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To: The Barracuda™ who wrote (39274)	8/20/1999 8:09:00 AM
From: Rarebird	Read Replies (2) \| Respond to of 116909

Digging Deeper... Inside the trade deficit release, we believe a few facts are worth mentioning. Our specific deficit with Japan rose 19.3% in July relative to June. As we all know, this is happening despite the negative move in the dollar relative to the Yen. Additionally, for the first time in over three years, the U.S. is running a trade shortfall with Central and Latin America. Now wait a minute, we thought the Central and Latin American economies were recovering. Could it be that this sanguine, consensus Wall Street view is off the mark? We don't know whether you've taken notice, but there have been some significant currency moves globally over the past week. Among a host of others, the Thai bhat got whacked for over 10% and the Brazilian real is touching five month lows. The dollar isn't the only sore spot among the world of global currency aficionados. After witnessing many an Asian and Central American stock market "recover" over the last 9 months, currency movements suggest trouble may again be brewing. For our markets specifically, the sinking dollar is not a good sign. The bulls would have you believe that this is wonderful for the multinationals. Conversely, domestic demand in many a foreign economy is flat on it's back. Just ask Coca-Cola how this is working. If you'd prefer, give Gillette a call and check in on foreign demand. In today's trade numbers, our year-over-year exports are down. A sinking dollar is not a guarantee of an instant lift in foreign profits. Turnabout is fair play...In fact, a sinking dollar changes the rules of the "new era". A strong dollar has allowed the U.S. to basically import deflation over the past few years. This, in addition to anomalistic capital inflows to this country over the last few years, have reinforced new paradigm thinking among most Wall Street participants who are clearly not thinking. You have heard us argue before that to keep the game going, the U.S. needs a strong dollar. The sinking dollar now allows us to import inflation as opposed to deflation. With a lower dollar, more dollars must be spent to purchase the same quantity of goods coming from abroad. In essence, prices have gone up. To the extent that consumers switch from foreign goods to domestically produced products, domestic pressure is added as manufacturing capacity must respond, labor costs potentially rise, and possibly prices rise. It also goes without saying that a declining dollar allows foreign holders of our bonds to lose money while standing still. Since foreigners (largely Japan) hold one-third of total Treasury securities, just how do you think they feel about the recent dollar movement? The last little economic "tidbit" released today came from the Labor Department and showed the four week moving average of jobless claims at a 26 year low. Unfortunately for Goldilocks, we hear Papa Bear, Mama Bear and Baby Bear skipping down the path toward home. Our suggestion: Better wake up now Goldilocks. Non-Intervention...Despite the plummet in the greenback versus the Yen recently, the Japanese Ministry of Finance/Bank of Japan have been absent from the "prop-up" game. In fact, yesterday, Bank of Japan Governor Masaru Hayami said that "private companies should consider establishing operations that could withstand currency swings instead of relying on authorities' actions". On face value, Hayami is suggesting that Japanese corporations should engage in currency hedging on their own as opposed to expecting the government to bear the burden. Is this an about face in policy? Only time will tell. To deal with the changing currency, Japanese corporations would essentially sell/short the dollar and go long the Yen to hedge. Wouldn't this just put further pressure on the already fragile currency situation? The alternative is that Hayami's statements are one huge head fake to eventually take out the dollar shorts that must be building given current activity. Stepping back, it just amazes us that one of the largest "new era" bull market rationales is that we exist in a world of "free markets" and global economic "synergy". Unfortunately, we happen to be a period when global interest rates and currencies are being manipulated by governmental authorities like never before. Additionally, credit exhausted emerging economies are being fed an intravenous solution of more credit to ward off sudden (financial) death. The irony is truly rich... contraryinvestor.com