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To: waldo who wrote (21467)	10/12/1998 1:36:00 PM
From: Alex	Respond to of 116764

The Buck Is Bruised So is another big hedge fund. What's going on? By Kenneth Klee Ok, you may not like it. But you can at least understand why the U.S. stock market is getting hammered by far-off financial problems. If Indonesians are poorer, they'll buy less Coke and fewer of those nifty Gillette Mach 3 razors. Likewise, you can probably see why the gyrations of the global bond markets might cause a Connecticut money manager to lose a few billion--at least if he has a couple of Nobel Prize winners to help him, as Long-Term Capital Management's John Meriwether did. But why on earth should the U.S. dollar suddenly lose 13.7 percent of its value against the yen, as it did last week? This is the Japanese yen we're talking about--coin of a realm of economic gridlock and political paralysis. Yet the same currency that was free-falling against the greenback in July rebounded so abruptly that one big investor--hedge fund Tiger Capital Management--lost nearly $2 billion in a single day. Strong currencies are supposed to reflect strong fundamentals--such as a balanced budget, prospects for growth, the balance of trade. In most ways (though not that last) the United States beats Japan hands down; just ask Julian Robertson, the man who runs Tiger. So what strange forces are combining to produce this latest disruption? The short answer is Alan Greenspan, Monica Lewinsky and a longstanding Japanese policy of making money available practically free. The Fed chairman warned in a speech on Wednesday that the U.S. economic outlook had deteriorated. Bad news for the dollar. Worse news came Thursday, when Congress moved a step closer to impeaching Bill Clinton. U.S. leadership appeared shaky just as Japan's hapless leaders looked like they might actually start cleaning up the country's trillion or so dollars in bad bank loans. With a nudge from those developments, some carefully placed investments began to tremble. They call it the "yen carry trade," and it is (or was) a thing of beauty. You borrow in Japan, where interest rates have steadily approached zero for the past five years because the government is desperately trying to restart the economy. Then you sell the yen for dollars and invest in the United States--and pocket, say, 4 percent a year. All you need is a yen that's stable against the dollar or, better yet, falling, as it has been since 1995. The carry trade wasn't just for the carriage trade, the superrich folks who invest with Robertson. It was also a favorite of Japanese insurance companies, retail Japanese investors, big U.S. banks--lots of people were doing it. Until last week. And as everyone sold dollars to pay back the yen they'd borrowed, the dollar sank as low as 112 yen (it closed at 117 on Friday). Bill Clinton, ever alert for a silver lining, pronounced the weaker dollar a good thing. And, in fact, it is. It helps U.S. exporters and protects industries facing import competition--such as steel, where some of Clinton's union allies work. As for average Americans, they saw interest rates spike up a bit, but mortgage rates are still a bargain. Even Robertson can't complain too much. Now 65, the North Carolina native is, along with George Soros, one of the doyens of the hedge-fund business. Leveraged merely fivefold--LTCM, by contrast, borrowed 20 times its equity--Tiger specializes in stocks, though it also has a major position in palladium (don't ask). Even after the nearly $2 billion loss, market sources say, Robertson is still managing some $18 billion, up some 10 percent on the year, and still bearish on Japan. So what's the harm? Just this: for anyone making a cross-border business decision, sudden exchange-rate swings are pure poison. One of the things that clobbered Asia in the first place was the unstable relationship between the currencies of its two major trading partners, the United States and Japan. Alas, the prospect is for more of the same. With Rich Thomas Newsweek, October 19, 1998 newsweek.com