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White House for 8 years followedby Hillary as the first woman presi-dent coming to power in 2000. Atleast these goals are somewhattarnished as many questionwhether Hillary even wrote her ownbook.

Tax reform is starting to split the

Republican party down the middle.We have the same old boys likeJack Kemp, who gave us the fairer1986 tax reform movement leadingthe charge for the flat tax. Nobodyin the Armey-Kemp camp of theo-retical tax reform has any practicalreal world experience. The flat taxcamp is too thick-headed to listento reason and cant see how remov-

ing deductions on real estate backin 1986 led to the collapse in pricesfollowed by the S&L Crisis. The lastthing we need is a flat tax that ismore of the same type of reform as1986. They dont have a clue thatcountless businesses borrow tofund inventory and by removing in-terest deductions they will cause adurable goods crash this timearound. Of course they also fail torealize that by not allowing you todeduct taxes paid to state and localgovernments, we just might end upwith the old British system of taxa-tion where the combined tax rateshit 102%. Maggie Thatcher waselected to end that type of tax sys-tem and Armey-Kemp are tryingbring it home to America as if itwere the solution to all our prob-lems. When it comes to lobbyists,the vast majority are licking theirlips in anticipation of the flat taxenactment. One actually made acomment in private that the flat taxwas going to set the scale back tozero so they get to start all overagain. As long as you have anyform of an income tax, it allowsWashington to cut deals that theAmerican public will never knowabout.

The pure retail sales tax group isalso totally insane with tax fever.They think that by making taxes onbusiness zero they will create jobs.What they dont seem to get is thatbusiness income taxes account for

a small fraction of total revenue.The bulk of all taxes on businessare actually carried out by the taxon labor. If you shift the tax burdenon to the back of labor and awayfrom business, then labor merelydemands a higher wage to survive.This is the mechanism that drives

our cost of production higher andreduces jobs. To make mattersworse, a zero tax on business dis-criminates against America. Such asystem asks nothing of foreignbusiness operations with respect tocontributing to the national infra-structure costs of America whileplacing the entire burden upon theAmerican citizen.

Tax reform is going to be a bigissue in 1996 and the battle be-tween theory and reality has yet to

begin. Clinton will have to stick hisfoot in this debate and he maycome down with a sales tax be-cause any state governor knows itproduces more revenue than anincome tax. A sales tax is also auto-matically indexed to "real" inflationon the street. The liberal Demo-crats are only interested in punish-ing the rich rather than looking atthe impact of taxation on the middleclass. The flat tax Republicans onlysee getting rid of the Liberal systemof progressive tax rates as theirgoal while ignoring the dangers ofa flat tax. The pure retail sales taxcamp has a goal of getting rid of theIRS while falling short of under-standing how taxation on laborcosts businesses more than an in-come tax. So somewhere in thisbattle lies the truth - but getting itout into the full light of day is any-thing but easy.

The budget crisis is an illuminat-ing issue that goes directly to theheart of why serious reform is sodesperately needed. We must askourselves, if Congress is in chargeof authorizing spending and bor-rowing, then how is it possible forthe Treasury to be able to fund theinterest on the national debt for upto 1 year without the authority ofCongress? The question thatarises is quite simple. Who is really

running the government? Do ourelected officials run the govern-ment or is it the bureaucrats incharge of all the agencies? Theentire debate over the budget crisishinges on a deal to balance thebudget in 7 years. The real interest-ing issue here is should we care?

The projections used by govern-ment are static models meaningthat since we cannot forecast thefuture, why bother? Therefore, allthe assumptions that go into thisprojection of a 7 year balancedbudget are based upon real worldoutcomes that are impossible any-way. Therefore, since interest rateswill certainly change between nowand 7 years from now, should wecare if they proclaim victory for a 7year balanced budget deal? Nomatter what they agree to, it doesnt

matter because that projection willnever prevail for the next 7 years.Unless we are talking about a Con-stitutional Amendment that specifi-cally limits government spending toa precise calculation of GDP(Gross Domestic Product), there isno hope of solving our fiscal mis-management problems.

