THE WAY THEY WERE
GONE FOREVER!
Prepared by Commodity Information Systems
Turmoil in this week's financial markets was a result of Asian nations using currency markets to enhance their competitive edge in world trade. China devalued the yaun for years ago in an effort to keep exports high. Japan allowed the yen to devalue three years ago in an effort to bring their struggling economy out of recession by stimulating exports. Because China and Japan are the two dominant economies in the region, their devaluations put pressure on smaller Asian nations, such as Thailand, Indonesia, Taiwan and South Korea. The result was a domino effect of forced devaluations by small Asian countries.
To stabilize currencies in the region, the International Monetary Fund (IMF) offered emergency loans in return for the promise of tighter fiscal policy and higher interest rates. While this combination is the standard prescription for currency stabilization, it comes at the cost of extremely high interest rates and economic deprivation. This will slow growth in the region and make their exports more competitive in the world marketplace.
Unfortunately, once problems in Southeast Asia were uncovered, it led world currency traders to look at other regions with similar problems. That brought Latin America into the gray with focus on Brazil, the most vulnerable of the group. The Brazilian real was under intense pressure this week until the central bank raise interest rates from just over 20% to 40%. However, because the U.S. hold massive assets in Latin America, the dollar also came under pressure. This pushed the value of European currencies sharply higher, making their goods and services less competitive in the world marketplace.
It is difficult to envision Europe as the bastion of stability in world currency markets. Their economics are already in poor shape and the loss of competitiveness in world markets will only make a bad situation worse. Therefore, pressure will eventually intensify for the U.S. to raise interest rates and bolster the dollar's value. How that pressure will be exerted could be the next chapter in this unfolding saga of world currency revaluations.
The turmoil in world currencies naturally fell over into stock markets as international investing and world trade have never been greater. The worst of the financial earthquakes may be over, there are bound to be many after-shocks before true stability returns. This shakeout in the stock market has been much wilder that the one experienced in 1987.
The S&P declined only 12% this year compared to 39% in 1987. Whether the current pullback has run its course is a critical near-term question. However, the important point of the comparison is the indication that things will not return to the “way they were” for some time to come.
Whether the outcome from financial market instability will be inflationary or deflationary is still unanswered. However, one thing appears certain, things will not return to the way they were anytime soon.
Moderate growth, low inflation and low interest rates will no longer dominate markets. Until a new theme becomes evident, markets should be expected to remain erratic and somewhat irrational. This will present a greater number of trading opportunities, but it also carries a higher degree of risk. More conservative commodity traders should look to options and spread opportunities as a method of risk reduction during this period of economic transition.
November 1, 1997Bill Gary
Commodity Information Systems, Inc
1601 N.W. Expressway, Ste. 1450, Oklahoma City, Oklahoma
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com
