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To: long-gone who wrote (39261)	8/20/1999 7:59:00 AM
From: Rarebird	Respond to of 116927

Liquid deterrent to facing reality Thursday 19 August 1999 Markets provide information. They tell us what investors expect to happen. What is so peculiar today is that investors in different markets seem to expect such different things. Currency, credit and equity markets have sharply conflicting views. With US inflation picking up, bond markets have been falling and are forecasting a rise in short-term interest rates. This usually pushes up the dollar. If interest rates rise, the higher return normally encourages more people to hold dollars. The dollar, however, has been weak. The currency market seems worried that rising interest rates will cause the US stock market to crash. As the American economy depends on the stock market, interest rates are likely to fall sharply once Wall Street falls. The currency market is looking beyond the next rise in interest rates, to the fall it expects afterwards. There are two problems with this. The first is that the futures market is not forecasting a rise in interest rates followed by a fall. It is forecasting only a rise. The second is that if the stock market was expecting a crash it would have crashed already. Credit markets provide the same contrast. While the yield on US government debt has been rising, the cost of borrowing for American companies has gone up much more. This happens when lenders become more nervous about being repaid. Even for top-quality AAA borrowers, the gap between what they have to pay and what lenders charge the government is twice the long-term average. In the long bond market, the gap is not as wide as it was during the scares of last autumn, but in the 10-year 'swap' market it is much worse. The puzzle is why currency and credit markets are so scared while the stock market is so confident. A strong clue is provided by the recent collapse of Internet stocks. The Press has been absolutely unanimous. Everyone knew that the Internet stock prices were crazy and it was just a matter of time before they collapsed. This does not explain why they were so high if everyone knew that they would fall. The answer, of course, is that while everyone knew prices were crazy, no one knew when they would fall. Internet stocks are only the stock market writ small. They are simply the bubble on the bubble. The reason that the currency and credit markets have different views from the equity market, is that currency and credit markets live in a world of absolute, not relative, performance. When a currency trader loses money, he does not get a bonus because he has lost less money than other traders. That is the unique privilege of fund managers. It is no secret that Wall Street is bananas, just as it was no secret that Tokyo went crazy in its bubble. What prevents overpriced markets from falling is not ignorance about their lack of value, it is the impossibility of knowing when they will crack. Most fund managers are fully-invested bears. Those who have been courageous and gone liquid have suffered. Their example is a deterrent to those who have not. smithers.co.uk