Pension funds and institutionalinvestors are scrambling to buybonds while companies like CocaCola and Disney feel their pain andtry to help by issuing 100 yearbonds. Bill Clintons Arkansas styleof budget management is only nowstarting to rise to the surface as wemove into an inverted yield curve.Clinton ordered the Treasury to cutthe 30 year bond auctions in halfand shift the national debt short-term. While Clinton argued that thiswould help bring long-term ratesdown, the truth of the matter is thathe was enticed by the fact thatshort-term rates were half that oflong-term rates back then. Hequickly broke out his pocket calcu-lator and said "gosh, if we can issueall short-term notes and bills, it willsave a lot of money in interest ex-penditures!" As the light bulbs went

Providing Economic & Market Analysis Worldwide

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off in the smoke and mirror room atthe White House, the Clintonbudget reduction plan was born. Hethen ran out to deliver his speechabout how he cut the deficit by $500billion -the "biggest" in history, sohe claimed. The curious factor isthat nobody cried! We didnt hear

about children starving or taintedmeat. But when the Republicans tryto cut spending by $150 billion,everybody dies. The difference be-tween Arkansas style politicalbudgets and reality is to shift thedebt to save interest and throw inanother tax increase while raisingspending to produce a deficit re-duction plan. Obviously, it takes alot more talent to do this type ofdeficit reduction than to simply cutspending in order to reduce thedeficit.

The inverted yield curve that isnow unfolding has 10 year ratesbelow overnight fed funds rates.Clintons deficit reduction ended upwith one-third of the national debtfunded 1 year or less. What is hap-pening is that there is a lack oflong-term debt supply and an ex-cess of short-term demand comingfrom government. So while mort-gage rates decline, government in-terest expenditures are starting torise. This brilliant scheme is no dif-ferent from that used in Japanwhen they bought long-term realestate and funded it with short-term debt. The end result, a mas-sive inverted yield curve that rosefrom 1% to 6% in less than 2 years.

While this soap opera has occu-pied the attention of investmentcapital, the real danger to invest-ment strategies is silently creepingalong - Russia! The political shiftsthat are taking place in Russia arealong the lines of yet another majorrevolution. Originally, Yeltsin prom-ised that he would step down in1996. Well so much for politicalpromises. Socrates was correctmore than 2000 years ago -there isa politician under every rock.

American or Russian, politiciansare a breed unto themselves.

The real interesting silent revo-lution that is taking place right be-fore our eyes concerns the cabinetmembers under Yeltsin. The re-formers are all gone and they are

being replaced by nationalists.Yeltsins military posture has be-come much more aggressive andVladimir Zhirinovskys plan of refo-cusing Russia to look north to southrather than east to west is interest-ing. The southern flank of Russiacontains rich oil fields - a vital na-tional asset both economically aswell as militarily. Islamic nationsnow represent a major threat toRussias political stability. Add tothis, the fact that Yeltsen has re-fused to declare himself as a can-

didate of any party, the politicalstrategy to stay in power is to movetoward the nationalists by handing

them all the power behind thescenes. The question that remains,will Yeltsin be able to pull this oneoff? Like Clinton who is movingmore center and away from Liber-als in order to stay in power, Yelt-sens strategy takes Russia in thedirection of confrontation with the

West and away from democraticreforms. The first run off is sched-uled for June 16th. All candidatesare to run at that time and the toptwo candidates then face eachother in the final election normallyheld a few weeks later. But theUpper House was supposed to ex-pire in December and nothing hasbeen done on that issue either.Given the fact that our politicalmodels show a major turning pointfor Russia being May 25th, 1996,this will mark the END of reforms

and swing back toward the goodold days of conflict, oppression andintrigue. This will have a very im-

Come join us for one of the most important conferences

ever held. Our list of guest speakers will include some ofthe most important political leaders that will help shed somelight upon what we see as the driving forces behind capitaland the geopolitical future that lies ahead for all of us goinginto the next century.

Thursday, April 18th will be a solid day of reviewing ourforecasts for the future as we approach the next turningpoint on our Economic Confidence Model. Friday, we will

have special technical training sessions for those whowould like to continue their education process of under-standing market behaviour. Friday night, we will have abanquet with Lady Thatcher delivering her view of ourgeopolitical future. Other guests will include William Kristol,former Chief of Staff and driving force behind the ContractWith America, Steve Moore of the Cato Institute and more.

