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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: danderso who wrote (24853)	9/3/1999 5:49:00 PM
From: pater tenebrarum	Read Replies (3) \| Respond to of 99985

David,one feature of international capital flows is that changes can sometimes be abrupt...trying to forecast when the trend toward inflows into U.S. equities markets will change is like flipping a coin. a good example is the year 1987 (sorry<g>), which had in many ways characteristics similar to '99: the current account deficit was exploding, foreigners started to sell bonds and were heavy buyers of equities throughout the first half of that year. along came the September trade deficit number, which hit what was then a new record, and presto, the foreign capital decided to leave the U.S. stock market in the span of one week. similar to this was the emerging markets crisis that began in '97 and culminated in '98: foreign capital left these markets virtually overnight. the big advantage of the U.S. is her status as the center of the empire if you like. this is a perception that is unlikely to change in the near future. but past experience suggests that whenever foreign inflows into U.S. equities hit fresh records, it is time to become a bit wary. especially if these inflows come from Europe, for some reason the European institutions are notorious late-comers. with regards to Japan, there is an increasing likelihood that Japanese institutions will start to opt to cut their losses in the currency and bond arena short and look for opportunities at home. after all, while Japan is still in the dumps, the recovery potential is huge, and i doubt that this has been lost on them. Japanese institutions own a whopping 10% of the U.S. stock market and almost a third of the outstanding treasury debt. as the former Japanese prime minister Hashimoto once remarked, the U.S. have the house, but Japan holds the mortgage. due to the vast increase in Japans budget deficit, Japanese bond yields become juicier by the day...the spread between JGB's and treasuries is shrinking fast. i think it is a pretty safe bet that Japanese institutions will soon begin to put on a new version of the Yen carry trade: borrow short term Yen and buy long-dated JGB's, the spread has become very inviting, and the currency risk is zero. in fact, Japan has the steepest yield curve of all industrialized nations, and this is in itself a strong endorsement of the prospects for recovery. i have always held that Japan actually NEEDED higher long term rates to heal it's battered economy, contrary to conventional wisdom. one of the reasons is that the steep yield curve allows the Japanese Banks to begin their recovery process, using the very carry trade i just described. after all, that's what the U.S. banks did in the wake of the S&L crisis, and it has been a very successful strategy. one could in fact argue that Japan now looks very much like the U.S. at the beginning of the current bull market: a vast budget deficit and a corporate restructuring process in it's infancy. since the Japanese government needs to finance it's deficit, which is projected to grow to almost 10% of GDP in coming years, capital will have to be repatriated by sheer necessity. since Japan's consumers seem as of yet unprepared to unlock their huge pool of savings to induce a demand-led recovery, the government is doing it for them,thus mobilizing the savings indirectly. at some point, Japanese consumer confidence will revive, and capital will shift back from the savings pool to the government's coffers as economic growth revives. this process will lead to a giant shift of global capital flows. in order to compete with the future capacity of Japan to suck it's domestic private capital back home, the U.S. will be forced to tolerate a higher level of interest rates than the level actually appropriate for the economy. it will be the period of paying the piper: the past sins of excess consumption and running up a giant current account deficit while depleting domestic savings will finally come home to roost and the will likely result in a bear market for stocks and a much slowed down economy, much like what Japan has experienced during the past decade. this seems an unlikely prospect according to the new era economists who regularly spout their nonsense on CNBC, since everything looks so gloriously PERFECT right now. corporate profits are near record levels, new technologies proliferate, productivity has been accelerating for more than a decade, inflation is tame and the stock market is incredibly buoyant. however, the same description would have fitted Japan in the 1980's and all over the world Japans success was paraded as an example worthy of emulation. of course Japan was not the same in every respect, but certainly in those i enumerated. i believe we are now getting close to another secular shift, which will result in a resurgent Japan and a relative decline in the U.S., until the imbalances that have been created in the U.S. economy have been addressed. imo, the process has already begun, even though there are as of yet only tentative signs that this is the case. it will become apparent once the U.S. stock market suffers a sizeable setback due to the above mentioned possibly sudden shift in capital flows. i suspect, that the U.S. market will thereafter not see it's highs for a long time, while the Japanese market after an initial correction in sympathy will quickly resume it's recent upward trend. bookmark this post and look at it again in a year's time... regards, hb

To: danderso who wrote (24853)	9/3/1999 7:00:00 PM
From: James F. Hopkins	Read Replies (2) \| Respond to of 99985

Thanx David; I see even CNBC is starting to talk about Dollar, and such, tahts good as for so long it looked as if they never looked at it. The markets still ought to have a TOBIN tax on big currency swaps. 1 ,half to fund the IMF, so it becomes self supporting instead of just depending on hand outs that are collected from all tax payers even them that don't swap currency. 2 the other half to what ever countries currency is being sold or shorted. ------------- It would go a long way to stabize markets and TAX the Cartel that makes all the profit off arranging whose currency they will attack next. Jim