June 15, 1998
On Wall Street today the Dow Jones Industrial Average had its second worst showing this year. The loss was led by a plunge in financial markets throughout Asia. Margaret Warner discusses the stock market drop with international economist, David Malpass.
MARGARET WARNER: A bad day in Asian markets, a bad day on Wall Street. To tell us what's going on we're joined by David Malpass, chief international economist at the New York investment firm Bear Stearns. He's a former Treasury Department official during the Reagan administration. Welcome, Mr. Malpass. Why did the market go down 207 points today?
DAVID MALPASS, International Economist: It was concern over Japan and the spillover. Japan's yen has gone through now 146, so that's a weak level for the yen. And their GDP numbers are shrinking at a 5 percent annual rate.
MARGARET WARNER: Explain-take us through this step by step, the connection between the yen and American investors. First of all, why-how much has the yen dropped say in the past year and why?
DAVID MALPASS: Well, it's dropped from roughly 120 or 125 to the 146 level, so that's maybe 15 percent over the last year. That's a combination of factors. Let me cite three: first, fundamentals in Japan are weakening. The economy is in recession, so people don't want to own assets in Japan. That's one. Second is momentum. Once a currency starts weakening, then the tendency is to keep weakening. And then thirdly there were some comments last week by the U.S. Government and over the last month by the U.S. Government that the market may have interpreted as a bit of indifference about the yen. Treasury Secretary Rubin spoke to the Senate Finance Committee and indicated the currencies are governed by fundamentals. Well, that seemed to be saying that the U.S. didn't want to intervene or try to affect the course of the yen. That allowed the market to continue selling.
MARGARET WARNER: So why does a drop in the value of the yen and a drop in the Japanese stock market spook investors in the United States?
DAVID MALPASS: It involves corporate earnings. As we look at U.S. companies, they begin to look at a world environment that's no longer growing. Not only is Japan in recession now, Southeast Asia and South Korea are in an actual depression. And the economy in China is slowing down. The concern is that combinations will lead to lower earnings in the U.S..
MARGARET WARNER: Briefly, which sectors of the U.S. economy are most affected by that, which industries?
DAVID MALPASS: It's been rotating around. To an extent, multinationals come into concern, but those with steady earnings growth, steady sales growth, such as the pharmaceuticals, haven't been as much affected. Getting a real read on the U.S. sectors is a tough job, because there's a tendency to mis-estimate what company sales and earnings are going to be.
MARGARET WARNER: Now, the market, the U.S. market is actually down, I think, some 600 points just in the past month. Again, is this the same factors, or others?
DAVID MALPASS: I think it's largely an Asia-related factor. As the stock market and currencies in Asia have gone through a second round of weakening really since April, that's renewed this concern about how it affects the U.S. economy. Also, we should note that the U.S. market was at a big high, and so part of this is simply the natural kind of correction that comes after a big run-up.
MARGARET WARNER: And then where is this money going, the money that's leaving the U.S. stock market or the Asian stock market?
DAVID MALPASS: Actually, there may not be that much money leaving the markets. When a market goes down, sometimes it's simply a reduction in the value of the market, itself. Now in the case of Japan and Southeast Asia there is some money still coming out of those countries. That money has been going into the U.S. in the form of both the bond market and the stock market here. That was helping our markets in the first quarter, but then by now in June we're seeing weakness, some weakening in the flow there also.
MARGARET WARNER: Is there a way that the U.S. stock market can rebound if the Japanese economy remains weak?
DAVID MALPASS: Yes, actually there is. U.S. earnings can be strong even if Japan is in a recession if we have strong consumption in the U.S., strong investment levels in our own corporations, the public is patient in terms of keeping their money in the stock market and the bond market, and then we also have Europe staying strong. If those factors hold together, then you can have this polarization in the way of the world economy where the U.S. and Europe do well, Asia does poorly. One of the key issues in my mind is going to be whether more things break in Asia. We have to worry about the effect tomorrow morning in Asia of the U.S. sell-off and then what's going to happen to Asian currencies due to the weakness of the Japanese yen. I'm worried, for example, about the Korean currency.
MARGARET WARNER: All right. Well, thank you very much.
DAVID MALPASS: Thank you, Margaret.