CHAPTER 4
The 1997 Asian Currency Crisis and Deflation

ASIAN CURRENCY CRISIS STARTS IN 1997

The intermarket principles that I have described are based on market trends since 1970. The 1970s saw runaway inflation, which favored commodity assets. The 1980s and 1990s were characterized by falling commodities (disinflation) and strong bull markets in bonds and stocks. Starting in 1997, however, some changes started showing up in the traditional intermarket model. The problems started with a currency crisis in Thailand during 1997 and climaxed with another one in Russia during 1998. The events of 1997 and 1998 provided a dramatic example of how closely linked global markets really are, and how a crisis in one part of the world can quickly spread to other parts.
During the summer of 1997, the currency of Thailand started to tumble. It was a trend that soon spread to other currencies in that region. The collapse in Asian currency markets caused a corresponding collapse in Asian stock prices, which had a ripple effect around the globe. Fears of global deflation pushed commodity prices into a free fall and contributed to a worldwide rotation out of stocks into bonds. Over the following year and a half, the CRB fell to the lowest level in 20 years. The reaction of Asian central bankers to the crisis provided a lesson in intermarket relationships. In an attempt to stabilize their falling currencies, they raised interest rates. This jump in interest rates pushed Asian stocks into a sharp ...

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