Promise, n. This and good advice make an excellent gift, which we can all afford to give to the poor. Ambrose Bierce
Medieval sportsmen developed elaborate rules to govern hunting, including seasons for various game animals and birds, as well as other restrictions intended to give the quarry a sporting chance. But after the decline of chivalry these were ruled by custom rather than by law, and someone who merely wished to fill his cooking pot frequently ignored the rules of sportsmanship by shooting young animals, or those out of season. It was not unusual for that person to bait a field and kill birds from ambush. Since all rules were thrown aside while shooting for the pot, an indiscriminate attack came into the beautiful English language as a pot shot.*
* None but the brave deserve affairs.
With speculators taking pot shots at virtually every currency worldwide, sending their stock markets tumbling, we are increasingly deeply grateful that we led our loyal TDLrs out of Asian and other "emerging-market" investments five years ago, in 1993, right at their Tops, instead to be safely ensconced in the steadily-rising US dollar.
Since TDL was luckily the only advisory in the world to have predicted the Asian currency crisis, we believe that we have earned the right to at least venture a guess as to what might happen next. We have been on record since 1989 that there would be a major banking crisis in Japan that would challenge the world to its roots. We have also predicted that Asia's currency crisis would spread to Canada, America's largest trading partner, so that when the Canadian dollar crashed it is difficult to imagine how the United States could avoid suffering what we call "The Coming Father of All Bear Markets." Especially since we predict that the Mexican peso is a candidate for yet another currency crash.
For the moment, there is nothing holding world paper currencies up, they are pure air, because nobody knows how many pieces of paper money their governments furtively print each day, diminishing the value of the remainder. By the inevitability of the law of supply and demand. The only method governments know of holding these paper currencies up is to bribe innocents into holding them with ultra-high interest rates, such as Russia's recent boost to 150% that any prudent lender would regard with skeptical alarm. But you can never do merely one thing. High interest rates are a cost of doing business, and cause recessions or depressions, so the poor will suffer most, suicides will continue to rise in Japan, there will be political upheavals as in Indonesia and The Hive drifts toward Niagara Falls without comprehending why currencies are plunging.
Another layer of understanding is that the entire world is devaluing against the US dollar in order to gain an export advantage, a modern version of the infamous Smoot-Hawley Act of 1930 whose tariff walls aggravated what we call The First Great Depression. While nations devaluing by simply running their printing presses affords them a short-term export advantage, as currencies devalue, commodities priced in US dollars cost more and unaffordably more in the devaluing countries, which creates a commodity depression that is already showing up in oil, steel, copper and soybeans, revealing the distressing depth of Asia's crash. TDL calls this, "The Coming Currency Race to the Bottom," a fool's game that could only be perpetrated in a world of currencies not linked to gold or silver. We begin to detect the elements falling into place for "The Coming Father of All Bear Markets." The US cannot forever allow all nations to devalue against our dollar because our exports would plummet and then end.
As TDL untangles this spaghetti of crosscurrents, Asian capital is in a "flight to safety" to the United States dollar because it has been rising (actually, not devaluing along with the rest of the world), plus it boasts a rising stock market. A self-feeding delusion because foreigners tend to buy the stocks of companies with which they are familiar, such as Coca-Cola, McDonald's, and Disney, pushing such stocks to levels far above what classic value analysis would dictate, and baffling traditional Security Analysts who do not realize the Mass Psychology at work. Thus Wall Street does not know how to integrate the spectacle of a two-tier market featuring declining smaller stocks and rising blue chips, new all-time highs by the Dow-Jones Utility Average, a stronger bond market and a stronger US dollar, a perpetual-motion machine, a self-feeding monster that will eventually devour itself.*
* Money can be lost in more ways than won.
The final crosscurrent is an understanding that, as the mini-computer displaced the mainframe, and the PC displaced the mini-computer, so the Internet will take pot shots at personal computers. The result is an inflectionary crash in the disk drive, semiconductor and computer boxmaker group that is now blaming lower sales on "inventory accumulation" which is a fancy way of saying that they can't sell the stuff. It is remarkable that demand does not rise even as computer prices plummet, what economists call "inelastic demand," so profit margins for the industry will plunge. As pointed out in one of our recent Interim Warning Bulletins, Dell Computer is a hybrid situation because they are selling a fading product on the Internet, like an animal taking pot shots at itself. There are no personal-computer stocks left on our lists and our last Interim Warning Bulletin yet again recommended avoiding the group.
