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Non-Tech : Invest / LTD -- Ignore unavailable to you. Want to Upgrade?

To: R. Gates who wrote (3437)	9/27/1998 12:42:00 PM
From: Lucretius	Read Replies (1) \| Respond to of 14427

NY POST BET AGAINST BRAZIL BAILOUT By JOHN DIZARD -------------------------------------------------------------------------------- Smart money says the currency will devalue in the end A S the large banks dutifully trim their credit lines to hedge funds, their traders are placing side bets on how big the Brazil rescue package will be, and whether it will be seen to be effective. Seen to be is the operative phrase, since we're really talking about a very big bluff. The IMF, the U.S. Treasury, other official lenders, and the major banks are preparing to double up their bets that Brazil will plunge itself further into an economic decline to save its currency from devaluation. They are likely to do this after next weekend's Brazilian elections provide some headlines about a tough, reformist government being re-elected. No matter how many tens of billions of dollars the Brazil package contains, and the word is that it will be over $50 billion, the smart money - by which we don't mean the IMF or the Treasury - is seeing the announcement of the bailout as a great selling opportunity. That can include you, if, for example, you own shares in the Brazil Fund (BZF). The relief rally that will come in Brazil in the bailout's wake is action that you should fade, as they say in Atlantic City, or sell as others buy. The problem is not that the re-elected government of President Cardoso won't really, really mean its promises to cut its budget deficit from 8 percent of GDP to 3 percent. It's that a) that's a moving target as the economy slows, and b) spending cuts require Congressional approval, constitutional change, and the consent of state governors who have staked their lives on building roads and bridges to nowhere. That's if the most important thing in life is to maintain a currency peg. Interestingly, promising to do so has been the way Cardoso has gotten his big lead for re-election. It is, however, one thing to say with your vote that you will tough out the austerity. It's another when you lose your job or your pension. Especially if it's for the wrong program. The IMF castor oil program for Brazil could easily cause a deflationary spiral. Alternatively, they could devalue by 20 percent or 25 percent sooner rather than later. Then any assistance package could go to cushioning the effect on Brazilian banks and companies that borrowed dollars, at least until their income statements come back. If there is going to be a devaluation, then perhaps the increasingly scarce international loans shouldn't be spent on a futile battle with the markets. And if the price of getting European support for a Brazil bailout package is a U.S. agreement with a new regime of capital controls, that's even more reason the bailout shouldn't be done. But it likely will be. Bet against its success. If you own BZF or Telebras stock, sell into any rally. Goldbugs are among my most faithful e-mailers. They often want to know when I am going to pull the trigger for a buy recommendation on the metal. OK, trigger pulled. This stuff is going up. No, it's not just Jim Blanchard's pitches for gold coins to insure against a social collapse when the computers stop in the Y2K. Since the precious metal bear market started in 1980, the smart way to hedge yourself against market risks has been to use derivatives contracts. They have been a cheap, liquid way to offset some or all of realized or potential losses on you underlying portfolio or inventories. In contrast, gold has remained expensive to store and can earn little, if any, interest. Eventually, even Swiss bankers stopped talking it up as a hedge against market disruptions and the goldbug investors were reduced to a small fraction of the market. Jewelry demand in the emerging markets became the new source of demand. According to JP Morgan's gold market analyst in London, Kevin Crisp, last year jewelry demand in the emerging markets added up to 2,372 metric tonnes, compared to 955 tonnes in the developed world. He's a skeptic about the gold price, basing his position on the assumption that emerging market demand next year will fall by 400 metric tonnes or so, as distressed new poor sell what they can. Four hundred tonnes of gold is only about $3.8 billion. That's the market cap of a medium-sized public company, or the size of the Long-Term Capital bailout. All we need to keep the gold rally going is for a tiny fraction of the investors in rich countries to conclude that while you might not be able to cash in a put option on the Malaysian ringgit, you can always sell a gold bar. Investor demand in the rich countries is coming back. My moles among the new forced investors in Long-Term Credit say that the day after news of the rescue package, the fund's net asset value went up by $400 million. By the way, I hear the partners of Long-Term turned down a deal where their interests would be bought out for $200 million after which they could walk away and leave the fund's unwinding to the new investors. Instead, they decided to stay and fight another day.