Prepared by AIC Investment Advisors, Inc.

The monetary chaos that began in Thailand has spread throughout Asia and there is no sign that the situation has been stabilized as we go to press, despite encouraging words from the International Monetary Fund and various other monetary authorities. The malaise spread from Thailand to Indonesia, South Korea and, most recently, Japan–the world's second major economy. While aid packages of various amounts are presumably being developed for these nations in need, there exists no accurate estimate of the total support that will be required to calm their tottering currency and equity markets.

As the Hong Kong equity market began to settle down and stabilize, the South Korean currency began to collapse and the nation was forced to seek IMF assistance to the tune of $20 billion. Because the initial reports of the needed support usually fall far short of the actual amount needed to provide support, many observers, including AIC, expect that the final amount needed will far exceed $20 billion.

At the close of 1996, Korean companies and banks were indebted to foreign lenders to the tune of $100 billion. The meltdown in equity markets in Korea and the currency plunge have resulted in substantially lower valuations for the assets backing these loans. The implications of lower valuations are disturbing to the lenders. Korean companies also were large investors in Eastern European nations whose credit worthiness is suspect, at best, were payment to be required in the short term. At the close of 1996, Korea owed Japanese lenders approximately $24.0 billion. The financial problems in Korea created uncertainty in Japanese markets, and equity markets turned sharply lower in Japan.

Equity prices on American markets recovered somewhat from the late October carnage inflicted by the currency turmoil in Asia. Equity and currency markets in Hong Kong and Japan remain in turmoil and the impact of these Asian collapses on U.S. security markets has yet to be determined. For the time being, the impact on U.S. markets seems to be lessening. However, in a global economy, this lessening may be temporary rather than long lasting. After governments and monetary authorities cobble together aid packages for Thailand and South Korea, the immediate urgency caused by collapsing Asian markets will moderate. However, the financial crisis may be far from over. The financial collapse of Yamaichi Securities, one of the so-called Big Four, forced this brokerage house to close. Yamaichi Securities is rumored to have debts of $23.8 billion (3.0 trillion yen) with its asset base contracting. To lessen the growing fear in Japanese markets, the Bank of Japan has announced that it will guarantee the customers' assets. The Yamaichi failure follows the failure of Hokkaido Taskuskoku Bank, one of Japan's major banks, a week earlier.

The threat to the West is the possibility that falling asset values will result in a trade war as nations and companies cut prices to maintain viability. This could result in a deflationary situation that could spread to Europe and America as world growth slows. The result would be deflation.

Money Supply–Liquidity

The accompanying chart depicting liquidity indicates that this broad gauge of the purchasing media available to Americans continued to increase at a steady year-over- year rate during the past six months. Liquidity (dashed line) has risen $1.2 trillion, to nearly $6.4 trillion, during the past three years. Year-over-year changes in liquidity (solid line) remains in the 6% to 7% range at this time. This rate of growth in liquidity appears sustainable and is sufficient to support gross domestic product growth within the 2% to 3% range. Any decline in the growth rate of the money supply would likely have a negative impact on the real economy and bring about a recession quickly.

_ _ _ _ _Money Supply, Liquidity ($ BN)

_________% Change From Year Earlier

Gross Savings

Public and private gross savings of Americans have been increasing sharply since 1992. Following several years of stagnate savings from 1989 to 1993, at about a $900 billion per annum level, gross savings (dashed line) began to increase sharply beginning in early 1994. As the accompanying chart indicates, total annual savings increased from the $900 billion level to the $1,400 billion level–an increase of 55% in less than 5 years. The year-over-year increase in savings (solid line) rose to near 15% in late 1994 and has fluctuated between 6% and 12% for the past two years. The rapid increase in savings since 1994 goes far in explaining the surge in equity prices since late 1994. Whether the surge in savings continues ahead remains to be seen.

_ _ _ _ _Gross Saving ($ BN, A/R)

_________% Change From Year Earlier

Federal Receipts And Expenditures

After many years of increasing annual deficits, federal receipts finally are increasing at a greater rate than government expenditures. Some economists now estimate that the deficit will disappear prior to the year 2000 and the nation will be in a surplus position. We believe that it is too early to make such a projection–especially in light of the monetary problems that are plaguing the Asian nations and the costs that will be incurred in resolving them. As the accompanying chart shows, federal receipts (solid line) are rapidly increasing to the level of federal expenditures (dashed line). The current deficit (double line) has decreased from the $300 billion level, in third quarter of 1993, to about $34 billion at this writing. The trend is certainly positive but the accounting may be less than exacting!

_ _ _ _ _Federal Expenditures ($ BN, Ann.)

_________Federal Receipts ($ BN, Ann.)

_________Current Deficit ($ BN, Ann.)

Housing starts climbed to an eight- month high during October, rising 1.4% to a seasonally-adjusted annual rate of 1.53 million units. The Commerce Department revised September starts upward to reflect a gain of 8%. The latest two positive months follow a reported decline of 4.8% in August. October's starts were at the highest level since February.

Year- over-year, housing starts marked an 8.6% increase during October, helped by surging apartment construction. Starts for apartments with five or more units rose 14.2% in October and were up a whopping 31 % from the same period a year ago. Similarly, starts for condos and duplexes (2 to 4 units) jumped in October by nearly 67%. This sector is typically a very volatile segment of the housing market. During October, single-family starts declined 3.8%, but remained 3.4% ahead of year-earlier levels.

By region, the Northeast was the only section reporting a decrease in starts–with activity failing 15.4% from September to October. The Midwest, South and West recorded gains of 3.6%, 2.6% and 3.6%, respectively, during October. Year-over-year, the Northeast shows the only decline in housing starts with a reading of minus 16.7%.

Building permits, a closely watched barometer of future building activity, rose 1.1% in October to a seasonally-adjusted annual rate of 1.48 million units–an 18-month high. Mortgage rates for a 30-year, fixed-rate loan averaged 7.23% in the latest week, marking a near twenty-month low. Market participants are not looking for the Federal Reserve to hike interest rates anytime soon. Still, many analysts in the housing industry do not expect 1998 housing figures to surpass a rather stellar 1997.

December 1, 1997Richard F. Maloney

AIC Investment Advisors, Inc.

440 South Street, Pittsfield, Massachusetts

Consensus National Futures and Financial On Line Index

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