Editor's Note: Marc Chandler, chief currency strategist at Mellon Bank, frequent
commentator and longtime
columnist, has prepared this Top 10 list of economic stories global investors should watch in 2000. (He offers any entry to David Letterman should the late-night talk show host wish to use them on his television program.)
The market has gone a long way toward pricing in continued tightening of monetary policy in the U.S., U.K., the euro zone, Canada and Australia. Look for these bond markets to have a better year than they had in 1999, when they all lost value in local currency terms. Bond yields may top out in the first half of 2000 as evidence appears that inflation is not accelerating. In fact, next year could see headline inflation rates ease, though core measures may be more resilient.
The odds of the much-talked-about Chinese devaluation of the yuan continue receding. The U.S. congressional debate over permanently extending favorable trading status and technical negotiations with the
World Trade Organization
will likely continue well into the middle of 2000. A devaluation, even if that was what China was contemplating, would seem highly unlikely while the process is in progress. In addition, the economic case for a devaluation appears to have weakened because exports picked up in the second half of 1999 and deflationary pressures eased.
The powerful economic and political forces that have coalesced around Russian President
are not going to give up control of the executive branch without a fight. The post-Yeltsin era may look a lot like the Yeltsin era. Without more convincing rule of law, most foreign investors will likely continue to avoid committing new funds to Russia.
From a purely economic point of view, the U.S. presidential contest may be immaterial. The leading candidates from the major parties do not appear to differ substantially on economic policy. The most likely nominees are internationalist as opposed to isolationist/unilateralist. With U.S. growth so strong for so long, tax cuts do not appear as salient to the majority of voters as they once did. Look for Sino-U.S. relations to be one of the most important foreign policy issues in the campaign, though
George W. Bush
all favor China's membership in the WTO.
will likely be renominated for another term as
chairman. By making it clear early,
will assist his vice president's bid for the
by removing the issue from political discourse. Meanwhile, look for some conservatives and business to propose their own solutions to Greenspan's worry about the shrinking supply of labor: increased use of prison labor and easier immigration for skilled foreign workers.
International markets, which have grown accustomed to a currency crisis in Mexico during presidential election years, may be disappointed in July, when Mexico holds its next presidential election. A deterioration of the country's current account, which has often preceded the cyclical crisis, is not materializing. Perhaps this is due to the dramatic rise in oil prices and the extra cushioning provided by the
North American Free Trade Agreement
. In addition, Mexico is making progress on its battle against inflation and strengthening its financial sector.
Australia and Canada enjoy solid economic fundamentals and their currencies may be among the world's strongest next year. Note too that the 2000 Olympics will be held in Australia and this could also help boost the currency.
The market's focus on Japan will shift from the country's economic straits to its serious fiscal straits. In order to revive its economy, the Japanese government accumulated the largest debt relative to GDP of any major industrialized country. It will take Japan years to stabilize its debt situation. Stronger growth will clearly help, as the Anglo-American experience has shown, but even the most ambitious cheerleaders of the Japanese economy (the government itself) only forecast 1% growth next year.
The euro finished 1999 as friendless as the dollar was at the end of 1998. There are significant reforms taking place in the euro zone and the market will likely recognize those reforms next year. The euro is still vulnerable to one more push below parity ($1.00) and that may very well prove to be a significant low for the single currency. Naysayers, who think European officials will abandon the euro after its inauspicious start, are mistaken. The solution to many of the euro's problems is more integration, not less. The U.K., however, may still be a tough sell. In the spring, look for more talk of the U.K. joining NAFTA.
I think the top economic event of 2000 will be that the U.S. equity market does not collapse, as many bubble-types argue. As many equity investors know too well, most stocks outside of the handful of highfliers did not have a particularly good year. I am not suggesting that we will have another year like this one, but only that the people warning of a bubble may prove to be a bit like Chicken Little warning the sky is falling. If it is an irrational bubble, as they have argued, then by definition it is impossible to predict the timing of the collapse with any degree of confidence.
Traditional valuation models may be stretched, but the way we live, work, consume and play is dramatically changing with the new technology. Valuations are arguably most stretched in this sector, but the appropriate valuation model may not be a claim on a future earnings stream, but as an option on a company that perhaps will hold one of the commanding heights of the new, more global economy.
Marc Chandler is the chief currency strategist for Mellon Bank. At the time of publication, he held no positions in the currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at