Greenspan's Anti-Inflation Success Plays Starring Role on Global Stage
FED ON THE SIDELINES
"Before Federal Reserve Chairman Alan Greenspan's testimony July 22, the bond market expected another tightening move this year and another one by March 1998. Now the market expects just one hike during this period. Short-term rates have declined, implying an easing move by the central bank. We don't expect the Fed to change interest rates in the foreseeable future. Technology is limiting inflation. During earlier boom times, businesses simply raised prices to increase the bottom line. But business mentality has totally changed. The emphasis is on productivity, not on price increases."
- Sung Won Sohn, chief economist, Norwest Corp., Minneapolis
ASIAN MONEY CRISIS
"In recent weeks, exchange rates in Thailand, the Philippines, Malaysia, Indonesia and Singapore have lost an average of roughly 10 percent relative to King Dollar. While each nation has its domestic story - a bankruptcy and bad debt situation in Thailand, for example - there is a contagion effect that smacks of a broad-based confidence loss in those currencies by the global financial markets. The stock markets of each country have dropped from 6 percent (in Indonesia) to 37 percent (in Thailand). Bad currencies lead to bad markets. The reason is Alan Greenspan and the zero to 1.5 percent U.S. inflation rate so far this year.
"Many of our Asian cousins, with dollar-linked currencies, can't seem to take the zero-inflation heat. Consequently, they have chosen to `fall off the wagon' and devalue in relation to the zero-inflation dollar standard. Even though their inflation rates are running in a moderate 5 percent range, they appear unwilling to accept the necessary monetary discipline in order to take the next big step forward to price stability. And since they're unwilling to honor the promise of dollar-related price stability, global investors are shunning their markets."
- Lawrence Kudlow, chief economist, American Skandia Life Assurance Corp.,
STILL BULLISH ON ASIA
"We continue to carry an overweight exposure to the southeast Asian equity markets, with the exception of Hong Kong. In our view, the investment case for the region is based on the following: a yen that will appreciate to 104 yen to the U.S. dollar next year; a cyclical recovery in a number of the region's economies, helped by an upturn in the electronics cycle; and finally, within a global context, we can find value within the region. With the devaluation of currencies recently, we can add that structural impediments to economic growth are being removed gradually.
"The Thai equity market suffered the most from these structural impediments. The breaking of the currency peg by itself is not a solution to some of Thailand's more deep-seated problems, but it is a prerequisite for change. On the ground, things will continue to appear beyond redemption for sometime, but the important fact is that the logjam has been broken. It is worth remembering just how bleak the economic landscape looked for a number of European countries for several years after the breakup of the ERM. That is all past now, and we maintain a positive view on the outlook for Thai stocks." - Joe Rooney, analyst, Lehman Brothers, London
GOLD FLASHING SIGNALS
"The spot price of gold, which recently fell below its trading range since 1989, is sending a deflation message. Maybe it's time to worry about deflation rather than inflation. Gold is a relatively good leading indicator of producer-price inflation, which is near zero. …