What do we envision ahead? There will be a shift, a flight to safety, sooner or later, out of dollar-denominated assets and into the traditional and even historic safety of gold and silver, as money managers seek to transform their paper money into hard assets. When will this happen? Nobody knows for sure, but TDL looks for it every single day. As a sheer guess, it will have something to do with a banking crisis in Japan, another wave of devaluations in Asia and/or Russia, or our very radical prediction that Canada is headed for a currency crisis something nobody else in the world is now predicting; with the Canadian dollar so depreciated skepticism no longer takes common cents! It might even be triggered by a spectacular terrorist act this summer, so avoid the Middle East, if at all possible.**
** Indeed, necessity is the martyr of invention.
Eleven months after the crash of the Thai currency, the baht, wreckage keeps piling up. Thailand said this week that manufacturing production had fallen 21% in March compared with a year earlier, suggesting that the scale of economic contraction already exceeds most of the gloomiest forecasts. Dismal figures have also emerged from Malaysia. Indonesia's forecast that shrinkage for the year can be kept to 10% seems optimistic. The currency, the rupiah, which has lost 80% of its value against the dollar since last July, still looks vulnerable. Its collapse is forcing prices skyward inflation is expected to reach at least 85% this year. It has also forced Indonesian companies to reschedule a mountain of some $80 billion of private-sector foreign debt. Even if the IMF, as expected, soon resumes doling out its rescue funds, confidence will not magically return. The banking system is still bust. Interest rates are high partly to stop further runs on the currencies. High interest rates and a drying up of credit in turn mean more companies are unable to repay debt. So banks' non-performing loans rise inexorably and governments take over more financial institutions, using up even more liquidity to keep them alive. Matters are made worse by the new weakness of the Japanese yen. It puts more competitive pressure on South-East Asia's currencies. It also raises fears that China may devalue. The notion that Asia's slump would be a sharp V-shaped bounce soon gave way to more modest hopes of a gradual U-shaped recovery. Now some analysts are resorting to the letter L. ECONOMIST (England), 6 Jun 98 Ed: Later, the letter "I."
For no clear reason Russian markets decide to ditch the country's financial liabilities (its money, its bonds, its equities). Capital takes flight, and the currency threatens to collapse. Domestic resources prove inadequate to defend it. The pressure on the ruble is hard to explain. The currency isn't overvalued. The economy had an external surplus last year. The budget deficit has been shrinking and inflation is in single figures. This suggests, as many observers insist, that the markets are in a blind panic. If only western governments pat them on the head and tell them everything will be all right, everything will be all right. The case for bold western help for a currency-stabilization fund big enough to calm the markets seems clear. ECONOMIST (England), 6 Jun 98 Ed: Anything but a currency link to gold.
A recession would not be a surprise. But the depth of the downturn, the difficulty of a recovery and the gloom that suffuses the region have surprised even the pessimists. The culprit in this latest bout of Asian contraction and gloom is the Japanese yen, which has plummeted. The fear among investors is that a chronically ill Asia will infect the robust American and European economies. After some predictions that major economies would bounce back quickly, perhaps in six months, most economists and analysts now agree that the region will be flat on its back for at least another year. A full recovery could take as long as five years. Foreign sentiment toward Asia has turned bleaker in the last two weeks, with the slide in the yen's value. Japan's economic ills have dire implications because many analysts regard it as the locomotive that could propel Asia's recovery. In Hong Kong, a noisy crowd of 200 apartment owners marched to complain about the plunging value of real estate. The IMF's fiscal and monetary prescriptions which favor high interest rates and stable exchange rates, even at the cost of recession are strangling some Asian economies by choking off credit. Mark Landler, Front Page, NY TIMES, 12 Jun 98 Ed: Japan bashing will not help.
