Wednesday, April 25, 2007

Asian Contagion

MarkM writes: "But I sleep nights knowing that some Asian Contagion and gap down open will not hurt me significantly." Yes, I think that the probability of another Asian Contagion is a possibility. I've not seen much news this a.m. about Nikkei having a bad day yesterday. This image from Bloomberg. Now this drop is not surprising because the consumer confidence numbers were low.
I'm sure that you've read the same stuff as I have about how the Asian markets have a cultivated a consumer base that can step in when American consumers' knees buckle under the weight of their debt. Well, I don't buy it. The American consumer has a decades long addiction to debt (which we can only hope that our Asian neighbors do not follow us into that chasm), and is a much practiced consumer in buying the latest and greatest.

Perhaps I have it wrong, but we are a culture of consumption and appearances. Though Asian societies have a new wealth, to have a real change in consumption practices you have to have a cultural shift. I don't pretend that these observations are well thought our or even well-researched. But there are two things that make the Asian markets vulnerable. First, there is the extraordinary expansion in their markets (they have mastered speculation as have we). Second, THEY perceived the linkage of their economies to ours. So when we have weakness due to (a) weak dollar that makes their exports to us seem expensive and (b) a consumer that may be on the verge of exhaustion, their markets get nervous.

My point is that I think that there is a probability of our waking up to a market gapping down horribly. No one knows, and I know less than anyone. But we've seen that happen with Shanghai. Yes, everyone is giddy with the subsequent recovery and the prospect of Dow hitting 13,000. But with these dizzying heights people get nervous. And a big gap down will cause the futures to plunge, and I'm not sure that our portfolios can be shielded by selling at acceptable stop losses. It's something to think about.


Anonymous said...

I have to think that until the asians make a real effort to rein in their currencies its going to be business as usual. The bigger they are the harder they fall type of thing. Or there would be a similar catalyst?

Leisa said...

Angelav, you make a good point. I think that currency and consumer demand are two discrete, though interdependent issues.

And I don't think that China/Japan are motivated to re-value their currencies. I've wondered, though, that if the US dropped interest rates, what that would do to the carry trade, which would be a third item.

I guess one could construct a matrix of currency strength, interest rates (all players) and Americian consumer demand.