Forum Archive Index - July 2001

["Geoff Brown" <brownz@xtra.co.nz>]

Here is a posting from hotcopper site and its basically what I believe will
happen soon.........I have, over the last 6 months been putting my money
where my mouth is.... by  selling most of my tec shares( I still own cag and
itc )....I am slowley buying gold shares. On our farm we are selling all our
stock paying back debt and leasing out our farm to these cwazy dairy farmers
who believe that trees will grow to the sky. I think we are approaching a
major world depression. Can you suivive one????????


US Currencies and Bond market are about to crack
By Philip Angers

In 2000, the U.S. trade deficit set another new record, rising 31% to $435
billion. However, the US government has so far managed to finance this
deficit with foreign cash inflows. The dollar has been strong because the
foreign money coming out of U.S. stocks is not going overseas. Instead, it's
being re-invested in U.S. T-notes and T-bonds.

U.S. bonds and notes are still seen as the ultimate flight-to-quality
investments (having replaced the traditional international currency GOLD).
In order for the sluice gate to open and foreign capital to begin pouring
out of the United States, the bond market would need to break down. Unlikely
you say, I don't think so, in fact such an event could be but weeks away.

This year, the Fed, in an attempt to stimulate the US economy, has cut its
target for the federal-funds rate, the rate at which banks lend one another
money overnight, by 2.5 percentage points to 4%. Wednesdays, .25% cut brings
it to the guideline rate of 3.75%. However to date, this has been largely
ignored by the share market and the American consumer.

Savvy investors understand that lower short-term rates do not necessarily
mean lower long-term interest rates. During the past two Fed cycles,
long-term Treasuries changed direction well before Fed policy, correctly
anticipating, each time, that the Fed had overplayed its hand. Bonds are
forward-looking. As soon as they feel Alan Greenspan's rate cuts have
crossed the line from stimulative to inflationary, the bond market will
crack. (Gold should also begin to rally.)

Not only does the Fed's latest rate cuts make the dollar less attractive
than the euro, a declining bond market could finally send lingering foreign
capital back home overseas in an ever accelerating trend.

Considering that March 2000, (very near the start of the new millennium) was
the peak in the NASDAQ and since then all the major stock markets in the
United States, Japan, continental Europe, and Britain have fallen, it is
fairly clear to see that we are 12 months into a global stock market
recession.

Even the poorest economist regards stock markets as good lead indicators of
broader economic trends. A year after the 1929 crash, in the second half of
1930, the U.S. economy itself had headed downwards. This is natural enough,
because investors, who are themselves involved in all the businesses of the
country, respond both to current events and to their expectations for the
future.

Businesses are now reporting that they have missed their past forecasts and
are lowering their forecasts for the future.
Stock markets also relate to credit markets. When credit is easy, money
flows into markets. Credit is not as easy as it was. Bankers become worried
about the security for their loans, as both stock market prices and property
values start to fall. In the United States, consumers have been saving too
little and borrowing too much. Credit markets will tend to become less
liquid, and that will push asset values down further - not just in the
United States but worldwide.

In the 1970s, inflationary pressures centring on the oil market nearly
destroyed the world currency system. In the 1980sthat inflation was brought
under control, with interest rates going up to 15% or even 20%, and many
ruined businesses and lives. In the 1990s, after a mild recession Alan
Greenspan and the Federal Reserve allowed a huge inflation of asset values
to occur, even though Alan Greenspan knew it was irrational and therefore
highly dangerous. This boom went completely out of control in President
Clinton's second term. Now that boom is over.

In the 1930s, the collapse of a credit boom, which had not gone to anything
like the same extent, was followed by competitive devaluations. There will
be competitive interest rate cuts, and therefore competitive devaluations
again in this decade. The euro is far too low relative to the dollar at the
present time and the Japanese would like a cheap yen to boost their exports.

How can the Fed boost their economy? The US needs to see a weaker dollar if
it is to remain competitive from an overseas trade point of view, however a
lower US dollar could signal an exodus of foreign capital. The Fed has
consistently tried lowering interest rates but so far both the US economy
and stock market have ignored their attempts at stimulation. In these
circumstances, it is very hard to boost the liquidity of the system.

The Japanese in the 1990s tried everything, including zero interest rates,
and nothing got their economy out of recession. This is where gold comes in.
At present the gold price is far too low. A vital monetary asset is
undervalued. The central bankers need to create additional liquidity, and a
higher gold price would help them to overcome their present difficulties.

The next few weeks will show the direction of the US dollar. Further
weakening of US interest rates will do little or nothing to stimulate the US
share market but will have a further weakening effect on the US dollar. The
previous Bull market, the strength of the US economy and the expanding US
deficit have all been financed by foreign funds inflows, but I now believe
the tide has turned and the flow of money will be out of the US as offshore
investors see little reason to hold US dollars any longer.

The final curtain will come as the falling US currency heralds the demise of
the US stock and global stock markets.
Will Australia be exempt from this scenario?

The Australian stock market has not reached anything like the highs of
overseas markets and it could be said that it is still fairly valued. The
Australian dollar has already corrected in advance of other world currencies
and inflation is in check. But what effect will HIH Insurance have on the
Australian economy? Already the effects of this national disaster are
beginning to be felt.

The Australian government believed they could stay recession by stimulating
the building industry, thus creating jobs and bolstering manufacturing.
However, today builders are struggling to acquire the builders indemnity
insurance that is required by all shire councils before the building of a
new home can commence. Many builders are already going to the wall and
tradesmen are finding that not only is the building boom that was created by
the introduction of GST over, but that the building industry is going into
decline.

Many other areas of Australian industry will shortly be affected by HIH and
other large companies will shortly follow the example made by One.Tel
leaving the unemployed in their wake. If the rest of the world goes the
recessionary way, then there will be little requirement for our natural
resources and what else does Australia have to sell?


Ends


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