New Year's Musings: More Tears Than Joy

January 1, 1998

Introduction by vronsky -

John Kutyn is undoubtedly one of last year's most brilliant and perceptive analysts on the Domino Effect sweeping through Southeast Asia. His insightful take on currency chaos and stock market turmoil paint a grim picture of what the new year holds for the countries of that area... indeed what the ramifications are for the rest of the world. Following are a few of his random thoughts on the area. Additionally, he shares his opinion of the precarious condition of the Japanese Banking System, and what we might brace ourselves for in 1998.

Amid currency chaos and stockmarket turmoil in South Korea, it was reported the newly established Korean Futures Exchange (KOFEX) would begin operations soon. Moreover, GOLD Futures will be one of KOFEX's first Futures Contracts to be traded.

South Korea's decision to start trading gold futures is a very positive step, despite the total disarray in their financial markets today. There are several positive developments happening in the gold market to be considered. India and Egypt will be substantially reducing taxes on gold, and liberalizing their gold markets - which should stimulate demand in 1998. It was also reported that China will liberalize its gold market early in 1998. On the supply side, we will continue to see contraction as several mines will be closing down due to last year's relentless fall in price of the yellow metal. Moreover, it was recently reported, that without emergency funds, a large portion of Russian mines would have to close... further reducing supply. I am also comforted, that despite the scare tactics of the Central Banks, demand for gold has grown substantially in the last few months.

I have just finished reading "The Alchemy of Financial Checkmate" by Markus Angelicus, which I found to be very enlightening. The Alchemist's have successfully handled several potential financial crises in the past, and therefore believe their policies will be able to resolve future problems. In this world where no one should fail, banks rescue bankrupt companies by injecting more loans. And when this action threatens the financial health of the banks, governments are called to rescue the banks. And when this action threatens the financial health of the governments, the IMF is called in. And when problems get too large for the IMF, everything collapses. All economic theories aside, financial flows within an economy have their parallel with financial flows within a company. For a given year, you have a starting position - money inflows and outflows - and an ending position.

Let us consider what will happen in Japan over the next 12 months. Starting position: Many companies are bankrupt in everything but name. They have no financial strength and rely on increased loans from banks to finance losses.

The value of the Nikkei is close to the value that will obliterate all capital gains Japanese banks show in their Balance Sheets. Furthermore, unreported loan losses must be conservatively estimated at U.S.$500 billion, though I believe they are substantially above $1 trillion. The governments direct and indirect liabilities exceed 150% of GDP.

Financial Flows: The contraction in Japan and financial collapse in South-East Asia will substantially increase losses. Without large increases in bank loans, many companies will fail... SOON!

Distrusting depositors are pulling out of Japanese banks. To make matters worse, lending from foreign banks is becoming acutely more difficult. Unless they can reduce their loan portfolios to meet these withdrawals, Japanese Banks will fail.

In order to meet its financial obligations, the Japanese government (both central and local governments) must borrow 54 trillion yen to fund its budget deficit, plus 32 trillion yen to inject into the banking system. This totals 86 trillion yen or about U.S.$660 billion.

We have now reached a situation where corporate Japan, Nippon banks, and the Japanese government ALL require a massive influx of money. If one of these entities does not get these funds, then the whole system collapses. All three entities are technically bankrupt, all three require money, and except for the printing press at the Bank of Japan, there is no source for this money. Up until the Asian Crises, the Japanese banks were able to supply sufficient liquidity to the system. Now the demand for liquidity has DRAMATICALLY increased, but the supply is contracting. Japan will fail in 1998.

This has nothing to do with any economic theory, it has to do with running out of money... as simple as that! Any attempt by the Bank of Japan to print the money required will drive up interest rates and cause a run on the banks. There are NO policy options.

It is painfully and overtly evident Japanese banks have run out of funds to continue financing the losses of both business and government. Total bankruptcy is at hand. Subsequently, 1998 will truly be a monumental year in human and market history.

When Japan collapses, money will flow out of the United States back into Asia. This will precipitate panic in the debt-ridden United States - and as the world population sees the destruction of the bond, stock and currencies markets in Asia, they will move into tangible assets, thus threatening America's financial collapse.

Gold will then rise as the international monetary unit. Nothing can stop this scenario from unfolding... and little can delay the inevitable from happening. After we see the collapse of paper currencies and government bond markets on a global basis, the world will refuse to accept any fiat currency as money. Paper will be KAPUT!

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.