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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: MikeM54321 who wrote (5251)	7/23/1998 1:11:00 PM
From: Robert Douglas	Read Replies (3) \| Respond to of 9980

Mike, You have an excellent memory! You quote me as saying that the Asian crisis is nothing more than a bump in the road. I still believe this to be true and I actually think that a lot of good will come from it. I am unabashedly a long term bull on Asia and the world (see my post exchange2000.com. I think, however, that many asset valuations have gotten a bit carried away and don't reflect the risks that have arisen. Chief among the risks on my list is inflation. Now perversely inflation should be good for asset prices, and a stock is nothing more than ownership in the assets of a business. The fly in the ointment, however, is that inflation well never be tolerated, to any degree, in a modern economy. This means that inflation will be combated as soon as it appears. Generally this means higher interest rates, a slowing economy and a lower currency. I think the odds are fairly high that the US will have to follow this prescription sometime in the next 18 months. The Asian situation makes things trickier to forecast and could be either a plus or a minus depending on how their recession unfolds and the timing of their recovery. Let me illustrate more clearly what I am talking about by citing three possible outcomes. 1. The economies of Asia rebound quickly before the US cools. Not many people consider this likely - but stop and consider all the stimulative measures the Asian countries are taking and it looks like a classical boom, bust, boom cycle. This is the worst possible scenario because it would result in the highest inflation and the highest interest rates. 2. Asia continues to fade and the US economy cools. This is the most talked about outcome among the "Bears" and those who fear recession. Under these circumstances interest rates would decline, the US dollar would decline, as countries engaged in competitive devaluation trying to get a larger piece of a shrinking demand pie. This too would be negative for stocks. 3. Asia rebounds just as the US economy cools. Nirvana continues. (And I don't mean Kurt Cobain) This is what I referred to in an earlier post about good timing. This would enable the US dollar to decline and a shrinking trade deficit to pull the US economy up just at the time it needed it. Whatever happens I still believe that world growth will return and that investors will do well. I am particularly bullish on the role of technology in this world growth. Hence my presence in these forums. It's hard to be a long term bull and short term cautious. I still own most of my stocks but have tried to hedge them against a decline that I view as likely but not a sure thing. No one ever said investing was easy! Robert PS. Mike I forgot to answer your question on investment flows, a notoriously hard thing to predict. I think that most foreign investors are trend followers and have benefited greatly from the bonus of owning US assets while they were appreciating along with US dollar. This has made their gains quite handsome. I believe the flows will turn when the dollar turns and makes investing in US assets more an exercise in swimming upstream. When will that be? Depends a lot on which outcome, listed above, comes to pass.