-Caveat Lector- from: a friend. ----- David Tice The Prudent Bear King Dollar? July 21, 1999 After last week�s powerful advance, and extraordinary buyers� panic throughout the technology sector, it certainly appears that a break has developed in speculative psychology. So far this week, the Dow has declined about 2% and the S&P 500 almost 3%. The Transports and Utilities have bucked the trend, gaining 1%. Many large-caps have outperformed the indices, with the Morgan Stanley Cyclical and Morgan Stanley Consumer indices both dropping about 1%. The Russell 2000 has shed almost 2%. The tech sector, after an historic speculative run, has given up some gains. So far this week, the NASDAQ 100 has declined 4%, the Morgan Stanley High Tech index 5%, and the semiconductor stocks 6%. Year-to-date gains, however, remain astonishing at 29%, 34% and 41%. The Internet stocks have actually held up relatively well, with The Street.com Internet index declining 3% this week. Financial stocks have been under pressure with the S&P Bank index and Bloomberg Wall Street index both dropping 3%. Interestingly, this selling has occurred despite very strong earnings reports and a stable bond market. The poor performance within the financial sector, however, does appear related to a sharp sell-off in the dollar. Certainly, we view the dollar as a critical factor in the US bubble. For the past six weeks, the Bank of Japan has been intervening repeatedly in currency markets to support the value of the dollar. Estimates have the BOJ spending $25 billion in this effort. Despite this, today the dollar closed at 118 yen, down from 121 at the end of June and about 140 yen this time last year. We have, of course, often referred to the weak dollar as an ominous signal that all was not right in the US financial system. Now, a sharply weaker dollar against the Euro and Swiss Franc make this week look like an important inflection point for the greenback. Monday was a key day in the currencies with the dollar trading below 118 yen, clobbered for a more than 2% decline. The dollar also reversed sharply and lost considerable ground against the Euro and Swiss Franc. Monday morning business headlines had talk of the Euro trading at par with the dollar. This afternoon, the Euro is above 105, 4% above Monday�s lows. The Swiss Franc has also rallied about 3% against the dollar this week. Are fundamentals beginning to shine through? In regard to fundamentals, yesterday�s trade data was simply atrocious. With expectations for a trade deficit of $19.2 billion, the actual number came in at $21.3, 40% greater than last May�s deficit. For comparison, the trade gap was $14 billion in May of 1998 and $8 billion in May of 1997. From two years ago, goods exports have declined 2% to $56 billion, while goods imports have increased 14% to $86 billion. Clearly, our trade position is deteriorating rapidly, no matter how you look at it. Since January, higher usage and higher prices has led to a 66% increase in imports of "energy-related petroleum. " Orders for Japanese microchip-making equipment rose 34%, year-over-year. Year to date, automobile imports have increased 17% and consumer goods 8%. By country, our imports from Canada, our largest trading partner, rose almost 10%, from Mexico 11%, China 12%, France 10%, Germany 8%, United Kingdom 9%, and Korea 19%. This certainly provides some explanation as to why these economies are doing better. Our country�s export situation, however, continues to look bleak. Year-over-year, exports to Western Europe have declined about 2%, while exports to Eastern Europe collapsed 44%. Exports to Japan are 10% below last year and Hong Kong 20%. The recovering economy in Korea was noticeable, however, with a big jump of American imports. Closer to home, prospects in Latin America look particularly poor. The recession-battered economy in Brazil imported 16% less US goods, Argentina 19%, and Colombia 30%. Yesterday, Argentina�s Economic Minister estimated that the country�s industrial production in June was 10% below last year. Today, a leading economic consulting firm stated that Argentine industrial production continues to decline, with June levels 14% below last year. Interestingly, it was not that many months ago that conventional thinking in the markets and economic community had it as an economic truth that Argentina�s currency board was a savior, ensuring financial and economic stability. Well, now Argentina is a basket case and some are beginning to call for a repudiation of the currency board so the Argentine central bank can begin "printing money". Wow, what a difference a few months makes. Today, the piece, written back in January by Lawrence Kudlow, "King Dollar Smartest Way to Rule Latin America" seems a bit off the mark. Basically, his argument had the dollar as "King" of the world and all countries had to do to prosper was either have a currency board tied to the dollar, like Argentina, or simply dollarize. Well, sometimes it appears the rules of global currency systems are being written as we go along. After dropping gold backing, fiat currencies move at the whim of the marketplace. In 1993, Wall Street loved Mexican financial assets, in 1995 the peso collapsed. In 1996, Wall Street loved SE Asia financial assets, in 1997 collapse here as well. At the outset of 1998, "hot money" Wall Street had a love affair with financial assets in Russia, by summer default and a collapse of the ruble. Wall Street had similar love affairs with securities in Brazil and Argentina that now appear but inadvisable lust. In each case, money moves into a country�s securities which helps foster a boom, the boom helps propel financial markets, which fuels a flood of money into the economy, in what is seemingly a self-feeding state of prosperity. This prosperity feels