Copyright January 1996 PEI All Rights Reserved

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portant impact upon the capitalmarkets and your investment strat-egy for 1996 going into 1998.

Precious Metals

Here we see a consolidation pe-riod for the first half of 1996 with abull market unfolding followingJune. As long as the metals do notexceed the January reaction high,then a retest of support should un-fold going into the May/June timeperiod. It is unlikely that gold wouldfall BELOW the $368 area but sil-ver could still drop to at least $4.50before any sustainable rally devel-ops. A weekly close above $428.30will warn of a breakout.

Bonds

Long-term bonds on a worldwidebasis are generally pressing highergoing into the April/May time pe-riod. January may represent aLOW for US bonds followed by arally to new highs. Basis the near-

est futures, we may see the finalhigh come in around the 12800 to13200 level.

Dollar

The dollar has clearly bottomedagainst the Japanese yen. While aretest of support is possible goinginto the April/May time period, wesee the dollar rising significantlyagainst the yen going into 1998.Against the Europeans, the dollarcould still make one last new low

going into April/May. However, thedollar will rise rather sharply follow-ing June moving into a high for1998, some consolidation for 1999,and new highs into 2003.

The dollar seems poised tomake new highs against the Cana-dian dollar during the first half of1996. We see the C$ dropping to atleast the 67 cent level but a moveunder 65 cents could lead to a final

low around the 58-59 cent level.The A$ may also move back downto retest support against the USdollar during the first half of 1996.However, the major low is in placeand we see a rather strong bullmarket for this currency going into1998. Even against the C$, we seethe A$ rising to about 12190 fromits current trading level of near par.

US Share Market

The US share market remainsvery healthy - yet volatile. As longas the Dow backs off at this timeand moves into a slight correctionphase to consolidation period, thenall will look well into the yearsahead. Run for the hills ONLY if yousee the Dow rising to the 5800 to6000 area going into May. That willwarn of a major high and a bigcrash ahead.

For now, initial support on theDow begins at 4946 level followedby 4770-4698. Major support be-gins at the 4607-4551 area. Only amonthly closing BELOW 4551 willsignal the end of a bull market forright now.

Canadian Share Market

The TSE has rallied rather wellin the face of problems in Canada.This undertone of bullishness hasbeen largely due to a clear trend forcapital shifts away from govern-

ment debt and into the private sec-tor. At this time the primary supportlies at the 4527 area followed by4486. Monthly closing below thiszone will warn that a retest of sup-port is likely. The major resistancestands at the 4831 level. Once wesee a monthly closing ABOVE thisarea, a test of the 5000 zone willfollow. However, a move above5000 points to a final major highcoming in around 6325 or perhaps

6720 by 1998. Again, we do NOTwant to see a new high in May. Anew high at that time warns of amajor crash thereafter much like1987.

US Economy

The US economy appears to beslowing ever so marginally goinginto May/June. There does NOTappear to be a risk of any majorrecession at this time. However, wedo expect to see a very seriouscorrection to begin around 1998going into 2003.

At this time, we do see that busi-nesses will tend to pull back as theyawait to see what will happen withtax reform. The capital gains issuewill be a big issue caught up in themiddle of the budget crisis. Thisissue alone caused sharp shortselling against the box, all in aneffort to push profits into 1996 inhopes of lower capital gains.

The flat tax has serious implica-tions for business with regard tointerest deductability. Of course,Washington is too stupid to figureout that just maybe while this de-bate heats up, major financingdeals could be postponed. This an-ticipation factor caused the reces-sion to begin in 1981 and the peakin interest rates at that time. OnceReagan won the election, everyonebegan to pull back in anticipationthat Reagan would seriously re-duce inflation. In reality, Reagandidnt do a thing, but the end resultwas a sharp and swift recession. Ifthis debate over tax reform is NOTsettled and soon, the gradual slow-down in the economy could be-come a bit more severe leading intoa recession that builds going into1997.


