To: James F. Hopkins who wrote (20974 ) 7/23/1999 5:57:00 PM From: pater tenebrarum Read Replies (2) | Respond to
Jim, i fully agree that the dollar is the key to all this - and the chart of the dollar index (it broke from a rising wedge to the downside) combined with the extremely high bullish sentiment on the dollar up until recently should give both bond and stock market bulls pause. there is a real danger that further strength in the yen could lead to an increase in the unwinding of carry trades, which could fuel further yen strength and bond market weakness, irrespective of the underlying fundamentals (which btw. are not so much in favor of the dollar anymore anyway - see the exploding trade deficit). much of the stock market's strength owes to massive foreign capital inflows which finance the current account deficit. should these flows start to reverse, the Fed will perceive a need for higher rates to stem a slide in the dollar and the attendant inflationary implications. the perception of this possibly happening alone could suffice to prick the stock market bubble. thus a weakening dollar could set off a vicious cycle that in the end drags down the global economy. of course the authorities will continue to do everything they can to keep such a scenario from unfolding. unfortunately, in the case of the yen, the market has already said 'checkmate' to the BOJ. an interesting summer awaits.btw, Japans Qu.2 GDP growth is already being talked down in the media - yet another attempt to put the brakes on the yen. if it succeeds, the bull could conceivably have another go at it - which seems unlikely right now. another festering problem are once again widening credit spreads, which are back to last october's panic levels in some cases. something is brewing in bond-land.
