THE JAPANESE LIQUIDITY TRAP AND RUSSIAN DEBT DEFAULT
Quite simply, when a nation suffers from recession, a common tactic is to
lower interest rates and stimulate spending at the consumer and corporate
levels. However, Japan has posted the lowest interest rates in the world
for 5 years in a row and that has failed to stimulate any sort of
spending or investment from any level of the economy. The prolonged
recession has damaged consumer and business confidence so deeply that
neither group will spend money, regardless of interest rates.
As such, there is now strong evidence that Japan has fallen into a
liquidity trap. In a liquidity trap, demand remains stagnant or negative
in a decreasing interest rate environment. At the point where interest
rates no longer have any room to decrease and demand for money remains
flat, the economy is suffering from a liquidity trap. At this point, the
only real option for government is to increase money supply by "printing
money".
When a government engages in this practice it literally prints more money
in order to pay for public works programs intended to stimulate the
economy. The government will engage in building roads, bridges, highways
and anything else that will require hiring workers and paying salaries.
By doing for the economy what the economy will not do for itself, the
government hopes to kick start the flow of spending and prosperity. The
tactic works in theory and worked in practice for the US Federal Reserve
back in the 1930's.
However, risk of failure aside, the tactic of printing money comes at a
price. Specifically, the devaluation of the national currency. Quite
simply, it is economics 101 - the greater the supply of an item, the
lower its value. In this case, a lower Japanese Yen with many
repercussions. For example, possible effects include but are not limited
to the following:
- lower Japanese demand for US goods due to affordability
- lower Japanese demand for gold
- further currency devaluation in the region
- possible global currency devaluation in emerging and commodity based
nations
- lower demand for commodities
- reduced ability of emerging nations to meet international debt
obligations
- global deflation
Back in the 1930's, the US Federal Reserve Board did not have to worry
about these issues because the global economy was not so interdependent.
In 1998, things are much different. A virus in one of the world's major
economic links, Japan, has the ability to spread quickly first through
the Asian region and then through the rest of the global economic
chain.
With respect to Russia, we have already discussed the facts that present
possible large debt defaults. With the government in turmoil, there has
been no official word on servicing its international debt. This is
probably due to the fact they do not know how or IF they will be able to
meet their payments. If Russia defaults, the global economic system
would suffer a major shock.
Currently, commercial banks from Germany, the US, Japan, Britain and
others had outstanding claims at the end of 1997 totaling approximately
$US 60 billion. German banks are the greatest exposed with $30 Billion,
followed by the US and France at $7 billion each. However, private
lenders stand to lose as much as
$US 100 billion if Russia can not meet its debt, which would be
considered the single greatest loss ever by the international banking
community.
What alternatives does Russia have to default? A fire sale of its
commodities. Russia is very rich in gold, crude oil and a number of
other valuable commodities. However, that too would come at an expense.
The severe devaluation of commodities that many nations heavily depend
upon, including Canada. Once again, there would be a shock to the global
economic system.
CONCLUSION
These are only two of the major economic concerns facing the global
economy but they are very big and significant. More importantly, the
resolution of each crisis involve severe repercussions to the global
economic system. As such, we repeat our comments from last week:
"After a period of negative news and performance, markets have a tendency
to try and forget bad news in an effort to return to "the good old days".
You may have heard of the terms "suckers rally" or "bear market trap",
well this is the exact set of circumstances it applies to - don't fall
for it. Quite simply, the next true bull can not arise until current
global economic issues are solved."
GENERAL STRATEGY
We repeat our comments from last week:
-------------
"We also see the real possibility of gains in the gold sector, as the $US
continues to decline. This will especially be the case if the Federal
Reserve cuts interest rates. Thus, we are keeping a close eye on IMG and
AZS, our two favourite gold traders, for cheap prices over the next few
days and weeks"
--------------
Both AZS and IMG made gains last week, especially IMG which climbed to
the 4.35 level from 2.40. Unfortunately, Alan Greenspan's comments were
made on the Friday before the labour day weekend and did not give us
enough time to take advantage of the environment. However, we expect the
gold markets to continue its wild swings over the next 2 months and we
will recommence making additions to our portfolio when the swings are
low.