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For now, expect interest rates todecline slightly going into theMay/June period with a rise there-after. Unemployment will moveslightly higher at this time but againthe major risk of a sharp rise willcome between 1998 and 2003.


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DURABLE GOODS: New or-ders for US durable goods dippedin October but the underlying trend

remained encouraging. The Com-merce Department said orders fell1% in October but remained 8.1%higher than in the same period theprevious year.

The decline mainly reflected anerratic 10.5% drop in transport or-ders, which are volatile on monthlybasis. Excluding the transport sec-tor, orders rose 2.3%, to registertheir third consecutive gain.

INDUSTRIAL PRODUCTION:

The Federal Reserve revised esti-mates of US industrial production,which showed a drop of 0.4% inOctober against the 0.3% pre-viously reported.

The rate of industrial capacityutilization was revised down to83.2% from 83.6%, indicating re-duced risk upward pressure on ma-terials prices

PRODUCER PRICES: US pro-ducer prices rose by an unex-pected 0.5% in November, but thiswas not seen as signaling a sus-tained increase in inflationary pres-sure. In their half-yearly economicforecast, purchasing managerspredicted sluggish growth, weakcapital investment and near staticprices in 1996.

Economists said the producerprice figures were distorted by anerratic 1.3% in car prices in Novem-ber, partly caused by the timing ofthe release of the 1996 models.Elsewhere, price movements werelargely offset: food prices rose1.2% but energy costs fell 0.5%.The overall index rose 2% on anannual basis.

LEADING INDICATORS: Theofficial index of leading indicatorsdropped sharply in October. TheCommerce Department said the in-dex - designed to predict businesscycle troughs and peaks - fell 0.5%,

more than expected. The fallmainly reflected an unusually largedrop in materials prices, anothersign of subdued inflationary pres-sure. The leading index has fallenin seven of the past 10 months.

"BEIGE BOOK": The Fed re-leased its latest "beige book" ofregional

business cond i t ions . Th ispointed to slower growth but gaveno hint of a sharp contraction ofactivity. The economy was expand-ing "but at the somewhat slowerpace reported in the last beigebook", the Fed said. Car sales weredown but their were signs of a pickup in retail spending in Novemberafter weakness in October.

Construction spending was alsostronger then expected with expen-ditures reported up 2.6% betweenSeptember and October.

RETAIL SALES: The Com-merce Department said retail salesrose 0.8% in November, againstprojections in financial markets ofan increase of 0.5%. Excludingcars, which tend to be volatile on amonthly basis, sales rose by 0.9%

The increase in sales wasbroadly based. Sales of clothing,building materials and furniturewere up 2.8%, 2% and 1.5% re-spectively from October.

INDUSTRIAL PRODUCTION:

Official figures showed that Brit-ains industrial production fell aseasonally adjusted 1% in October,largely because of the unusuallyhot weather. Manufacturing outputgrew by a seasonally adjusted0.2% in the month, roughly in linewith expectations. The decline inoverall production was attributed tolower gas and electricity output, asconsumers cut back on fuel con-sumption.

Some City economists said thedata was evidence of a slowdown.They warned that growth couldslow even more sharply in themonths ahead because officialdata suggest that industry is hold-ing excess stocks. These fearsabout broader economic growthwere strengthened by signs thatthe Central Statistical Offices lead-ing indicators, which plot trendsmonths in advance - continue topoint to a downturn.

The Treasury insists that growthremains on a steady path. Officialsexpect some de-stocking to occurin the coming months, they believethis will be gradual. Meanwhile,some officials - and Mr. KennethClarke, the chancellor of the ex-chequer - suspect that the CSOdata on stocks and growth may beinaccurate and will

be revised.

M0 MONEY SUPPLY: M0, thenarrowest measure of money sup-ply, grew by a seasonally adjusted0.7% between October and No-vember, and by 5.6% in the year toSeptember. This rate was fasterthan the previous two months.Much of the increase was causedby a surge in the banks operationaldeposits. Although these form partof the data, they are highly volatileand thus are usually discounted byeconomists. However, the growthalso reflected a continued steadyexpansion in the level of notes andcoins, which account for the rest ofM0. These grew 0.5% between Oc-tober and November, and 5.7% inthe year to November.

