From the Privateer..................
Two weeks ago, Treasury Secretary Rubin was quoted to the effect that the present level of global financial instability is "unprecedented". Ten days ago, Mr Greenspan weighed in, stating during Congressional testimony that the U.S. economy was in the best shape he had seen in his 50 years of watching it. Last week, Mr Rubin made another remark, this time about the trials and tribulations of the Japanese Yen. He said, in effect, that the weak Yen was a Japanese problem. He also stated, very clearly, that intervention in the currency markets was no way to "fix" the Japanese problem.
Of course, he was right, but "fixing" a problem has always taken second place to slapping a band aid on it when it threatens to go out of control. When the Fed waded into the currency markets to prop up the Yen on June 17, that is exactly what was accomplished. Everyone was "saved" - for 24 hours.
The US Dollar did a swan dive, against practically every other currency, but especially against the Yen. Asian markets took off. The Dow rose 164 points while US long-bond yields were rising by 10 basis points. "See", said Mr Rubin, "I told you all there were enough lifeboats for everyone!"
The truth is that there has been a never ending stream of financial "Summits" taking place all over the world for more than two months. The latest is, of course, the G-7 meeting in Tokyo this weekend. At every stage, the financial devastation that has swept through Asia has worsened. At every stage, the surge of flight capital out of Asia (and elsewhere) and into the US has intensified.
The June 17 currency intervention has been the climax - so far. Earlier this year, the U.S. stock market boomed as the flight capital flowed in. But more recently, as the flows grew even greater, the Dow has weakened considerably. In fact, while the uptrend on the long term Dow bar chart is intact, the Dow in P&F format chart is actually signalling a top. Even worse, it bears an ominous resemblance to the Nikkei chart as it stood at the end of the 1980s.
Meanwhile, on the Gold front, as has been the case throughout the Asian Crisis, the higher the level of financial tension and concern, the weaker the Gold price in $US terms. At the moment, needing US Dollars desperately to purchase necessary raw materials and producer goods and to service existing debts, Asians are scrambling for Dollars. On top of that, flight capital is all heading in one direction - into cash and Treasury debt.
(From June 12)
Right up until June 17, the rest of the world (outside Europe), had been putting all its eggs in one basket (Dollars and Treasury Debt). When the Fed intervened on June 17 to drive the Dollar down (and, of course, bond yields went up), it tore a hole in the bottom of that basket.
The intervention hasn't worked very well, especially on the US stock market. Much more ominous, for the financial powers that be, Gold has been driven down to more "affordable" levels in terms of most other currencies, while it has taken its sharpest upmove in months in $US terms. On Friday (June 19), Gold rose in terms of ALL currencies.
This intervention has done nothing to address the fundamental imbalances underlying the present crisis which is devastating Asia and inexorably fanning out to affect the rest of the world. What it has done is to put the first seeds of doubt in the minds of those who have been desperately buying up U.S. Dollars and Treasury debt. If the bedrock of the financial system is not safe, what is?
Special Note:
In light of yet another G-7 Assistant Finance Ministers meeting, this one in Tokyo this weekend, it is a good time to take a good look at the Japanese situation. The Privateer seldom singles out an analysis as a "must read", but we have found one.
In the Saturday, June 20 edition of the Australian Financial Review, there is an article by Mr Kenichi Ohmae titled Why Japan is heading for a crash. Read it!
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