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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Al Serrao who wrote (13262)	10/30/1997 7:55:00 PM
From: IQBAL LATIF	Read Replies (2) \| Respond to of 50167

Must read- Al- What is a bubble economy- and why US economy is no bubble! Let me tell you living under many a recessions upturns and downturns -what is a bubble economy- and what an average person should know- every bubble economy has two features and that is 'asset inflation'- and 'spiral of debt'- asset inflation is overpricing of an asset without any consideration of income or cash flow it produces- some assets do not produce income but produce growth- growth companies have to be pardoned from this strict definition of 'asset inflation' although my critics would not spare me from this liberal interpretation. Lets look at Japan - Nekkei fall - 1990-97 1-It all started with extraordinary valuations of Nekkei- P/E around 80-100 , but one cannot pin the problems on high P/E's Japanese have been notorious for camoflaging earnings- the stock market was at 32000 and a meter square of Ginza land was 1,000,000- 2-The banks had lent money to land speculators- the richest man on earth was a Japanese land owner based on paper valuations of land which was not producing any returns- the capitalisation of returns was around 1% means value of land was 100 times rev. 3-When Gulf war started a global slide in stock values the 'web of debt' was needed to be dis-entagled- it was something like this- Bank lent money to 'real estate' like 120% of valuation since real estate land or property only produced 1% return the borrower in 80's overleveraged and invested in 'stock market' -which seemed to go up up and up- as a result of recession ensuing from Gulf war and a sharp drop of NEKKEI in harmony with global markets bank had to foreclose on many of the realestate loans- now see the how closely realestate and stock market asset inflation was tied together- one fed the other- once the loans were called in it resulted in crash of realestate companies and assets- to return the loans of the banks the land speculators had to redeem their stock assets deepening the stock market crisis on every strength stocks were sold- the collapse of NEKKEI complicated the banking troubles since most of the banks ended up owning a lot of inflated property plus much lowered value of their investments portfolios- these two factors together dealt a 'death blow' to banking sector of Japan- where capital adequacy ratio's agreed in Basle were threatened- this was a collective typicl problem emerging from -spiral of debt- asset inflation and manipulated domestic investment market where most of the japanese pension money sits in local post offices prohibited to be invested in local stock market. ASEAN countries today face a similar crisis- overextended infrastreucture and real estate boom- HSI and Singapore Malayasians borrowed blindly to construct tallest and the biggest without any appreciation of prospective returns- the markets have become very sensitive barometeres of 'extravagance' and moment their current account deficits exceeded generally accepted norms- the speculators descendecd on these countries like a pack of wolves- now instead of leeting teir currencies float they tried to use sticks - realising very little that stick do not work- the moment restrcitions were placed on transfer of domestic capital- the funds shorted their markets- flight of capital expedited with greater pain- falling currency and falling stock markets. Now lets try to draw some similarities with US- 1- How much of US banks are exposed to 'a bubble economy'- answer negligible 2- How much of US banks assets are tied up in a spiral of debt which has overinflated real estate on one hand and money raised from that collateral invested in equities on the other- answer is none 3- How much of US corporate profits come from ASEA or Latin America- answer 6% and 9% 4- Will this crisis lead to global 'ice age'- the only crisis which had this ability was Japanese crisis- now we have a rationalisation of stock markets but Latin America is on far better footing then it ever has been over the last two decades- 5-Will demand slow down- stock market rationalisation never hits aggregate demand if it is not tied up to 'spiral of debt'- In US luckily the reason stock markets are worried is slow ing down of corporate profits- I think we all know that US markets were earlier jittery because of 'overheating 'threat today NAPM number shows higher prices and bigger purchases- this fits in my scenerio very well I am a little ahead of the markets but soon they will realise that slow down in six pmonths is helpful as we save ourselves from scourage of 'overheating and wage pressures'- it is a very timely overheated US economy now slowing down due to global slackening in demand- I do see that this is a bit compicated for an average fund manager but I will not think this for a moment oto be begining 'ice age'. In my opinion we will see the Island economies becoming more efficient and productive so as to export more and re-establish their economies on firm footing. I am in to explain what I have learnt over 20 years of investmewnt experience to my friends on this thread- they can decide to dump the US stocks but I know when we will really look for 'flight to quality' I will prefer US holdings as most secure. Writng bullish notes on a down day where even globex shows battered DOW or SP - I have never followed the crowd I will short stock market on trading basis but in a months time I hope this all will be over.