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To: long-gone who wrote (35623)	6/20/1999 11:34:00 PM
From: Bill Murphy	Respond to of 116764

Richard, Will get to that. Am overwhelmed on so much. Will get back to you. Much is going on behind the scenes. Bill

To: long-gone who wrote (35623)	6/21/1999 1:53:00 AM
From: Bob Dobbs	Respond to of 116764

Blue Skies - Nothing But Blue Skies From Now oN Healy Brothers Eaton & Company June 19, 1999 The Next Financial Crisis The Japanese economy expanded by nearly 2% in the first quarter of 1999 but government debt ballooned. The new European currency, the EURO, hit new lows in value against the United States dollar and the Japanese Yen. Both 10 year and 30 year US Treasury bonds yielded more than 6% last week. Yields on Japanese Government Bonds (JGB) rose to 1.73%. The British cut their base interest rates and the US Fed is on the verge of hiking our rates. The Bank of Japan has interest rates at nearly zero. In the last two weeks the European Central Bank and the Bank of Japan have intervened in the currency markets, the former to support its currency against the US dollar and the latter to weaken its currency against the EURO. The music is playing faster and the number of chairs is getting smaller. Why is all this important? you ask. Well - the Japanese are trying to recover but the the decline in the Yen from 150 to 120 over the last year has reduced value their dollar denominated holdings by 20%. So the mighty Dow Jones Industrial Average is down by 10% to Japanese investors. Japanese life insurance companies bought EURO denominated bonds late last year and despite a decline in interest rates in Europe the currency losses on these bonds are enormous. As the yield on JGBs rises the higher interest rates offset the fiscal stimulus of the Japanese government. End result - no recovery. Instead of net capital outflows from Japan which would weaken the Yen, the Yen is strengthening which weakens the Japanese export market. Surrounded by this chaos is China. The US trade deficit with China now exceeds our deficit with Japan. Combined with the foreign reserve assets of its newest province, Hong Kong, the People's Bank of China has the largest holdings of all our trading partners. The Chinese currency, the Yuan, is not freely convertible and is pegged to the US dollar. The Hong Kong dollar is tightly pegged to the US dollar. The Chinese say their economy expanded at 8% last year, a figure which is no more credible than the Japanese claim for their first quarter expansion. The Chinese economy is slowing markedly. Chinese savers are increasing their savings as the economy slows. The weakness of the EURO has hurt China's exports to Europe. The Japanese market is closed to many Chinese products so the stronger Yen doesn't help the Chinese. There is no advantage to the Chinese of keeping their two currencies pegged to the US dollar and there is a need to bolster the value of the EURO. The Chinese will reallocate their foreign reserve holdings to favor the EURO over the dollar which will result in some selling of US treasuries pushing US interest rates higher. Then a devaluation of the combined Hong Kong dollar and Chinese Yuan will weaken the Yen which will crush the foreign buyers of the Nikkei. Financial assets will begin to crumble. As countries have been using trade surpluses to buy paper instead of goods the inflation of paper assets, whether currencies, stocks or bonds, must unwind. "There'll be Blue Skies over the White Cliffs of Dover" - but everywhere else looks a lot stormier. home.att.net