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Markets of the Rising Sun

Written By Brian Hicks

Posted August 21, 2007

It’s a world where Wednesday night’s news from Asia told me to expect a Thursday slide on Wall Street, but it took until Monday for Asia to absorb Thursday night’s Fed cut.  This is not the Twilight Zone, it’s the global stock market.

Anyone who’s traveled to Asia and back over the Pacific Ocean can tell you how bizarre it feels.  You take off from Beijing on Friday and you get to New York on…Thursday.  After an initial furrowing of the brow and perhaps a strain of spooky synthesizer music, you get it. 

Well, the International Date Line affects brokerage accounts as much as airline timetables, and if you don’t understand the way time moves from east to west, you’ll get stuck holding the wrong day’s ticket at the gate.

At night, after I watch the local news to find out about that day’s murder here in Baltimore (it’s been a bad summer), I tune in to the BBC to get a jump on the day that’s already begun for my friends across the Atlantic.

Last week, voices from BBC headquarters in Bush House, London gave me nightmares.  “Asian markets are sharply down in Thursday’s trading…” 

I had hoped for late-week relief after a horrible hump day.

Alas, London and Frankfurt got hit as their Thursday came around, and New York followed with its turn in this new-fangled Domino Effect. 

Yet, over the weekend, a voice down the road from me in nearby Washington had told The New York Times that, “there has been a decoupling of the US economy from the world economy.”  These are the words of none other than the head of the International Monetary Fund, Simon Johnson.

His words echo what I’ve heard for quite a while now.  The Organization for Economic Cooperation and Development (the “rich country club”) call it a “rebalancing,” Forbes is starting to use the term “worldsourcing,” the logical extension of outsourcing where the former sweatshop countries become their own managers and even in some cases start to acquire their former western patrons (or at least their government bonds).

However you look at it, the integrated global economy is maturing to the benefit of savvy investors.  Those players that keep themselves knowledgeable about foreign trends — from consumer credit card growth to energy consumption patterns (both areas where China is roaring ahead) to the investment potential of international equities (again, China is crushing Wall Street here, but with more volatility) – will be better positioned to safeguard and augment their accounts as American power wanes.

Rather than a “decoupling,” which implies a real separation of “Asia, Inc.” from the financial tides of New York, I see “informed integration” taking place.

Asian markets tumbled last week partially due to internationally infectious jitters, but more importantly because Tokyo was shaken by currency investors and their wary attitude towards a favorite foreign exchange trading practice called the “carry trade.”

In the carry trade, forex investors borrow in yen to finance purchases of higher-yielding currencies.  In times of trouble like these, where more stock market money is siphoned off to plain-vanilla savings accounts or government-backed bonds, forex traders crawl under their security blanket, which for now is the yen. 

This has driven the yen to periodic highs lately, threatening an export boom that has been the basis for valuations and earnings estimates of Japanese companies during Japan’s climb out of a long recession.  As the dollar climbs against the yen, goods from the Land of the Rising Sun look less attractive.

But the Market of the Rising Sun was the first bourse to open on Monday, finally reflecting the Fed’s decision late Thursday here (after Asian markets had already closed on Friday, arrgh) to make direct loans available to banks.  This move was intended to loosen the credit noose that is choking everyone from home buyers to merger and acquisition financiers.  The general consensus is that the Fed will finally cut the benchmark interest rate at its upcoming Federal Open Market Commission meeting on September 18.

By Tuesday, August 21, central banks were hard back at work pumping liquidity, better known as moolah, back into this trembling credit market. 

The Fed put up another $3.75 billion Tuesday after over $100 billion of infusion last week.  The European Central Bank in Frankfurt put up $370 billion, all after the Bank of Japan started the week with a trillion (yen, not dollars) on Monday and another round Tuesday, adding nearly $16 billion in two days to trickle down through the Japanese banking system.

Of course, we’re also watching China, where another period of nearly 12% economic growth and 4.4% inflation in food prices and other essentials are precipitating central bank interest rate hikes.

Everyone should have international exposure in his or her investment portfolio.  Take a look at these three key continental exchanges (Japan, Germany, and the S&P) and their performance over the past two years, and tell me who comes out ahead.


And finally, in Tuesday’s news, we have the announcement that US foreclosure filings soared skyward by 93% this year, information that should already be priced in to the sub-prime shudder and deflation of mortgage companies like Countrywide.  But how do we know for sure that foreign markets have already priced in that punch?

By the time we find out, it’ll already be yesterday’s news.



Sam Hopkins