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To: Alex who wrote (17030)	8/31/1998 10:15:00 AM
From: Giraffe	Respond to of 116816

Traders braced for more turmoil By David Pilling in London Commodity traders are braced for further turmoil this week amid concern that global deflationary pressures may continue to depress prices and that hard-hit commodity producers, notably Russia, might try to export their way out of trouble. Last week the Chicago-based Commodity Research Bureau index of 17 leading commodity prices fell to its lowest level since 1977. Analysts fear that commodity prices may sink still lower if the Asian and Russian financial crisis spreads. On Friday gold prices slid to a 19-year low of $273.40 an ounce, partly on fears that Russia had pledged a significant amount of its 520-tonne gold reserves as collateral against credits from Swiss banks. International prices of nickel and copper have fallen about 40 per cent in 12 months. Prices for timber, rice, rubber and vegetable oils have also dropped, in some cases dramatically. Currency depreciation and recession in Asia has encouraged producers to step up exports and curbed demand for imports. Some analysts are concerned that Russia - an important exporter of oil, gas, nickel, aluminium, grain and timber, as well as a big gold producer - may seek to follow Asia by increasing commodity exports to boost its dwindling foreign currency reserves. Some commentators say those fears are overdone, however. In oil, for example, Russian companies are already operating at full capacity. Many have already shifted as much production as they can into exports. "There may well be a psychological effect produced by concern that Russia is about to flood the market," said Stephen O'Sullivan, co-director of research at United Financial Group. "It will take people a while to realise that they won't be able to do this." Similarly, Russian metals exports could as easily fall as rise, said Tony Warwick-Ching, an analyst with Flemings Global Mining Group. Russian mines, cut off from foreign investment, might see their output diminish, as happened in Congo and Zambia. Among oil exporters, Venezuela was of much greater concern than Russia, said Mr O'Sullivan. The markets fear that Venezuela, which accounts for 6 per cent of world oil exports, may renege on its commitment to cut production when it meets Mexico and Saudi Arabia to discuss quotas this week. Financial Times

To: Alex who wrote (17030)	8/31/1998 10:24:00 AM
From: Giraffe	Respond to of 116816

The Dismal Scientist An interesting site for economic information of all sorts. dismal.com

To: Alex who wrote (17030)	8/31/1998 10:30:00 AM
From: Giraffe	Read Replies (3) \| Respond to of 116816