M4 MONEY SUPPLY: The Bankof England said the annual rate ofgrowth in M4, the broadest meas-ure of money supply, grew by aseasonally adjusted 9.3% in theyear to November up from an up-wardly revised 8.9% in October.

This was the highest rate sinceApril 1991. It also takes the annualgrowth rate of M4 above the top ofthe governments monitoring rangeof between 3% and 9% for the first


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time since the range was set up inthe March 1993 budget.

In spite of the strong monetarygrowth, M4 lending by banks andbuilding societies (mutually ownedsavings and loans institutions) wassubdued. It rose by 8.2% in the year

to November, down from 8.7% forthe year to October

INFLATION: UK inflation fell inNovember for the second consecu-tive month to its lowest rate for al-most a year. The Central StatisticalOffice said the headline annual rateof inflation was 3.1% in November- slightly lower than the 3.2% re-corded in October.

A decline in motoring costs - inparticular a fall in used car prices -

contributed most to the drop. Butsmaller rises than last year in theprices of food and householdgoods and sharp reductions in al-cohol prices, as shops cut prices inthe run-up to Christmas, also hadan impact.

RETAIL SALES MONITOR:

The British Retail Sales Consor-tium, the shops and stores tradeassociation, published for the firsttime its retail sales monitor.

The monitor, published monthly,is based on actual sales data andanecdotal evidence from a sampleof 75 large retailers who account formore than half of the total UK retailsales.

It measures the growth in thevalue of retail sales, unadjusted forchanges in prices or holiday peri-ods, each month compared withthe same month earlier.

The consortium said the surveyof retailers covers the same periodas that covered by the Central Sta-tistical Offices own figures on re-tail sales and is therefore compara-ble with the official statistics.

But it said that the monitor hadan advantage in that it was publish-ed a week ahead of the official fig-ures. It said its objective was for themonitor to be the "earliest authori-tative measure of monthly retail

sales in the UK". The consortiumalso said that the monitor wouldprovide a more useful guide to retailsales than the British Industrys dis-tributive trades survey.

The monitor found that althoughthe value of goods sold in Britains

high street shops grew modestly inNovember, consumer spending re-mains fragile.

It showed that the nominal valueof retail sales last month was 3.2%higher than in the same month ayear earlier on a like-for- like basis- which adjusts for changes in theretailers floorspace.

The consortium said the latestmonthly rise was a modest pick upfrom the 2.4% annual growth in Oc-

tober but it was weaker than the3.4% annual growth rate in Sep-tember.

TRADE DEFICIT: The CSOsaid that Britains trade gap withcountries outside the EU more thanhalved in November as exportsrose to a record level. The visibletrade deficit was BP0.5 billion($0.77 billion) compared withBP1.2 billion in October. Exportsrose to BP5.8 billion from BP5.3billion in the previous month whileimports fell to BP6.3 billion fromBP6.5 billion.

The CSO said the increase inexports was spread across all sec-tors, with particularly strong growthin semi-manufactured goods suchas iron, steel and finished manufac-tured good.

Imports of food, beverages andtobacco declined, reversing theprevious months large increase.There was also a big drop in im-ports of basis materials and semi-manufactured goods.

The CSOs estimate of thelonger-term trend now shows ex-ports rising slightly faster than im-ports with the deficit remaining un-changed. In the three months toSeptember, exports rose by 8.5%while imports rose by 6%

INS T IT UT IONAL INVE S T-MENT: Institutional investment,which has been depressed sincelate 1994, recovered in the thirdquarter of 1995 as investment innon-UK assets rose to a record.Institutional investors such as pen-sion funds and insurance compa-

nies made a total net investment ofBP13.8 billion ($21.25 billion) in thethird quarter, according to the CSO.

The CSO said this is a sharp risefrom the BP8.9 billion invested inthe second quarter and marked areturn to the levels of investmentseen until the third quarter of 1994.Spending on non-UK securitiessuch as overseas company sharessurged to BP4.8 billion from BP163million in the second quarter.

