News Release
Johns Hopkins Economics Professor Looks AheadSteve H. Hanke, professor of applied economics in the Department of Geography and Environmental Engineering and in the Department of Economics, gives his views on the U.S. and world economies and what we might face as we approach the year 2000.Question: There s been a lot of volatility in the stock market in the last eight months. What do you foresee in 1999? Hanke: First of all, the volatility will continue because I think there will be periodic blowups that do occur in the emerging markets, most notably in Brazil and perhaps major problems again in places like Russia, Indonesia and Malaysia. And that will create volatility in the U.S. market. Also, I think the market will start heading south because the fundamentals that support it are shaky. You need strong earnings to support a strong stock market. And I think the earnings picture will continue to deteriorate in the U.S. this year. By my calculation, the market is probably overvalued by 35 percent. Question: The effects of economic turmoil in other areas of the world so far seem not to have affected the United States. Do you see this continuing? Hanke: No. Although the market went way down, came back up and is roughly where it was before the ruble collapsed, you have other more subtle things that have occurred. For example, the quality spread or the interest rate spread between government bonds and corporate junk bonds has deteriorated. The spread or differential between those interest rates has widened as risk has been repriced after all these foreign fiascos. Anything that's perceived as being a little risky is paying you a higher return now, relative to U.S. Treasury risk-free instruments, than it was before the crisis. Lots of things have been undermined. People just look at the Dow Jones. Well, that tells you something. But a lot more is going on. And it's not a particularly pretty picture. Question: Russia s economic woes have gotten a lot less attention recently. How is that country doing now, and where do you see it going as we approach the year 2000? Hanke: It's a complete disaster from the economic point of view. Contrary to the press reports, Russia never went through a transition moving from a communist/socialist system toward a market-oriented system. They kind of had a mutation. And as a result, the economy is just completely dysfunctional and continues to go down. This year we'll see it decline another 10 percent. And it's already less than half the size it was in 1990. I can see nothing but a decline in economic activity, probably a very large increase in inflation and further devaluation of the value of the ruble. Question: Asia. Have we seen the worst there?
Hanke: I don't think so because due to meddling in the region,
primarily by the U.S., we have several
countries that are very shaky, politically and economically. I
think you've probably got the bright boys from
the CIA fully engaged in the region. And these are the fellows
who, according to Sen. Daniel Patrick
Moynihan in his recent book,
Question: How are emerging economies faring? Where do you see
them going in 1999?
Hanke: Some of them have taken fairly tough measures. For
example, in Asia, Singapore really looks
impressive to me. And Taiwan s been reasonably impressive. In
Latin America the only one that s
impressive is Argentina. Brazil s still very shaky. The exchange
rate setup there is fatally flawed. I really do
think it will eventually blow up. And this year is probably going
to be the year when the thing blows up,
even though they ve got $41.5 billion in credit lines arranged by
the International Monetary Fund. I don t
think that s going to be enough to do the trick. Eastern Europe?
Really the only star performer is Poland.
The rest are question marks, all of them. They re very small
markets and aren t very liquid. They do plan a
record number of initial public offerings of new stock in
privatized companies for 1999. But the market
environment in general is not too good.
Question: There s been a lot of doomsday talk about the Y2K
computer problem and the potential for
havoc. Do you have any thoughts on this? Should we be
worried?
Hanke: I m not an expert on Y2000, but I have talked to some of
the experts and they do tell me that the
private sector is in pretty good shape. The experts view is that
there [are] some holes in the government
sector, and some real problems might pop up and spin out of that
because if you have a problem in the
government sector it can contaminate the private sector.
Question: Economic union in Europe takes a step forward this
month with the euro becoming the
official currency for 11 of 15 EU countries. What impact do you
foresee this having for the United States
and the rest of the world?
Hanke: Asia is in a depression, there are lots of problems in the
emerging markets in general and the U.S.
will clearly slow down by the end of 1999. Now the greatest
monetary experiment of the century starts on
Jan. 1; that throws additional uncertainty into the mix. Whether
you like the idea of a euro or not, the
Europeans couldn t have picked a worse time to start.
Question: Do you have any advice for the small investor for
1999?
Hanke: I d do just what I ve been recommending for a year and
that is stay in relatively safe investments
and overweight your portfolio towards government bonds and safe
securities. To know whether you re
overweighted or underweighted, you have to look at your age, and
that should indicate the percentage of
your portfolio that should be in fixed income securities, and
then the remainder should be in stocks. So if
you re 30 years old, you should have, normally, 30 percent of
your portfolio in bonds and 70 percent of
your portfolio in stocks.
Question: Oil prices and other commodity prices continue to
fall. Interest rates are being cut. At
what point does a recession turn into a depression?
Hanke: Russia is clearly in a depression; if you ve been sinking
about 10 percent a year for eight or nine
years.... I think the most constructive thing to say is that all
the revisions and all the forecasts have been
coming into line with what I ve been forecasting for about 18
months now, which is much, much slower
growth in the world. We still have positive growth in the U.S, by
the way. But I think we re going to really
start slowing down this year. So I see more downward revisions.
The problem is that you ve got 30 percent
of the world s output produced by Asia, and they are in a serious
depression in that region. To put things
into perspective, in the Great Depression consumption went down
about 14 percent in the United States,
and in Korea consumption is down about 28 percent from where it
was last year. Asia has really been hit
and there will continue to be a lot of collateral damage in
1999.
Question: Any final thoughts?
Hanke: I think we re living in fairly dangerous times from the
investor s point of view. And most people,
particularly in the U.S., just don t have a clue particularly
younger people of what could hit their assets
in a hurry. They can really dissipate in no time. So I would just
send out a wake-up call: Now is a time to
be defensive with your assets. I think the U.S. foreign policy
under the Clinton administration has been
extremely adventurous and way overextended in their meddling and
trying to micro-manage literally the
world. It s not just Asia but the Middle East, the Balkans and
Russia. So we have lots of potential major
international problems that could come back to haunt us. If any
of these regional problems blow up, they
could trigger some bad news for the stock market because I think
the stock market s quite vulnerable.
To learn more about Steve Hanke, see:
http://www.jhu.edu/~dogee/hanke.html
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