To: Jim S who wrote (8326 ) 10/11/1998 12:30:00 AM From: JF Quinnelly Respond to
Don't feel like the Lone Ranger; understanding what currency and interest rate changes mean is like solving the X Files. But I have learned that it's wise to try and watch this stuff. One of the precipitating factors in the 1987 Crash appears to have been the weakening dollar. The dollar had become very strong by 1985, so when the G-5 met we coordinated a drop in its value. The Japanese, who owned a ton of our Treasury bonds, were getting shafted by the currency play as the dollar fell, wiping out whatever they were earning in interest. One weekend in '87 our Treasury Secretary announced we were going to drive the dollar down again (I forget why), so the Japanese bond holders all bolted for the door at the same time. And you know what that set off.Barron's ("A Lousy New Year") says that lenders are demanding higher margin requirements from hedge funds, and this is forcing hedge funds to cover short yen positions. The rising yen is making dollar-based assets fall, so Japanese investors may be bailing out early to avoid a repeat of '87's herd behavior. And then there's the hedge funds like LTCM, that borrowed in yen to go long Danish and Russian bonds, and they have had to sell dollar assets to cover their yen obligations. Whatever it is, the capital flows are very big. Keep in mind that bond markets dwarf the stock markets, and when the bond markets start acting weird they are the dog and stocks are the tail.
