Good evening to you all. In our analysis of global economic conditions
over the last few months, we have consistently drawn two conclusions.
First, fundamental troubles in Asia would lead to a slow down of the global
economy and, inevitably, an end to the bull market of the 90's. As of
today, approximately 40% of the global economy is in recession and equity
markets, including the Dow, are in negative territory for the year.
Secondly, the failure of Asia and other key regions to solve problems
pertaining to their banking industries, brought about by historically high
extensions of credit, will inevitably lead the world into a global
recession - possibly of proportions not seen in recent history. To date,
the United States has performed admirably as both a lender and importer of
last resort. However, the persistence of major economies, such as Japan,
to "export their way back to prosperity" will eventually lead to a collapse
of the US economy. The rationale is quite simple. As the global economy
slows down and reduces its imports of US products, the resulting reduction
of American wealth diminishes the ability of the US to continue its role as
importer/lender of last resort. Thus, the insurgence of a global economic
recession.
Our conclusions have always been simple, yet correct. So called "experts"
can dazzle their audience with charts, graphs and tables but the fact of
the matter is, nations are no different from individuals when considering
the effects of irresponsible credit management. The only real difference
is that nations have deeper pockets and can extend bad credit situations
for a substantially longer period of time. However, even nations such as
Japan, Russia and others can not escape the credit crunch in perpetuity.
This is what we are witnessing today.
Question. Are we therefore doomed and on course with certain economic
catastrophe?
Answer. No, not yet.
To elaborate, several global economies have now reached a stage where they
are neither able to borrow more money, nor increase cash flow to continue
servicing their debt. Much like individuals, these nations must now make a
choice. For example, trade in the expensive car for a much cheaper model;
Sell the expensive home and move into a much smaller home; Give up the
five star restaurants and order in pizza; and stop wearing designer clothes
and start shopping at the department store.
Make no mistake about it, the aforementioned examples are to scale. Most
nations have been living on the high end at the expense of taxpayers and
now they must adjust those standards or face fiscal death. However, as
much of an advantage it was to have those deep pockets, it is now equally
disadvantageous to make those changes which will disrupt the life taxpayers
are accustomed to. In most cases, incumbent rulers must choose between
fiscal and political death. The logical choice is easy but whoever said
politicians were logical? If they were, we would not have these problems
to begin with.
Hence the answer "No, not yet". Nations still have the time to make the
right fiscal decisions but it is running out. For years, incumbent parties
have ignored these issues and passed credit problems onto the next ruling
party, only to have the latter blame the former for it. It worked for so
long because nations had deep pockets, our taxpaying pockets, but it
appears the string is now coming to an end. Without radical decision
making by world economies, even at the expense of political death, "No, not
yet" will certainly become an unequivocal "Yes".
To that end, please find enclosed an article from the Associated Press that
should be reviewed carefully by all investors.
Regards,
Agora International Enterprises Corp.
__________________________________________________________________
Economic Crisis Moves Closer to US
By MARTIN CRUTSINGER
AP Economics Writer
WASHINGTON (AP) - The economic crisis that has hit Asia and Russia - and
rattled the U.S. stock market - is moving ever closer to American borders
as major trading partner Canada and fast-growing Latin American markets
start to suffer.
The International Monetary Fund on Thursday convened an unusual meeting of
top finance officials from across the Western Hemisphere to try to
accomplish the so-far impossible - keeping the trouble from spreading.
A major goal is to try to calm jittery foreign investors who have begun
dumping stocks and currencies from all markets in fear that what happened
in Asia and now Russia will hit elsewhere, said Treasury Secretary Robert
Rubin.
''There has been spillover from the turmoil elsewhere,'' Rubin told
reporters during a break in the closed-door discussions. ''The markets, as
we are going through this period of great difficulty, are tending to sweep
equally over all countries.''
When the economic troubles began in July 1997 with the collapse of the Thai
baht, Americans hardly noticed.
Even after the stock market suffered its biggest one-day point loss because
of Asian jitters last October, the United States still seemed largely
immune. The market came roaring back, helped by foreign investors who were
looking for a safe haven.
But in recent weeks, the situation has grown more serious.
Canada, which buys 20 percent of American companies' exports, is slowing
dramatically because of the hit suffered by its own commodity exports. And
after Russia's botched devaluation of the ruble last month, investors have
been fleeing emerging markets in Latin America, including Mexico, America's
third-biggest trading partner.
Even before the turmoil, the U.S. trade deficit was hitting record highs
because of the loss of Asian markets. Japan, America's second-biggest
trading partner, is in its worst recession in 50 years.
But the problem will grow far more serious if the Asian contagion engulfs
America's nearby neighbors. Taken together, Canada, Mexico and the rest of
Latin America account for 40 percent of U.S. exports.
''Japan is in recession. Asia in general is in recession. If Latin America
goes, it will be hard to keep us from getting sucked into the whirlpool,''
said David Wyss, economist at Standard & Poor's DRI.
American companies might be unable to sell as much overseas to countries in
Latin America, for example, that suddenly find themselves poorer. That
would hurt American companies' profits, in turn rattling a Wall Street
already worried that profit expectations are too high.
In addition, thousands of layoff notices have already gone out to American
workers in high-tech industries such as aerospace, which depend heavily on
Asia for sales.
Officials gathered by the IMF are expected to issue a statement Friday
highlighting many Latin American countries' recent accomplishments at
getting their budget deficits and inflation under control - in hopes that
will steady investors' nerves.
Economists, however, say that's unlikely, with so many growing risks.
Colombia on Wednesday became the latest victim of the global jitters,
announcing a 5 percent devaluation of its currency, a move that increased
worries in Mexico, Venezuela and Brazil.
In addition, one of the biggest threats now is that China will be forced to
devalue its currency, setting off a new wave of turmoil in Asia.
Also, Japan is still mired in deep economic and banking troubles. Rubin and
Federal Reserve Chairman Alan Greenspan were scheduled to meet in San
Francisco on Friday with new Japanese Finance Minister Kiichi Miyazawa.
There were market rumors the talks might prompt a global agreement for the
Federal Reserve and other major countries to lower interest rates to spur
growth, but U.S. officials sought to lower expectations for any major
breakthroughs.
They described the discussions merely as a chance for Rubin to continue
pressing the U.S. case that Japan must do more to get its own house in order.
''We don't expect new initiatives to come out of this specific meeting,''
said one Treasury official, speaking on grounds of anonymity.
The Investor's Investor. Published by Agora International Enterprises Corp.
c COPYRIGHT 1997-1998 by Agora International Enterprises Corp. ALL RIGHTS
RESERVED
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