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Although I trade on technicals rather than fundamentals, I generally concur with
the fundamental views expressed. One needs a fundamental context in which to
examine the technicals for opportunities.
Something alluded to, but not specifically stated, is that it's no longer just
"the economy stupid". The political scene has shifted to it's "the world stupid"
and this administration has resolutely ignored world affairs at every turn for
years allowing all these seemingly inconsequential pots to begin/continue
bubbling all over the world. By ignoring, I mean taking concrete action (where
possible) in lieu of lip service. Now these pots are boiling and there is not a
chance in hell in containing all of them. Like it or not, we are likely to be
confronted by a whole host of enemies with the ability to inflict substantial
damage using relatively cheap weapons of mass destruction almost anywhere in the
world. Failed economies are withdrawing from world markets and are busy erecting
their own barriers and controlling/manipulating their markets. Hundreds of
millions of people have been disenfranchised economically, most through no fault
of their own and are plenty pissed off. No longer is the planet's population
preoccupied with getting rich, now they are preoccupied with surviving. Russia
never really changed - capitalist Russia was looted by the same people who
looted it when it communist Russia and let us not forget that the infamous
Russian winter is on its way. So the stage is set for economic change leading to
political change and the world is unlikely to be one happy capitalist family.
Certainly the world will survive, however it is unlikely to be the kind of world
so beloved by fat and happy markets.
And on the US economic front, it is not inconceivable that a severe market
downturn (say 50%) would be accompanied by slowing economy, declining tax
revenues, rising social costs, rising military costs (like an anti-missle
defense system), balooning deficits, and a raging electorate stripped of their f
at stock market profits. Might bring a few more political changes not
appreciated by the free markets here.
I believe we are seeing these possibilities being priced into the world
markets - except possibly for the holders of US treasuries.
Earl
-----Original Message-----
From: Gerrit Jacobsen <jrt@xxxxxxxxxx>
To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
Date: Saturday, September 05, 1998 9:54 AM
Subject: Speculators running for cover
Some fundamental views are following further down. First I want
to make some comment on
> http://www.geocities.com/WallStreet/6243/crack/crash.html
These charts suggest that the market crashed 29 and 87 always 36 days
after an all time high. At first sight these statistics look
convincing.
BUT there have been plenty of all time highs in this century with a
supsequent downturn. If I was to be convinced then I would like to
see statistics showing relationships between "all time high" AND
"subsequent downturn percentage" AND the crash.
In any case: Two events do not make a meaningful statistic.
I just want to add my own psychological and fundamental thoughts
regarding the current situation - I hope that the technical traders
will excuse these rather lengthy comments - but perhaps someone
wants to give me some feedback to verify or falsify my thoughts:
I have been bearish on this market for quite some time and have had
numerous conversations on this list with bulls like Bruce and others
I do not want to boast that I was right I just want to say that I was
not really surprised about the downturn itself - I have been
surprised about something else:
The move downwards has started very innocently and suddenly turned
violently without giving individual investors a chance to bailout.
This is really worrying because it fuels unease with individual
investors. I have had my fair amount of talking with small investors
last week who suddenly turned bearish. This however strikes me as odd
since these investors only get bearish with the market being at 7500
and not earlier. I would had thought that the down-turn target was
7200 - 7400. Now we are nearly there.
So basically these small investors have missed te opportunity to take
their profits. And they are not really selling at these levels
because it looks as if the market is stabilizing here.
My big worry is that the professionals will test the new lows made
and drive the market through 7200. I suspect that such a move would
take all confidence out of the punters and could easily knock 1500
points off the dow.
And now the fundamentals:
One of the main problems is that the American administration who
have been the leaders of the global economic cycle are loosing
control of the situation. Recent comments from the IMF and the
American administration regarding the Russian situation show that
they do not see big problems ahead and do not want to step in to
stabilize the situation. One of the reasons seems to be that they are
quite happy that the American economy is slowing down. However as the
American economy slows down other economies (Europe or Asia) should
take over the lead. Asia still seems to be weak and the Europaens are
just trying to get their economies going again. It remains doubtfull
whether they can really take the global lead from here.