If the yen continues to swoon, other Asian countries will have to let their currencies collapse against the dollar and the German mark just to keep their export sector competitive. That's called competitive currency devaluation. The idea is that the first country to devalue gets a leg up in the battle for export business. If the yen suddenly falls 12%, and the won, baht, rupiah and ringgit are unchanged, Japan can steal export market share from those others. So other countries devalue. Soon, any country that doesn't let its currency fall against the dollar is left out in the cold. Many now fear that China will be forced to devalue, despite denials from top officials there. Donald H Gold, INVESTOR'S BUSINESS DAILY, 15 Jun 98 Ed: Remember our innumerable predictions of, "The Coming Competing Currency Devaluations"? This is the first time we have seen it in the press. To their credit.
Asian slump could infect world. A World Bank official warned that Asia was plunging into depression and called on Japan to help pull the region out of its economic nose dive. Warnings about Asia were dire. World Bank senior regional official Jean-Michel Severino said, "This depression could be very long-lasting if it is not handled very, very carefully," he told a major trade and investment conference in Australia, warning that a global economic slump could be just months away. "This is (Prime Minister Ryutaro) Hashimoto's recession," said Merner. Japan's leaders are "only now beginning to grasp how bad things are." The depreciation of the yen is having an enormous impact on Hong Kong and the region. What is clear is that there isn't the sense of crisis among Japan's ruling-party members that there is among their Asian counterparts. Senior officials of the ruling Liberal Democratic Party say, "We've done enough to fix the economy. What else can be done beyond what we've done already? We're really at a loss to say." Jathon Sapsford & Norihiko Shirouzu, WALL STREET JOURNAL, 16 Jun 98
Government officials and economists around the world are increasingly worried that Japan's accumulated financial and economic problems are pushing it to the brink of a depression, one replete with deflation, bank runs and tremendous unemployment. But such concerns remain almost inaudible in Japan itself. Japanese officials insist that a $115 billion stimulus package announced in April and awaiting approval by parliament will spark an economic recovery. Tokyo has placed its faith in roughly 70-trillion yen ($478.94 billion) worth of such spending packages to rescue its economy. The result: its second recession of the 1990s, in an economy that some forecasters say is deteriorating at its fastest rate since the mid-1970s. Now there is also the sudden collapse of the yen, which has fallen 15% against the dollar in the past three months and by nearly half since its peak in 1995. The yen's weakness is shrinking Japanese banks' capital, raising concern that they will cut back on lending. The weak yen is rattling Asia by threatening to trigger a new round of currency devaluations throughout the region. Even worse for Japan, the currency threatens to tighten the screws on the nation's shaky banks as it erodes their capital. Just a few months ago, eager fund managers piled into what appeared to be rapidly recovering Asian markets. After months of declines in Asian share prices and in the currencies they are quoted in, stocks seemed cheap. South Korea and Thailand seemed to be taking the tight-money medicine the International Monetary Fund had prescribed; authorities in Hong Kong appeared to have fought off the traders who had attacked the Hong Kong dollar; with the exception of Indonesia, Southeast Asia seemed to be turning the corner. Such big names as George Soros and emerging-markets guru Mark Mobius were seen buying, and others followed. But the yen's fall and Japan's recession have hurt hopes that Asia can revive soon without a Japanese recovery. David P Hmilton, Front Page, WALL STREET JOURNAL, 17 Jun 98
The Dines Letter (TDL) offers regular features such as TDL'S Latest on Currencies, and the following excerpt is from our Letter dated 19 Jun 98. Other features covered regularly include: TDL's Current Market Analysis, TDL's Latest on Gold, TDL's Latest on Silver, TDL's Seasonalities, TDL's Newly Recommended, TDL's Supervised Investment Lists, timely articles, special writeups, as market conditions warrant. For our current thinking, please see our Latest issue.
15 July 1998
(The Dines Letter (TDL) offers regular features such as TDL's Latest on Gold, and the above report is our Latest on Gold feature and a special writeup excerpted from our Letter dated 20 March 98. In addition to other features covered regularly: TDL's Current Market Analysis, TDL's Latest on Currencies, TDL's Seasonalities, TDL's Newly Recommended, TDL's Supervised Investment Lists -- The Dines Letter also offers timely articles and special writeups as market conditions warrant).