There was also a large rise in netinvestment in short-term assetssuch as treasury bills which in-creased to BP3.8 billion in the latestquarter from BP1.4 billion in theprevious three months. But pur-chases of UK government bonds,or gilts, fell to BP2.5 billion, thelowest level for almost two years.Institutions net investment in UKcompany securities also remainedlow at BP1.5 billion.

BASE RATES: Mr. KennethClarke, the chief finance officer andMr. Eddie George, governor of thecentral bank cut interest rates forthe first time in nearly two years.The cut was a quarter of a percent-age point to a level of 6.5%.

Many mortgage lenders basicloan rates dropped 7.5%, the low-est level since the late 1960s. Mr.George, who had requested an in-crease in interest rates only eightmonths ago, conceded for the firsttime that the government was oncourse to hit its current inflation tar-get. He and the chancellor went outof their way to emphasize that theyhad both proposed a quarter pointcut during their monthly monetarymeeting.

Mr. Clarke said it was right to cutrates because the economy wasgrowing at well below the its currentlong-term trend rate and because


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pressures on prices and costs wassubdued.

The reduction followed threehalf-point increases since Mr.Clarke started tightening policy inSeptember of 1994. Mr Clarke saidhe had decided to cut rates a by a

quarter point rather than a half pointbecause he expected growth to re-bound in the second half of nextyear.

RETAIL SALES: The CSO saidthat retail sales volumes in Novem-ber were a seasonally adjusted0.6% higher than in October and1.1% higher than in November of1994. The CSO said BP3.3 billionin current prices and on a season-ally adjusted basis passed throughshopkeepers tills each week on av-

erage in November - 4.3% morethan in November of 1994.

In the three months to Novembersales of household goods were3.8% higher than in the previousthree months. In the three monthsto November retail sales volumeswere only 0.1% higher than in theprevious three months. They were0.4% higher than the same periodin the previous year.

CAR REGISTRATIONS: Regis-trations of new cars rose strongly inNovember for the second consecu-tive month. Sales climbed by12.8% to 143,055 units in Novem-ber, compared with November, ac-cording to a report by the Society ofMotor Manufacturers and Traders.The increase, which followed a riseof 11.5% in October on the samemonth of the previous year sur-prised the industry.

The two consecutive months ofhigher sales mean registrations inthe first 11 months of 1995, at1,873,826 are now almost 2%above the 1,837,696 cars sold inthe same period the precedingyear.

Although imports took a margin-ally lower 53.8% share of the mar-ket in November, compared with55.2% in November 1994, the over-all proportion of imported vehiclesin the first 11 months of this year

grew to 59.2% compared with57.2% between January and No-vember 1994.

LEVEL OF SAVINGS DROPS:

The CSO said that individuals realpersonal disposable income fell by0.2% between the second and third

quarters, but consumers expendi-ture grew by 0.6%.

The shortfall was financed bysavings - the savings ratio, whichmeasures personal savings as apercentage of total personal dis-posable income, dropped to 8.6%from 9.3% in the second quarter.

TRADE DEFICIT: The currentaccount - which measures tradeflows and financial transactions be-tween the UK and the rest of the

world was BP1.3 billion ($1.99 bil-lion) in the red between July andSeptember, according to the CSO.The City expected a deficit of aboutBP2 billion.

The CSO also announced thatthe deficit in the second quarterwas only half as large as it thoughtthree months ago at BP1.2 billionand that the first quarter deficit wasa third lower than previously calcu-lated at BP0.9 billion.

This means that the total deficitfor the three quarters of 1995 nowstands at BP3.4 billion - less thanthe figure previously published forthe first two quarters.

The second quarter figures wererevised because it appears thatBritain sold more financial servicesabroad than earlier surveys sug-gested.

INDUSTRIAL OUTPUT: Theoutput of German industry declinedmarkedly during October, accord-ing to provisional data which under-lined the continued weakness ofthe German economy.

The fall in German productioncame despite a strong rise in ex-

ports, which increased by 6.5%during September. The data sug-gest strong export sales are allevi-ating some of the effects on indus-try of weak domestic demand.

