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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (1701)	5/26/1999 8:53:00 PM
From: Paul Berliner	Respond to of 3536

I figure that if say, Venezuela, a major oil exporter were to dollarize, the oil sector would be at the monetary mercy of the U.S., their best customer - a big negative. It could either prosper or crumble. My analysis is as follows: The weaker Bolivar softened (barely) the effect of weaker oil prices on the Venezuelan economy late last year, as they modestly adjusted the trading band on occasion. If they were dollarized, they probably would've ended up dirt broke like Russia, and they would've defaulted on their external obligations. Venezuela was in serious pain with crude at $13, but they were no Russia. Moscow had the ruble fixed at .16 for most of the drop in oil prices. For a major oil-exporting country to fix its exchange rate to me is akin to a dollarization of the oil industries' cash flows. The Bolivar, on the other hand weakened over 10% during the slide. Their cash flows from oil were adjusted higher as the Bolivar was adjusted, so the punishing effect of $13 crude was lessened. Argentina is a major exporter of beef. Brazil a semi-major, but soon to be very major exporter of oil (many drilling cos. are tripping over themselves to get deals down there). They can't afford to dollarize. One more: Columbia devalued primarily to help the coffee growers, as coffee prices plummetted. They would've been dealt a death blow had Columbia been dollarized or fixed the rate like Russia. Lastly, I'm not saying that lower oil revenues were the cause of Russia's troubles, but they were surely the straw that broke the camal's back. Don't hesitate to point out flaws in my argument - I value your opinion. Paul

To: Henry Volquardsen who wrote (1701)	5/27/1999 5:00:00 AM
From: Skeet Shipman	Read Replies (2) \| Respond to of 3536

Henry and Paul, There are three key problems to official dollarization as presently implementable. First, the country needs to maintain on average a trade surplus and a capital flow surplus, or a combined surplus. The size of this surplus becomes a currency constraint on the economic multipliers in the economy. Second, the currency , US dollars, has to be purchased or borrowed from the US or other nations. This increases the country's debt payments. Third, because the currency, US dollar, does not reflect international competitive pricing in commodities and industrial goods, frequent price changes would be necessary; and long-term contracts would need to be written using an average international currency index. Long-term economic misallocation of resources and productivity could result. In fact, it is doubtful that any reasonably sized developing country can meet the requirements associated with these three areas. Only if the US would regionalize its currency and central banking system will dollarization be possible in my opinion. Argentina may be a unique situation. It will require extensive simulation studies to determine its suitability. The benefits of dollarization could easily outweigh the costs, especially , if these problem areas are addressed. Unfortunately, I think the solution requires regionalization either by the US or South America. Skeet

To: Henry Volquardsen who wrote (1701)	5/27/1999 12:19:00 PM
From: John Pitera	Respond to of 3536

Henry, Re. the Bond and the FED . It makes sense that the Fed may tighten at this next meeting. With Y2K concerns, if they want to tighten this year they do not want to wait until the fall, better to get it into the first half of the year. If the Fed does not raise rates at least once this year then,and the market then has a crash the Fed can be blamed for not raising rates even once to avert a crash. If the Fed waits until the fall and raises rates and we have a Y2K related crash the Fed will be blamed for raising rates when they should have know about Y2K distress to the global economy, the coming spot shortages, and supply disruptions. So to thread the needle, raise the rates in the window of time best suited to do it.... Just a thought

To: Henry Volquardsen who wrote (1701)	6/1/1999 10:54:00 PM
From: Chip McVickar	Read Replies (2) \| Respond to of 3536

