"More Than You Wish For"

08/05/2005 12:00 am EST

Focus:

Martin Weiss

Chairman, Weiss Research, Inc.

No matter how bullish one is on the markets, all investors are well-served by evaluating the bearish case. And few present that argument more concisely than Martin Weiss. Here, he explains how we may "just be getting more than we wished for" and the risks that entails.

"The folks in Washington and on Wall Street should be more careful about what they wish for. They may actually get what they want plus much more. For at least two years, they’ve been wishing for a stronger Chinese currency, supposedly to help make Chinese goods more expensive. Now they got it, along with other major consequences that they did not wish for.

"Wall Street and Washington don’t seem to be too worried about a decline in the dollar against the Chinese yuan. But they’re missing the point. Now, the dollar is going to fall not only against the yuan, but also against all major Asian currencies. In just one day of trading recently, the dollar plunged 2.6% against the Japanese yen and even more sharply against the Korean won. On top of that, two other Asian nations immediately announced revaluations in their own currencies—Malaysia and Singapore. This sets the stage for a dollar plunge throughout Southeast Asia.

"Until now, OPEC was at least making an effort to hold down oil prices. No more. When the members of OPEC and other oil exporting nations sell their oil, they collect US dollars. But if those dollars are worth less, they immediately suffer a loss. So to compensate for that loss, they have only one alternative: To jack up the price they charge for oil. This is what happened every time the dollar fell against European currencies. It’s also going to happen every time the dollar falls against Asian currencies. I see no other alternative.

"Experts on Wall Street and in Washington are saying that the meager 2% rise in the Chinese currency won’t make that much of a difference in the prices you pay at Wal-Mart. Maybe not. But what about a 10% rise in the yuan, a very real possibility in coming months? And what about a 20% rise in the yen, the won, and other Asian currencies? What will that do to the prices you pay—not only for apparel at Wal-Mart, but for Nissans and Panasonics, and Hyundais and Samsungs? Never forget: One of the big factors that had been holding down inflation in the United States was cheap Asian imports. Now, in their infinite wisdom, our leaders have found a way to end that protection against rapidly rising inflation in the United States.

"Wall Street analysts have pooh-poohed the bond market plunge. They say we can handle any reduced buying of US Treasuries by China. But they’re missing the point. This is not just about all the capital that’s been flowing into US bonds from China. It’s also about the money flowing into US bonds from Japan, Korea, Malaysia, Singapore, Taiwan, and the rest of Asia. Remember? This is the capital that’s been keeping our long-term interest rates low and financing much of our housing boom.

"As long as the dollar was stable against their currencies, it made sense for Asian investors to put their money in US bonds. But now, will they continue to invest in the US at the same pace? I doubt it. In fact, the landmark revaluation by three Asian nations may foreshadow the day when they actually begin to pull money out of our bond market. And the result will be falling bond prices and rising long-term rates."

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