The Global Financial Sell-Off Analysis by Mark Zandi Written August 28, 1998 Global financial markets are reeling. Stock prices have plunged in every major market from New York to Tokyo. Year-to-date equity prices in dollars are down close to 15% in Japan, 20% in Canada, 30% in Hong Kong, 40% in South Africa, 50% in Mexico, 70% in Venezuela and 90% in Russia. U.S. and European equity markets are still up so far this year, but are well down from the peaks of earlier this summer. The S&P 500 index is now off 12% from its mid-July high. The recent global equity market sell-off has been prompted by the Russian currency, economic and increasingly political crisis. It is not that the Russian economy is very important to the global economy-Russia accounts for less than 1% of U.S. exports and imports -but it is playing an outsized role in shaping global investor confidence. The Russian crisis symbolizes all the things that can go wrong when investing in a so-called emerging market. Moreover, it highlights a certain impotency on the part of the IMF to stem financial and economic crisis even in relatively small economies. The Russian crisis also appears intractable. A more stimulatory fiscal policy is out of the question given that the government is unable to collect taxes and is thus spewing red ink. There is no monetary policy given that the ruble has no clear value. The IMF is no longer willing to help out given that it has already blown through much of its financial resources trying to head off the current crisis. Private lenders are also scrambling to get out of Russia as the Russian government has effectively defaulted on previous loans. Further fueling investor concerns is that although Russia is an economic lightweight, it remains a nuclear power. With the Russian economy and political system seemingly teetering on collapse, just who is and will be in charge of this arsenal? Even having to ask this question has investors across the globe on edge. Will the current global financial sell-off ultimately result in an U.S. economic recession? It is certainly not difficult to construct such a scenario. The current crisis will result in weaker economies overseas due to falling currencies and financial markets and rising interest rates. Nearly every nation outside of the U.S. and Western Europe are raising interest rates in support of their currencies. Even the Canadians finally gave in and raised their key bank rate a full percentage point in defense of the record low Canadian dollar. A softer overseas economy will further exacerbate an already soaring trade deficit. The trade deficit has widened by over $100 billion to nearly $250 billion, worth almost one and half percentage points of real GDP growth, in just over the past year. Deteriorating overseas currencies and economies will also further undermine U.S. corporate profitability. U.S. businesses will sell less of their goods and services overseas, the prices they will get for their products will fall further and they will suffer in the currency translation of their overseas earnings. Corporate profit growth has already all but stopped during the past year after expanding at a double-digit pace for much of the previous five years. The U.S. stock market is particularly vulnerable to weakening corporate profitability due to what until the recent decline in prices was serious overvaluation. At its peak in mid-July the price-earnings ratio on the S&P 500 was a record 30, more than double the historical average. Based on a straightforward corporate earnings discount model, the S&P 500 index was overvalued by some 30%. Falling stock prices pose a particularly nettlesome problem for the U.S. economy since the surge in equity prices in recent years has been a key ingredient to the economy's stellar performance of recent years. Soaring household net worth is instrumental in supporting the rocketing housing market and consumer spending. The low cost of equity capital has fueled the investment boom and the tax revenues generated on realized capital gains has turned the federal deficit into a surplus and thus allowed fiscal policy to become less restrictive. While the chances of an U.S. economic downturn are thus on the rise and are now as high as they have been since 1995 in the wake of the Mexican crisis and a year of monetary tightening, they remain low. A subjective assessment of the chances of recession sometime in the next year at as high as one in five. It is important to remember that the overseas crisis is not uniformly bad for the U.S. economy. The global flight-to-quality into the U.S. bond market is sending U.S. long-term interest rates to record lows. Mortgage and other lending rates will soon follow, which will support continued housing activity and another round of mortgage refinancing. The stronger dollar also reduces import, energy and agricultural prices for U.S. consumers. In fact, since the Asian crisis began one year ago a case can be made that the net impact on the U.S. economy has been largely a wash. U.S. policymakers also have a number of options at their disposal to head off a downturn. Most importantly, the Federal Reserve Board has significant room to ease monetary policy given currently low inflation. Financial markets are anticipating that the Fed will ease by early next year. The implied funds rate from the price on the February Fed Funds future contract is 5.25%, 25 basis points below the current 5.5% rate. The Fed would like to avoid easing policy given that such a move may lay the foundation for a much stronger U.S. economy and accelerating inflation once the global crisis subsides, but it may have no choice. The Fed may soon become the lender of last resort for the entire global economy. The probability of U.S. recession also remains low since the economy's balance sheet, an accounting of the assets and liabilities of businesses, households, financial intermediaries, and government, is in good shape. A weak balance sheet as evidenced by overleveraged businesses and households, capital-short financial intermediaries, and a deficit plagued federal government has been a necessary condition for previous recessions. When the economy's balance sheet is weak, it is vulnerable to shocks such as an Asian economic crisis or stock market correction. Confidence is easily undermined and households and businesses quickly reign in spending and investment, intermediaries stop lending, and the government is hamstrung from following stimulatory tax and spending policies. At this time, corporate balance sheets are pristine and, despite weakening profitability, businesses are able and willing to hire and invest. While household debt burdens are high for lower-income households, they have recently begun to decline due to slower borrowing and lower interest rates. Financial intermediaries are highly profitable and their capital positions are ample, suggesting that lenders will remain aggressive providers of credit. The government's fiscal situation has vastly improved: the federal government may soon begin to redeem outstanding debt for the first time in more than a generation. Even with a good balance sheet, however, a big enough shock from overseas and a falling equity market could push the U.S. economy into recession. What would it take? The most likely outlook is that the U.S. economy slows from near 4% growth last year to 3% this year to 2% next year. This is based on the assumption that the global economy excluding the U.S. grows by just over 1% this year and 2% next year. The stock market is also assumed to trade sideways from here. The total sustained correction in U.S. equity prices from their peaks is thus approximately 10%. An U.S. recession in the second half of 1999 would occur if instead of growing 2% next year, the overseas economy posts a year of essentially no growth. Moreover, the U.S. stock market would have to experience a sustained decline of almost 40% from its peak, meaning another 25% to 30% decline in prices from their current valuations. The U.S. economic expansion will ultimately come to end, but not likely at the hands of the current global financial sell-off. Dismal Scientist