From Volume 5, Issue Number 21 of EIR Online, Published May 23, 2006

World Economic News

Global Stock Market Meltdown

The biggest worldwide stock market crash since the 2000-2003 collapse of the "New Economy" is right now unfolding. Within the past two weeks, roughly $2 trillion in market capitalization has been erased. Every major stock market reported their biggest two-week losses since early 2003. In the U.S., the S&P 500 index fell 4.4%, the biggest decline since January 2003. The Dow Jones Stoxx 600 Index, which covers the largest European stocks, plunged by 7.3% between May 9 and May 19. Just during the trading week ending May 19 it dropped by 4.5%, the steepest decline since March 2003. Hardest hit was the Norwegian market, sinking 11%. Two-week losses in Frankfurt, London, and Paris all exceeded the 7% mark. Asian stocks, measured by the Morgan Stanley Asia-Pacific Index dropped 5.3% within a single week, with the Jakarta Composite Index tumbling 9% and India’s Sensitive Index 11%. The Japanese Nikkei has plunged by 8% since early May. The Russian RTS index crashed by 15.6% within the last 10 trading days.

However, fears of an uncontrolled outbreak of inflation, and therefore rising pressure on central banks to raise interest rates, are not only threatening unsustainable stock-market bubbles, but have led to an overall panic flight out of "emerging markets," hitting everything from stocks to bonds and currencies. In particular, Latin American currencies fell sharply in recent days, with the Brazilian real dropping by 6.8% since May 10. The Brazilian Treasury had to cancel its weekly bond auction on May 18, as investors were demanding yields the government was not willing to accept. In Indonesia, the rupiah plunged by 5% in one week, in spite of an upgrading of its debt by international rating agencies. The Turkish lira imploded, falling 8% between May 11 and May 16.

Due to the sudden meltdown of stock prices and "carry trade" investments in "emerging markets," further extended by derivatives bets based on such markets, several large banks and hedge funds are believed to have suffered extraordinary losses in the past few days. This is probably the background to the short-term interruption of the commodity hyperinflation process. Banks and funds had to temporarily liquidate positions in commodities and other investments in order to get cash for covering losses in stocks, “carry trade, and related derivatives. Thus, the CRB index of 19 commodities fell by 6.4% within one week, the biggest weekly decline in 25 years.

Commodities See Biggest Drop Since 1980

Commodities, led by metals, faced their biggest weekly drop since 1980, as the dollar advanced against the euro and yen (Bloomberg, May 19), and U.S. ten-year notes headed for their biggest weekly gain since September—all purportedly because speculators and others bet that the Fed will continue raising interest rates. The Reuters/Jefferies CFB Index of 19 commodities fell 6.4% this past week, the most since 1980. The index dropped 23.11 points to 338.64, after reaching a record high of 365.45 on May 11.

Mergers Are Driving Commodities Hyperinflation

Extreme volatility of copper, zinc, nickel, and gold in recent days is linked to the extreme volatility of the merger battles over global metals miners Falconbridge and Inco, which produce them all, Reuters reported May 16. Inco first bid for Falconbridge seven months ago, valuing the target then at $12.6 billion in assets. Now, Inco is bidding $17.1 billion for Falconbridge. But it is being outbid by Swiss-based Xtrata, which has just made a bid valuing Falconbridge at $18 billion, which will probably go through. The money will come from UBS, Barclays, JP Morgan Chase, Deutsche, and Roy of Scotland banks. Thus the merger-value of Falconbridge's metals assets—copper, nickel, and zinc—has been pulled up by a whopping 45% in seven months giving the hedge-fund speculators their lead.

And what will Xtrata do with Falconbridge? According to UBS insiders, cited by Reuters, "Acquiring existing production provides certainty of cash flows immediately, and sector consolidation is better than building marginal new supply." Falconbridge has been taking mines out of production, one way or another, since the Inco bid. Market squeeze, anyone? And now Teck Cominco will proceed with its counter-takeover of Inco, valuing it at $16.3 billion, or 20% above its current stock valuation.

Parallels Seen to 1971 Collapse of Bretton Woods System

Last week's "correction" in the commodities markets was "overdue and unsurprising," the Sidney Morning Herald stated May 16. The paper asks, "What are the odds of a hedge fund accident?" referring to 1998, the year of the collapse of LTCM (Long Term Capital Management). They indicate that assets of funds are now five times what they were when LTCM went under. Hedge fund losses in that year, they say, were 10%; a similar problem today would cost $80 billion. This by itself would be "rocky but not a wreck," unless "it were associated with other problems, such as a mortgage crisis in the U.S." They note that the current commodity price bubble "bear[s] all the hallmarks of the Internet bubble of the late '90s: assets that don't make profits and don't pay dividends, doubling and trebling in price because of a 'game of pass the parcel to a bigger fool than me.'" They then cite an unidentified "Bridgewater," who "likens what is happening now to the collapse of the Bretton Woods system in the early 1970s." France first, and then other countries started to peel off the standard and started to ask the Fed for gold instead of dollars. The result was inevitable as the race for the dollar door began, the Herald stated.

For more on the past week's wave of financial turbulence, see "The Financial Bubbles Are About To Burst," in this week's InDepth Feature: "Race to the Bottom."

All rights reserved © 2006 EIRNS