not prevalent yet, but is showing up. Personally, I don't know how some sort of dollar-or-market smash can be avoided given the circumstances.
Take some pot shots at this view, as I'm trying to find an alternative scenario but can't.
Best, Earlie |
