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|User Info||Friday Financial Roof Fire; entered at 2007-08-04 08:09:37|
Registered: 2007-07-27 Re-inventing the future at the speed of time.
Looking ahead a bit, this reminds me of Brazil in 1998 / 1999. They had stabilized the currency, inflation wasn't too bad (they were publishing real figures unlike the USA's fudges). |
However they had a current account deficit and a fiscal deficit with a lot of debt owed to foreigners. They had to use reserves to defend the currency (whereas the US could only use interest rates since it is the reserve currency).
The Real went into the toilet and the market tanked when the new CB head raised interest rates to 60% to stop speculation against the currency. We were buying companies like crazy because our research showed that the market would snap back when the "brakes" were taken off.
BY the way, Brazil got into their situation for a number of reasons:
1. The foot was simultaneously on the gas pedal and on the brake. Interest rates had been raised (before the crisis) but the gov't was running fiscal deficits which needed financing = printing money there.
2. WHile there was plenty of liquidity in the world, it disappeared rapidly as first Asia then Russia puked. The black swan event was Russia defaulting on its debt and devaluing its currency SIMULTANEOUSLY. All bets seemed to be on one or the other but not both. This led to the LTC crisis and the FED providing liquidity in the USA. But it vanished from other markets.
I guess my point is that we could see a similar situation (and have been seeing it in the US) with one foot on the brake (interest rates) and one foot on the gas pedal (printing money via the financial intermediaries. The main differnce is that the inflation has gone into asset prices and not consumable prices (apart from services).
So if the market crashes due to a dramatic increase in interest rates, it may be a screaming buy (we made oodles of cash even after accounting for the devaluation).
Also, our research showed that every major crash of more than 70% since 1900 has been followed by a 200 - 500% gain in the next 3 - 5 years (off of the bottom) except for the Phillipines in the Asia crisis (I don't know why it was an aberration but I suspect that it was the type of gov't policies put in place and the rampant corruption that made it an unattractive place to invest).