In the meantime, we repeat that patience is vital at this point. We have
said it before and we will say it again, sometimes the best trade is the
one never made.
AGORA PORTFOLIO ADDITIONS, DELETIONS AND HOLDS
AGORA PORTFOLIO DELETIONS
EEL $.18 No trading since original purchase at 1.00.
Since looking for an opportunity to sell in the .25-.30 range, EEL has
fallen to sub .20 levels. We are not in a hurry to sell this position and
would prefer to wait for .20-.25 levels.
AGORA PORTFOLIO ADDITIONS
None at this time.
AGORA PORTFOLIO HOLDS
YF.T - $7.90
We added a trading position at 9.00 last week. Unfortunately, we were
taken surprise by the Dow Jones article which knocked down Yogen Fruz by
1.55 in a single day. You have all received our conference call data, as
well as, the YF press release with statements from Price Waterhouse
Coopers. We are extremely confident in YF and look at this short term
action as temporary.
CGO $13.10
After taking profits at $18.00, we were very happy to add CGO at $14.00
in August. We now intend to hold this position into the $16.00 + range
for more trading profits.
IMG.T $4.15
Iamgold made significant moves with the price of gold last week. IMG has
shown a strong correlation to movements with the price of gold. As such,
we will be patient and sure to add on the next dip.
IMG is a top mid-size gold producer with excellent revenues, profits and
properties. IMG is on schedule to produce 500,000 ounces of gold at an
average cost of $112.00. Despite solid fundamentals, the recent weakness
in gold has led
to a weaker price in IMG which looks attractive as a core purchase. If
the US dollar continues to weaken, we would expect gold and IMG to
appreciate in value, at which time we will attempt a momentum trade.
FM.V 1.59
We added a $2.00 trading position in FM a few weeks ago. Despite the
price decline, we will now hold onto this position in anticipation of
earnings over the next two quarters.
AC.T 7.90
The airline announced a tentative agreement on Thursday and we are
waiting for ratification on Monday. At that point, we will have to
determine the extent of losses due to the strike. At these levels, AC is
very attractive.
Our sales of two positions at 13.70 only last month is looking better and
better but we must confess that we did not foresee this large of a drop
in Air Canada.
VNE.A - .40
As this company makes progress in e-commerce, we remain very confident in
its future, especially in light of the deals they are signing and the
national coverage they are receiving. VNE has been caught in the
small-cap tornado but is setting the basis for a fundamentally strong
player in the e-commerce industry.
AZS.V - 1.36
AZS did not move with gold as much as we would have anticipated. An
indication that gold producers like IMG and Kinross will get most of the
attention during movements in bullion. Nonetheless, AZS remains
extremely undervalued and current levels are completely unwarranted.
BGO.T $1.90
AZS parent company moved almost 33% with gold last week. As such, we may
have to concentrate on these larger companies when playing the gold
swings.
KCI.V - .29
You all received the latest KCI press release which confirmed that merger
talks with US based SmartLink were progressing to the satisfaction of
both parties. This real possibility of merging and listing on a US
exchange, combined with excellent revenue and earnings numbers reported
to date, puts KCI in position to make great gains from these levels.
We are also awaiting news from the US Federal Tender for APCO 25
products. A successful bid here, which the company has hinted at in
previous updates, will also add significant value to this company.
We have covered KCI since October and we believe in the fundamentals over
the next 6-12 months. Look for KCI to excel in our portfolio. We are
currently holding a .35 trading position and believe current levels
represent excellent value for our portfolio.
SYD.V - .43
Sideware announced the establishment of US operations, to be based in
Washington, D.C. SYD is now making believers out of investors who did
not believe in management's ability and desire.
Having said that, investors are now becoming impatient in anticipation of
a corporate update.
MIQ.M - .19
MIQ/Kinross released excellent drill results in August. If you don't
take their word for it, just ask the Norther Miner who were equally
enthused by the results. We are also anticipating release of the next
set of drill results very shortly. In its last update, the company has
indicated its anticipation of continuing meaningful drill results.
