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To: Les H who wrote (818)	10/12/2001 10:29:47 AM
From: Les H	Respond to of 29596

First Be Happy, Now Be Scared By Adrian Tan, AsiaWise 11 Oct 2001 13:59 (GMT +08:00) At the beginning of this writer's sojourn in the investment industry, the word was that the worth of a broker's report was in its analysis not its conclusion. This maxim came to mind after reading "Bullish Consequences of the Global Recession". This is the September issue of Asian Liquidity Cycles -- A Monthly Flow-of-Funds Guide to Asian Equity Markets, published by Singapore broker Kim Eng Securities . The broker's economist is more pessimistic than other commentators in thinking that the after-effects of the events of the September 11 can turn the current economic downturn into the deepest post-1945 recession. He points out that in 1974-75, OECD industrial production fell by 12.3% from peak to trough. In the recessions of the late-1950s, early-1980s and early-1990s, the declines were 7.7%, 7.6% and 4.3%. The current OECD business cycle peaked in August 2000 and by July this year it was down 5.8% from that peak. The attacks, "brought large parts of the U.S. and the world economy to a virtual standstill and sent consumer and business confidence into a free fall." He thinks that the injection of liquidity by the central banks, "may considerably reduce the life-span, but not the unpleasantness, of the on-going bear market in global equities." As to the turnaround, he says the three essential factors are, "abundant excess capital, grossly under-owned equity markets and investor capitulation." There is excess of capital. There is the liquidity that the central banks are putting into the system by way of interest rate cuts. Then there is spare capacity in the "real" economy. As economic activity slows, companies have more capacity than they can profitably use. "Why build new factories, warehouses and office towers when existing facilities are grossly under-utilized?" Kim Eng's economist estimates that, as a whole, the OECD economies moved swiftly into a negative output gap – capacity outran production -- early this year. This spare capacity will grow much bigger, as the global recession worsens. But excess capital matters only if investors are not fully invested in equities. According to him, using something called the Market Cap/Quasi Money (MC/QM) Ratio, market ownership, or the allocation of savings to equities relative to cash, reached extreme "over-owned" levels in the U.S. in early-2000. Japan had reached this level in late-1989 while most of Asia ex-Japan reached this in early-1994 (just before the Federal Reserve started raising interest rate). "The U.S. equity market is now "heavily under-owned" in relative terms, but much less "under-owned" in absolute terms." Translation: Expect further falls in U.S. equities . And to extrapolate Asia's experience, the next few years will be volatile for the U.S. market. Remember that since 1994 Asian equity markets ex-Japan have been falling, recovering, collapsing, recovering, collapsing and collapsing. As to the final ingredient "shattered investor sentiment", the economist still sees no sign of it. "The usual indicators of investor sentiment, such as investment newsletters, the CBOT put/call volume ratio for equities and fund flows into U.S. equity mutual funds do show increased bearishness in recent weeks, but nowhere near the levels I would associate with capitulation. " All in all, a very pessimistic assessment of things, so why the optimistic title? asiawise.com