Macro Updates

March 19, 2003:

Here is what I have been watching recently:

Fed Watching: The Fed’s Open Market Committee decided to leave interest rates unchanged yesterday saying that they couldn’t figure out where the economy is headed giving all of geo-political uncertainty. What to make of this? The Fed understands that uncertainty has paralyzed the US economy: firms won’t invest, consumers are hesitant to spend. So what will the future bring? Here are a couple of scenarios: 

1. The Iraq problem is solved quickly with little loss of life. Watch for the stock market to take off and spending to increase dramatically. 
2. The war drags on, uncertainty continues to dominate. The economy remains weak. 
3. The war takes awhile and Saddam torches oil fields. Terrorists attack American targets. This is the worst case scenario. The economy would probably slide into a severe recession. Watch the Fed aggressively cut rates.

While option A. seems the most likely, it is not without its downside. Remember, there are a lot of expansionary policies in the pipeline. If spending increases dramatically, watch out for inflationary pressures to build. Fed might increase rates if inflation looks likely.

South Korea: Moody’s recently downgraded its outlook for South Korea to “negative” because the problems with North Korea, recent accounting scandal with SK Group (one of Korea’s big chaebol’s), weak export market, and weak domestic demand. Because of all of this the Korean stock market is down. In addition, there is uncertainty over what new President Roh Moo-hyun will do. Many claim that Korea is going to relive 1997 when it suffered horribly during the Asian Financial Crisis. 

I see things differently. I think the markets are being overly pessimistic. First, unlike 1997 Korean banks are healthy. They have shed many of their non-performing loans and have pretty strong balance sheets. The SK problems might actually turn out to a positive as it gives Roh an excuse to further break up the chaebol’s that still have too much power in Korea. Once the world geo-political problems go away and if Roh can do the things he is promising, watch Korea very closely. There may be great opportunities there.