Just challenged a friend with a prediction for 400+ down on the DOW for the day!
In case some people missed this article, here is what Barton Biggs has to say. I respect his view because he is among the first on the Street (OK Joe, your are THE fisrt! -g-) to use the D word. As early as in March 97, just when the Feds were obsessed with inflation. Now every tom, dick and harry are talking about the same.
------------------
September 9, 1998
Strategy and Economics: A Rally to Sell Into
by Barton M. Biggs
of Morgan Stanley Dean Witter Discover
Market Rap Extra
The "end of the beginning" that I wrote about last week is upon us, but I continue to believe that days like Monday are nothing more than ferocious rallies in what is still a bear market. None of the malignant fundamentals have changed. The world still has cancer.
This is as dangerous a time for investors as I can remember. You can't tell which way the train was going by looking at the tracks, but you can get annihilated in a flash if you are looking the wrong way.
Powerful economic and market forces, some of them countervailing, have been unleashed that no one really understands. The facts, though interesting, are irrelevant. Relationships and correlations that have worked for years suddenly have become unhinged. Volatility has soared, and markets are not behaving rationally, in part because there is forced deleveraging and a stampede for liquidity. A sane, dispassionate soul who didn't have to sail on in this hurricane would head for shore and observe the storm from a sage haven.
Just when they seemed on the brink of panic, stock markets everywhere magically lifted after the chairman of the Federal Reserve suggested the turbulence around the world was severe enough that easing was now a consideration. The ferocity of the subsequent rally showed that investors still want to believe that the bull market is intact and is also indicative of how oversold many markets were.
Although the rally phase may last for a while (days or weeks, not months), I think this strength should be cherished as a gift and sold into. Too much money has been lost, too many risk premiums have been elevated, and the forces of creeping deflation and economic weakness are too prevalent. Besides, Chairman Greenspan only said easing was an opinion. More ominous was his remark that the U.S. could not expect to be "an oasis of prosperity." In essence, Mr. Greenspan was saying that no country, not the U.S. or those in Europe, was immune from the contagion sweeping the world.
Last week the secondary effects of the Russian devaluation and default were very evident in Latin America, particularly Brazil and Mexico. These are two big economies that are directly related to the U.S., both through trade and finance. Mexico has rallied, but Brazil hasn't, which is very ominous. Foreign and domestic investors will not soon forget the trauma, and meanwhile, the real economies of both countries are being punished.
Also, I hardly find the imposition of capital controls by Malaysia and the actions of the Hong Kong Monetary Authority to be reassuring. The developing world is disillusioned with free markets and capitalism, and wants to get the foreign investors and hedge funds out of their lives. I can understand their frustration, but this is the stuff of still higher risk premiums. Capitol controls are not the answer.
Russia's devaluation and default are now reflected in prices around the world, but the collapse of the Russian economy into chaos is not. We must pray it doesn't happen, but current developments are not encouraging.
Someday, a coordinated, surprise move by the major central banks and governments of the world will spawn a major and enduring rally that may arrest the plagues that have been unleashed on the world and may even end the bear market. Action by the Fed alone is not sufficient, as it would have secondary consequences that would be destabilizing, such as causing the dollar to weaken.
Unfortunately, such concarved action seems unlikely in the current world environment. Although President Clinton is damaged, Messis. Rubin and Greenspan are very capable of global leadership. However, Germany is in the midst of an election, and even after the election the advent of the new European Central Bank complicates decisive action. For example, will all the finance ministers of the member states have to agree?
And then there is Japan. While short-term rates are so low in Japan that further cuts would be regarded as meaningless, if the Japanese government agreed to eliminate the VAT as its part of the package, it would be an important symbolic gesture. However, as the Japanese finance minister apparently conceded at this weekend's meeting, the government is so weak and in such disarray that such a move is very unlikely.
In my opinion, the key to what happens next is the U.S. economy. If it remains healthy, then the bear market may be over. My guess is that it will falter. Capital spending is grossly excessive, the consumer is too leveraged, the Asian and neighbor contagions are too violent, and the wealth effect is very enervation.
The best sales in my view are Japanese equities, technology stocks everywhere, U.S. consumer multinationals, and the yen. U.S. Treasury bonds still should be held, but cash and short-term bonds are the best buys. |