Henry and Thread, For those who might have missed Armstrong's latest..... One of the more interesting slices: <<The number one question we get from Japan is about the risk of a MAJOR crash in the US as they experienced back in 1989 in the Nikkei. Foreign participation in the US market is approaching a historical LOW at this time and in no way should the dollar be sold based upon fears of foreign capital repatriation due to a declining stock market.>> And this...<<With liquidity drastically reduced since July 20th, the downdrafts will be much faster and deeper.>> I thought the US was a "Rubber Duck" in a sea of liquidity. Unless the boomers retirement fund distributions is actually slowing down and the market has stoped recieving international stock purchases...this market is still being fueled? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The Return of Inflation Or the Beginning of Y2K? By Martin A. Armstrong Princeton Economics International (London Office) © Copyright May 14th, 1999 Today the markets were surprised by the sudden rise in business inventories and inflation statistics. The implication of today's numbers was clearly reflected in the price action that immediately followed - higher interest rates. The insane interpretation in currency was that the foreigners would begin to sell stocks so sell dollars while you're at it. Today's release of the CPI (Consumer Price Index) and business inventories should have come as no surprise. We have been warning that the effect of Y2K will be inflationary - NOT doom and gloom depression as some have touted over the Internet. Many businesses have realized in the United States that there may be a disruption in supply and as such they are starting to stockpile necessary goods. This effect will keep the US economy quite strong into year-end, but there is a risk of a slowdown come next year should Y2K turn out to be a flop. This will leave these same businesses with excess inventories and as such a slowdown in purchases will cause a downturn in the US economy in 2000. We may even see another sector shift that causes the real old forgotten stocks like elevator manufacturers, electrical contractors and perhaps heating and air conditioners to emerge as the darlings of 2000. If there are severe problems with power grids causing brownouts, that is a formula for record sales of electrical motors of all sorts - including computers. Even Coke has announced that they are accumulating a 3-month supply of raw materials needed for the manufacture of their soft drinks. Medical companies are anticipating the public to stockpile medicine and the manufacturers of those pretty bottles are running at full capacity. Every aspect of the economy is starting to heat up for Y2K and this may be the best reason of all to resign as the Treasurer of the United States while you're still on a high note. The question of whether or not the Fed will respond to this type of inflation depends entirely upon the performance of the stock market this year and long-term inflation next year, should Y2K cause a jump in general costs of doing business. If the market cools off a bit into June BEFORE running off to new highs perhaps in August (or a test of the April high), then the Fed may stand firm with a wait and see approach. If the majority continues to ignore the Fed as a threat, then they may need to be taught a lesson or two. The Fed will ONLY raise rates if there is something else such as wages that start to show sizable growth for within that statistic lies the seeds of sustainable inflation. The Fed itself has been experiencing its own problems thanks to the Euro and Y2K combination. The fact that the Euro does not physically exist poses serious problems when people are worried about the viability of the banking system outside of the United States. In some regions, including Europe, the issue of Y2K has been portrayed as an American plot to force companies to buy more American products. Nonetheless, the lack of attention paid to Y2K issues outside the US is having a major impact upon the demand for physical dollars. The Fed, for the first time in history, has established vaults overseas - one in Europe and one in Asia. This means that the Fed is now having to worry about the demand for dollars globally and how to facilitate that demand to avoid another major crisis next year as a result of international banking problems. Therefore, the overseas vaults of the Fed are intended to make sure that anyone who needs dollars due to banking problems in their local area will be able to get their hands on some greenbacks due to Y2K fears. The Fed is keenly aware of the Y2K issue and it is NOT likely to respond irresponsibly to a rise in inflation that is directly linked to increased stockpiling of materials. They will be far more concerned about the global banking system and only if inflation soars dramatically will the Fed respond short-term. They will also be watching not the rise in inventories or raw materials due to stockpiling, but wages. If wages start to rise, then this will translate into consumer demand inflation that is more associated with a bubble top in an economy. This could yet become a problem if consumers begin to stockpile goods for year-end in sizable quantity. The Fed may in that case have little choice but to RAISE rates in order to prevent a carry-over effect of inflation as was the case during the late 1970s. Those who have interpreted today's numbers as bearish for the stock market may not be totally wrong short-term. We still show that volatility should begin to rise starting next week and extending largely into the week of June 14th. A low at that time could still lead to new summer highs going into mid to late August or at least a retest of those highs established in April. Nonetheless, the prospect of extending the bull market beyond 1999 (assuming a sizeable correction takes place in late 1999) is still a viable outcome. We have stated many times before, that a dollar bull market into 2003 is still a highly likely event. The failure of the Euro has merely increased that outcome and indeed the performance of gold has further demonstrated the deflationary trends that exist outside of the United States. With gold closing within 40 cents of its 19-year low, one can hardly make a case that gold will prove to be a buying opportunity. We still see gold falling to slightly BELOW $200 on the London spot market before there is even a hint of a bottom coming in place. When gold drops BELOW $200 and silver under $3, then the global trend may begin to change - but not before! The real issue becomes the insane selling of dollars on the threat of foreign selling of stocks. This knee-jerk reaction following the morning numbers was quickly reversed and for good reason. The Europeans are NOT heavily invested in the US market and the majority of the "value" investors of Europe have almost ZERO exposure to US shares since 1994! The Japanese sold out for July 20th and have not returned. The popular view in Japan is that the US is in the middle of a "bubble top" and if anything, it is probably much easier to sell a put on the Dow than a call in Japan these days. The number one question we get from Japan is about the risk of a MAJOR crash in the US as they experienced back in 1989 in the Nikkei. Foreign participation in the US market is approaching a historical LOW at this time and in no way should the dollar be sold based upon fears of foreign capital repatriation due to a declining stock market. The more important issue behind the Euro weakness is the dirty little secret that is being kept from the general media at all costs - the Euro clearing system still does NOT work! Merchants who take Visa or Master Card normally receive instantaneous cash when they deposit your transaction with their bank. This is now true for all currencies EXCEPT the Euro! Euro credit cards are taking days to clear and as such the Merchants have been the first to feel the effects of a clearing system that still does not work. Between banks, all currency transactions settle at the end of every day. Euro settlements are also taking days. Banks in London are putting Euro checks on a 4-week clearing status. The net effect, many are starting to discount the Euro in order to accept it. Even American Express has issued only 5,000 Euro based cards. This is not such a good story for a currency that was going to knock the dollar off this planet. Most central banks are still unofficially not accepting Euros as a reserve currency, which has been told to us on a confidential basis. If publicly confronted on this issue, everyone would naturally deny it, but the failure of the Euro has been expressed in its near perfect swan dive since January 1st. The Europeans are having extreme difficulty solving the problems of the Euro. Most computers cannot calculate fractions of a currency and therein lines a far worse problem than merely Y2K. China's work around for Y2K is to simply turn their computers back 20 years. That trick will work, but calculating fractions of a currency remains impossible when such functionality never before existed. For this reason, your taxes in Germany are still payable in DMarks - not Euros. So while the stock market remains in peril of its life in the midst of short-term sustainability, the question of long-term remains unchanged. Record new highs in August from a June low may raise the risk of a more serious correction lasting 5-6 months starting in September. Nonetheless, there remains no doubt in our mind that this is not yet a bubble top in the US and that could still await us in the future. When the ALL the foreigners are here, as was the case in Tokyo of 1989, then the big one has arrived. Nevertheless, a minimum correction of 14% appears likely with the chance of a 23% correction during the later part of 1999. With liquidity drastically reduced since July 20th, the downdrafts will be much faster and deeper. A correction of 7% into June or worse yet only a sideways movement would tend to point to a new high by August 17th. At this point in the bull market, another scare to the downside may be just what the doctor has order to breath some life back into a bull that is starting to show his age.