great for everyone involved. There is no doubt that the locals love the influx of foreign money. As was the case in South Korea, it provided capital to invest in manufacturing capabilities. In the case of Russia, it allowed the locals to buy Mercedes and properties in the Mediterranean, as well as feeding Swiss bank accounts. Either way, everything is fine, as long foreigners are happy to continue to hold the respective country�s IOUs. Well, the laws of economics dictate that credit-induced booms do go bust and eventually something happens that leads investors to want their money back. This, however, changes everything. A big problem quickly develops as few are willing to part with cash in exchange for the foreigners� securities. And, it�s not like there is money sitting around available to return to investors. Investors' money was long ago spent. This, somewhat simplistically, explains why things can turn sour so quickly with a change in perceptions. And, importantly, you never know what event will alter market perceptions. Who knew that devaluation in Thailand would set off a global crisis? What was knowable, however, were the degree of credit excess and the distortions that had developed from the flood of money into these economies, and how this had created acutely vulnerable financial systems. How, especially in the frothy stages, the booms in SE Asian, Russia and Latin America were driven by "hot money" with the potential to turn and run for the hills at a moment�s notice. With this in mind, we believe it is of utmost importance to understand how similar dynamics have been at work here in the US for some time, and how vulnerable our system has become. Huge foreign flows have financed a boom and everyone has been quite happy. We trade goods for securities that only seem to rise in value. Importing much of the goods we need, we can use our resources to build expensive homes, shopping malls, billion dollar casinos, sports stadiums, cruise ships, multiplex cinemas and office buildings. But let�s not kid ourselves, this may be fun but with the great cost of distortions to our economy and financial system. And, actually, these destructive forces have become much more powerful since the Fed�s accommodations last Fall. Yet, today such distortions are easily ignored with the basic bullish premise that the rest of the world loves US financial assets and, with this being the case, we are indefinitely the great beneficiaries of King Dollar. This school of thought believes that our country�s trade position is irrelevant, as foreigners are, and will continue to be, more than happy to recycle these dollars back into American financial assets. Truly, this is a momentous, and we would say reckless, assumption. And, especially after repeated bouts of love turning to hate for securities markets around the world, rationality would dictate a major dose of skepticism that foreign investors will always love our stocks, bonds, and dollars. It is just hard for us to forget those days early last October when the dollar and the stock market were falling together and liquidity quickly vanished in our financial markets. At the time, it certainly looked like we were at the brink of a critical change in market perceptions � a point where foreign investors might decide to ask for their money back. Indeed, despite the doubling of tech stocks and more than 4,500 points added to the Dow, we still see last fall as an important inflection point. It was when cracks began to form in bullish perceptions of the health of the dollar. And, importantly, it marked a turn in the fortunes for many in the leveraged speculating community. Today, we are left pondering who is going to be buying all these dollars that we are increasingly flooding the world with. For years it was the foreign central banks, largely Asian, who accumulated these dollars so their local currencies would not rise, in what proved a failed strategy of boom and bust. In fact, foreign central bank holdings of US Treasuries grew from $350 billion to $650 billion from the beginning of 1994 to the end of 1996, and today are at about $600 billion. Meanwhile, we benefited from a few years of dollars being recycled back to US securities markets with the leveraged speculating community borrowing at low Japanese interest rates. This too, looks to have run its course as these players have suffered significant losses. And certainly the perception of an improving Japan adds considerable risk to shorting the yen. With this backdrop, we continue to see a weak dollar as the big surprise going forward. And with sentiment extraordinarily bullish on the dollar and US financial assets, any sudden change in perceptions could be cataclysmic. And we do not choose the word "cataclysmic" for hyperbole. Only time will tell how large the "hot money" flows have been into the dollar and US financial assets. And, unfortunately, we have witnessed a series of currency crises develop over the past few years in a global financial system that simply breeds excess and resulting crisis. We don�t know what will spark a break in market psychology � the change in perceptions as to the long-term health of the US economy and financial system. We do recognize, however, that the degree of credit excesses, stock market speculation and economic distortions are unprecedented. In sum, the foundation of our prosperity could not be more fragile. One of these days, foreign investors may actually want their money back. Or, at least, they may take a close look and determine they don�t like the way their money was spent. Either way, when that time comes, there won�t be talk of King Dollar. ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance�not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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