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Aberdeen Asia-Pacific Income Fu Message Board

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  • Pseudotsuga Pseudotsuga Dec 2, 1999 6:00 AM Flag

    Commentary..high yield market

    There is no simple answer to the possible
    evolution of economic growth, interest rates, and

    What seems to be clear, however, is that the present
    trend of accelerating national debt cannot continue
    forever. But, as every asset bubble in history proves, it
    CAN continue for quite awhile.

    We have seen a
    bull market built on a number of simultaneous

    1) Demographics. The Baby Boomers are in their peak
    productive years. That is a HUGE resource of well-eductaed,
    free-thinking workers.

    2) Technological revolution.
    Computers are revolutionizing everything. The world is
    changing MORE rapidly than it did during any of the
    previous technological revolutions in human history
    (agriculture, printing, industrial). Those took, respectively,
    millenia, centuries, and decades to affect the course of
    human history, and were separated by the same blocks of
    time. Computers brought the rate down to years, and
    now, a few YEARS later, the internet has brough it
    down to days.

    3) The fall of communist and
    totalitarian systems. This has created millions of people with
    economic wants, and without the economic or societal
    infrastructure to produce them. That has created the paradox of
    increased consumer demand with simulaneous capital

    4) Secular bear market in commodities. This is due,
    in part, to some of the previous forces, technology,
    ingenuity of workers, need for cash in cash-starved

    5) Stagnant economies in much of the rest of the
    industrialized world. For many reasons, much of the industrial
    world's economy has stagnated. Part may be demographic,
    regulatory, and cultural differences. Whatever the cause,
    this has created an enormous capital flight to the

    So, we have a combination of forces, some domestic
    and some international, that has lured capital, again
    both domestic and foreign, in to our equity

    The bottom line is that stock market equity and
    foreign bond holders are financing our current accounts
    deficits. Foreign money will continue to do that as long as
    it is in the best interest of the investors to do

    And that requires that:

    1) Foreign, and
    especially the industrialized countries', economies (and
    hence their equity markets) remain stagnant;

    Our economy, and especially our currency, remain
    strong; and

    3) Our equity and bond markets remain

    The bottom line is that our equity and bond markets
    are simply FREE MARKETS, governed in large part by
    the laws of supply and demand. So long as foreign
    money is willing to service our debt, then the present
    trend can continue.

    But if Japanese, European,
    or Russian economies come roaring out of the dark,
    then there will be increasing competition for that
    investment capital, and European, Arab, Japanese, and Hong
    Kong investors, among others, may not find a 6.2%
    return on U.S. dollars particularly

    That, and only that, is what is driving our bond market
    down now. And if that trend continues, or accelerates,
    then what the Fed does is meaningless. The Fed can
    piss whatever interest rate they like in to the wind,
    but if no one steps up to buy the 30-year long bond
    at the treasury auction, then interest rates will

    And while the magnitude of that increase, and its
    effect on inflation and economic growth, are hard to
    quantify, the DIRECTION of the effect is crystal clear.

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