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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: long-gone who wrote (13174)	6/15/1998 12:42:00 PM
From: Alex	Read Replies (1) \| Respond to of 116789

I don't know Richard. It is feeding on itself. The greater the imbalances become, the greater the threat to the world trading system and paper everywhere. I have taken up your call to buy the physical in the last month. Be on guard for phrases like 'the fundamentals are sound'. ................... Paris, Monday, June 15, 1998 Asian Crisis Carries Seeds of New Trauma With Yen in Trouble, 'The Omens Are Ugly' ------------------------------------------------------------------------ By Carl Gewirtz International Herald Tribune ------------------------------------------------------------------------ PARIS - As in Round One of the Asian financial turmoil, the immediate impact on the outside world looks to be overwhelmingly favorable: Money flooding out of Asia into the perceived safety of U.S. and Western European government bond markets is pushing yields down to modern-era lows. The attendant stall in regional economic activity also is putting renewed downward pressure on commodity prices, which, after an early spring recovery, are again falling. This combination of falling interest rates and declining inflation can only spell good news for the rest of the world - just as it did early this year - and a renewed boom in stock prices must be just around the corner, right? Wrong, analysts insist. ''It never happens the same way twice,'' said Steve Blitz at Offit Associates in New York. ''And besides, things are different this time. Now Japan is in full-blown recession and putting tremendous additional pressure on the rest of Asia.'' Stephen Roach at Morgan Stanley Dean Witter in New York agrees that the similarities to the first round of the crisis ''are striking,'' but he also warns that the current collapse of the yen ''is the single most destabilizing force at work in world financial markets today.'' Mr. Roach, a leading skeptic about ''New Age'' economics, assumes that Asia will calm down and that investors buying into the current bond-market rallies will be burned as yields climb on signs that inflation in the United States is not dead. The big unknown, of course, is Japan - the second largest economic power behind the United States - whose destabilization threatens not only Asia and emerging markets in Eastern Europe and Latin America, but the industrialized world as well. ''The omens are ugly,'' warned John Llewellyn at Lehman Brothers in London. ''With investors now more risk averse than they were at the initial peak of the crisis last October, they are bound to move progressively into U.S. and core European bonds. The dollar stands to strengthen further. And many emerging markets stand to be tested yet again. ''If matters were to stop there it would be grave enough. But investors are now also seeing the real possibility of serious credit losses out of Asia,'' he added, raising the prospect of a crisis that will be intensifying as it widens. The one depressing point on which all analysts appear to agree is that there is little likelihood of any new policy action in Japan until after the July 12 election for the upper house of the Diet. For analysts at Lehman Brothers as well as J.P. Morgan, it is now increasingly a question of ''when'' China devalues the yuan rather than ''if'' - a development that would add to the region's problems. This is the one issue on which opinion is deeply split. Paul Meggyesi at Deutsche Bank in London thinks that with China not a direct competitor of Japan on world export markets ''China may be willing to trade off the devaluation card to extract concessions in other strategic areas such as membership in the World Trade Organization.'' Although Japan's huge spending package will begin to feed into the beleaguered economy starting at the end of the month, experts fret that the size of the spending looks less impressive as the size of the problem shows no sign of stabilizing. ''The huge fiscal package makes for great arithmetic,'' said Jesper Koll at J.P. Morgan in Tokyo. ''It will no doubt boost activity so that the economy will be growing at an 8 percent annual rate in the third quarter.'' But, he added, it is still inadequate economics as ''it is not likely to trigger a sustained recovery in private sector spending'' that is needed to get the economy moving. Meanwhile, with the yen falling last week to an eight-year low against the dollar, analysts are busily reworking their estimates on how weak it will get. With the consensus rapidly moving up to the 160 yen area, Mr. Koll, a leading bear, is now looking for 180 yen by year's end. The yen's weakness has repercussions throughout Asia. A more competitive yen makes an export-led recovery more difficult for such countries as South Korea, which compete directly with Japan. For the region, as well as Japan, the currency's weakness worsens a credit crunch already in full swing. Richard Koo at Nomura Research Institute in Japan estimated that ''for each one-yen-per-dollar decline in the value of the yen, Japanese banks have to cut their assets by about 1 trillion yen. A five-yen depreciation, therefore, means a 5 trillion yen credit crunch, which is equivalent to 1 percent of gross domestic product.'' Mr. Koo added, ''A decline in the yen fuels the credit crunch because it raises the yen value of the assets held abroad by Japanese banks - most of which are denominated in dollars.'' With foreign assets of more than $1 trillion, the depreciation of the yen results in a huge deterioration in the banks' capital-adequacy ratios measured in yen. The pressure on the capital-adequacy ratios is exacerbated by the decline in the Nikkei stock average since unrealized capital gains on stock holdings are allowed as a portion of the Japanese banks' capital. Meanwhile, with public funds having been used to strengthen the banks, Mr. Koo said that ''it has become politically difficult for the banks to openly persist with the credit crunch at home. As a result, Japanese banks are cutting assets outside Japan, especially in Asia and the United States'' to shrink their holdings to fit their capital base. Increasingly, foreign analysts now are joining Mr. Koo in urging that public money be used to relieve the banking system of its bad loans - just the way it was done in the United States and the Nordic countries - as a necessary step to get the economy moving. But in the political vacuum preceding the mid-July election, analysts see only further weakness of the yen and the only question is just how devastating this is likely to be for the rest of the world.