Despite this, MIQ stock continues to fall for any number of reasons. As
long as fundamentals is not one of them, we remain very confident in the
future of this company.
KRT.V $.21
Sold our .36 position at .36
TRADING RECORD OF EXECUTED TRADES SINCE INCEPTION
FM.V $3.70 sold at 4.35-4.40 GAIN - $700/1000 shares
VEC.V $2.27 sold at 2.95 GAIN - $680/1000 shares
FM.V $4.15 sold at 4.85 - 5.00 (1/2) GAIN - $700/1000 shares
FM.V $4.15 sold at 5.50 (1/2) GAIN - $1,350/1000 shares
AZS.V $10.15 sold at 11.75 GAIN - $1,600/1000 shares
IMG.T $5.50 sold at 6.30 GAIN - $800/1000 shares
YF.T $4.60 sold at 5.30 GAIN - $700/1000 shares
<color><param>ffff,0000,0000</param>KRT.V $1.10 sold at .90 (avg) LOSS
- $200/1000 shares
</color>FM.V $4.95 sold at 5.80 (1/2) GAIN - $850/1000 shares
YF.T $5.40 sold at 6.35 GAIN - $935/1000 shares
FM.V $2.30 sold at 4.10 GAIN - $1,800/1000 shares
IMG.T $5.00 sold at 5.50 GAIN - $500/1000 shares
JOT.V $0.88 sold at 1.10 GAIN - $220/1000 shares
JOT.V $0.95 sold at 1.15 GAIN - $200/1000 shares
IMG $5.00 sold at 6.00 GAIN - $1000/1000shares
JOT.V $0.93 sold at 1.10 GAIN - $170/1000 shares
AZS.V $1.83 sold at 2.05 GAIN - $220/1000 shares
AZS.V $1.85 sold at 2.20 GAIN - $350/1000 shares
IMG.T $4.50 sold at 5.00 GAIN - $500/1000 shares
IMG.T $5.00 sold at 5.50 GAIN - $500/1000 shares
YF.T $5.60 sold at 7.20 GAIN - $1,600/1000 shares
YF.T $6.50 sold at 7.20 GAIN - $700/1000 shares
CGO.T $11.00 sold at 12.25 GAIN - $1,250/1000 shares
MIQ.M $0.26 sold at 0.45 GAIN - $190/1000 shares
BGO.T $2.75 sold at 3.30 GAIN - $550/1000 shares
AZS.V $1.55 sold at 1.95 GAIN - $400/1000 shares
AC.T $12.60 sold at 13.70 GAIN - $1,100/1000 shares
AC.T $13.25 sold at 13.70 GAIN - $450/1000 shares
CGO.M $14.00 sold at 18.00 GAIN - $4,000/1000 shares
As usual, in a sell we use the last bid and on a buy we use the last
ask.
In the end, that is the fairest assessment of our record. As well, we
only record a trade in which a sufficient amount of volume has been
transacted, so as to provide a realistic entry and exit for a large
number of investors.
We hope you all had a great weekend.
Regards,
Agora
The Investor's Investor. Published by Agora International Enterprises Corp.
c COPYRIGHT 1997-1998 by Agora International Enterprises Corp. ALL RIGHTS RESERVED
Information presented by The Investors Investor is not an offer to buy or sell securities referred to herein. It is strictly for information or entertainment purposes, highly opinionated and not in any way guaranteed as to accuracy or completeness. Readers are urged to obtain complete financial and other information directly from their investment advisor or the company. We are not liable for any investment decision. We are not an investment advisor, analyst, market maker, geologist, mining expert, money manager, stockbroker, etc. Stocks mentioned tend
to be extremely speculative, volatile, high-risk and unsuitable for all but the most aggressive investors willing to lose all of their investment.
DISCLOSURE STATEMENT
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AGORA INTERNET RELATIONS CORP does not participate in the maintenance of an orderly market in their client's securities, nor is required, or receives an incentive for, the maintenance or achievement of a price or trading volume for their client's securities at a certain level, for a specified period of time or by a certain date. AGORA INTERNET RELATIONS CORP. may, at any time, own shares in these companies.
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