The global flight to quality leads to immense loss of confidence in
other smaller economies. This loss of confidence drives up interest
rates in these countries and hurts their economies. The devaluations
of Peru, Columbia and other Latin American countries illustrate the
situation. All of Latin America has now already eperienced the market
down-turn which is now starting to hurt the States.
Some of the people on the list have questioned why the Russian
problems should have any effect on the world economy. The reason is
that the Russian example illustrates what can happen to a market. It
can just disappear. And this example frightens the shit out of all
investment banks.
Over the last two years we have seen huge amounts of speculative
money parked in hedge funds which tried to cash-in on emerging
markets. Viktor Niederhoffer busted his fund in Thailand. Now several
hedge funds are busting because of Russia. Nearly all of the major
investment banks have lost money in Russia. This leads to
reallocation of capital because all these banks run risk-models which
now have to be retuned since the prevailing risk parameters were
obviously wrong. Who can even imagine now that Russia launched last
year a 30 year (THIRTY YEAR) eurobond. Now people don't even want to
look one week ahead.
It seems that neither the Americans not the Europaens want to
stabilize this situation with an easy money policy. The IMF has been
extremely tight recently. The Ukraine received their loan approval
only late on Friday after they ran out of reserves and had to devalue
their currency. Funny enough the IMF loan was just meant to prevent
this - it came to late.
The Russians have cut partially their gas supplies to the Ukraine
until they pay their debts - luckily it's not winter now. It seems
that the Russians are raising the stakes in this game. The Ukraine is
a "friend" of the United States and used by the Americans as a
counter-force in Europe against the Russians - which is propably why
they are supported by the IMF although they have a less liberal
market than the Russians. By cutting the gas supplies to the Ukraine
the Russians are effectivly telling the Americans: "you are in the
same boat with us".
The Americans however are trying to play hardball with the Russians
and are telling them that they must sort out their problems first
before they get any further money. One of the reasons why the
Americans take this stance is because their investment banks have
been basically cheated by the Russians.
In Asia the investment banks lost mainly due to the devaluation of
their currencies and because the debtors are unable to repay up their
US DOLLAR loans. Now these banks take the chance to pay assets there
cheaply.
However the Russians have chosen to play the game with their own
rules:
The Russian government had kept their currency stable and borrowed
mainly heavily in RUSSIAN ROUBLES (and not in Dollars). The
investment banks and hedge funds bought these treasury bills (GKOs)
then hedged this Rouble exposure with Rouble/Dollar forward
contracts - which they settled with Russian banks. The Russian
Rouble debts ballooned over the last year and interest rates went up.
However the hedge funds and the investment banks felt that the high
interest rates and the currency hedge would give them a limited
downside if things should turn ugly.
What the investors did not think about was that the Russians could
invent a new approach to solve their problems:
1. They just refused to pay their treasury bills and replaced them
with fresh discounted debt.
2. they devalued their currrency
3. they forbid their banks to honor the forward contracts.
With these three measures they blocked all possible escape routes
that the investors could have had and basically cheated the
international investors out of several billions of dollars.
This experience is news to many bankers and they haven't digested it
fully. In any case it has made them extremely risk aware.
Malaysia has just followed the Russian example and forbid offshore
trading in their currency. Singapore which used to be a major trading
center in Malaysian Ruppees is frantically working out a plan how
their banks can get out of forward Rupee contracts .....
Who knows what the Chinese will come up with - they haven't devalued
yet.
For speculators like Soros these are a new experiences as well
because they cannot cash in on their correct predictions - they are
simply expropriated. Words like "hedge fund" are suddenly
getting the taste of "leveraged buyout" or "junk bond" - remember
those ?
The parameters are in place for a major correction (30%) in
the US market because many stocks are still extremely overvalued and
investors are suddenly realising the fact that we are living now in a
world where SPECULATIVE money is getting scarce.
The only way how this situation can possibly be defused is when the
IMF and G7 are actively helping the weak economies to get out off the
mess and share the burden of the down-turn.
This however will not quite work in the liberal market ways of
yesterday because some of these economies do not want their assets
snatched up cheaply by Americans. Remember the feelings when the
Japanese were buying America in the 80s ?
Hope to have some feedback on these issues in order to verify/
falsify my thoughts.
Gerrit
Gerrit Jacobsen
http://www.tickscape.com
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