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To: Alex who wrote (21108)	10/8/1998 6:21:00 PM
From: goldsnow	Respond to of 116791

Currency of doubt dogs markets Portfolio, By Barrie Dunstan We now live in very challenging times. Major changes are occuring as world currency markets adjust to new realities. For share investors, the big challenge is to decide whether this is simply just another phase which will pass or a new, serious economic event. In terms of share market strategy, is it a case of "buy on the dips" (as in the last decade) or, now, a case of "sell shares and buy bonds and cash"? The honest answer is that probably no one can be sure, though that won't stop thousands of experts penning millions of words on what it all means. But with world share markets down almost 14 per cent in the first three months of 1998-99, most would agree that this is a bear market in shares, rather than a temporary dip which long-term investors treat as a buying opportunity. The question now is whether things have deteriorated so much that we sell shares and buy bonds or cash. Life has changed because the market shocks have been transferred to the currency markets. On Wednesday night we saw our dollar move about US3¢ (or about 5 per cent) while world players were seeing a 6 per cent fall in the US dollar in yen terms or an 8 per cent rise in the yen – in effect the largest one-day moves since currencies were floated in the 1970s. To a large extent, the answer to all the questions lies with the abilities and wit of the world's economic managers, particularly the Japanese, to manage the world out of a potentially destructive deflationary recession. Hopefully, the authorities really are aware of what is happening and are taking their cue from the world's markets which are signalling that there is a real need to reflate economies. The rally in gold prices, for instance, suggests the penny is dropping about reflation. Some of the market concern may well be that players want to see some real sign of action by the authorities. This is why the reaction to the Fed's small 0.25 per cent easing was so negative and why some markets have been skittish in anticipation of easings. But the latest Japanese bank rescue package appears to get closer to what the markets reckon is needed. Indeed, National Mutual Funds Management's strategist Nigel Purchase argues that the Japanese, who account for more than 8 per cent of the world's GDP, need to forget about the recent past and start seriously reflating. "Managing inflation upwards" is his policy prescription. His argument is that when interest rates get so low (below 1 per cent on long-term bonds is low), then the only way to reduce real rates is to move inflation from a negative level to a positive level. That probably requires the government not only to pick up the cost of debt but to monetise it. In other words, perhaps the best way out of the present extreme situation is for governments like Japan to run the old printing press. Yes, that's right, the monetary policy suggested by Pauline Hanson to back One Nation's 2 per cent cheap loans might be the right policy in an extreme case. Investors also have to worry about how US markets will cope with the necessary changes in world markets. The sharp fall in the US dollar on Wednesday has shocked many American market players who have only just got their head around the idea that US companies and shares might be affected by a world slowdown. Of course, part of the necessary adjustments in the world system is for funds to flow back from the US to Japan and Asia, a process which will be helped by a fall in the value of the US dollar and an unwinding of the yen-US dollar plays. The only trouble is that, with the dollar falling 6 per cent in a day, currency market players face the equivalent of the 1987 crash in share prices. Whether all this can be managed without triggering further losses among highly-geared hedge funds and derivatives players remains to be seen. Losses (or even fears of losses) by major banks and investment banks will create very nervous times. In short, a key question is whether share markets can hold the line now, partly supported by lower bond yields, or whether all those new investors into the US stockmarket over the last decade or so are, finally, spooked into selling. afr.com.au