The data showed pan-Germanindustrial production in October

1.6% below Septembers level, and3.4% below the same month lastyear. The consensus view amongeconomists is that the figures wereconsistent with other evidencepointing towards a period of slowgrowth, though well short of a re-cession.

TRADE SURPLUS: The tradesurplus rose from DM55 billion ($38billion) in the first nine months of1994 to DM67.6 billion in the sameperiod this year. In September, ex-

ports were up 6.5%, compared withSeptember 1994, while importswere up 2.2%.

ECONOMIC GROWTH: Th eGerman economy experiencedzero growth during the third quar-ter. Pan-German gross domesticproduct was unchanged in the thirdquarter against the second quarterof 1995, and only 1.5% larger thanin the third quarter last year. Theyear-on-year rise was the weakestfor almost two years.

The weakness in the third quar-ter is largely a result of a 3.4% fallin investment in machinery andequipment, compared with the pre-vious quarter.

UNEMPLOYMENT: Seasonallyadjusted unemployment rose42,000 to 3.71 million, equivalent to9.7% of the labor force, in October.Unemployment in eastern Ger-many rose from 13% in Novemberlast year to 14% this past Novem-ber.

GROWTH FORECAST RE-VISED: A leading German eco-nomic research organization re-vised down sharply its expectationsof growth in 1996. The Munich-based Ifo economic research insti-tute now expects growth to slow to1.75% next year from 2% in 1995after forecasting growth of 2.5% for1996 and 2.25% this year as re-


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cently as October. Ifo forecaststronger growth in the second halfof 1996, supported by domestic de-mand. Ifo believes there may bescope in the spring for a further cutin the discount rate and blamedweak investment for the lower fore-casts.

INTEREST RATE CUT: T heBundesbank cut German short-term interest rates in December forthe third time in 1995 in an attemptto revive a stalled economy.

The Bundesbanks half a per-centage point cut in the discountand Lombard rates, to 3% and 5%respectively, brought them to theirlowest levels since July 1988.

Interest rates were also cut in

Switzerland, Belgium, the Nether-lands, Austria, Denmark and theIrish Republic. The cuts, whichcame a day after the UK base inter-est rates were reduced, wereclosely coordinated. Most centralbanks cited currency movementsand falling interest rates as the rea-son.

Mr. Hans Tietmayer, presidentof the Bundesbank said there was"no threat of recession". The reduc-tion in interest rates should not beseen as a confirmation of pessi-mism about the economy and didnot mean the Bundesbank was fol-lowing anti-cyclical policies.

The Bundesbank, which alsofixed the rate for the next threesecurities repurchase (repo) dealswith commercial banks at 3.75%compared with the current 3.98%,linked the rate cuts with setting of anew money supply goal for 1996.The target growth range for the M3monetary aggregate has beenfixed at 4-7% for 1995, slightlyhigher than the 4-6% for this year.

But the M3 has expanded at wellbelow the target range, with an an-nualized rate of 1.7% in Octoberand November. Mr. Tietmayer saidthe cut in rates would help ensureM3 again grew at a rate consistentwith potential economic growth.

M3 MONEY SUPPLY: Theweak trend in German money sup-ply continued in November as M3grew at an annualized rate of only2%. This leaves it well under the1995 target range of 4-6%. Thebank set an M3 target for 1996 of4-7%. Novembers rise in M3 was

the largest in 1995 and compareswith a rate of 1.7% in October.

The Bundesbank said banklending remained high in Novem-ber, growing by 7.8% on a sixmonthly annualized basis against7.2% in October. Monetary capitalformation (in which funds to longer-term investments outside M3) grewmore slowly at a 7% rate after Oc-tobers 8.1%

ECONOMIC GROWTH TO RE-

SUME: The Bundesbank said Ger-man economic growth was set toresume after a short period of stag-nation. The central banks monthlyreport on the economy was lesspessimistic than some assess-ments of recent economic data. Itacknowledged that the "actual situ-ation and businesses outlook hasbeen perceived increasingly badly"this year, but added: "Such periodsof slowdown have been observedin previous phases of [economic]upturn."

It noted that the German councilof economic experts had forecastgrowth for this and next year of 2%,which is in line with, or at the lowerend of, most national and interna-tional expectations.

CURRENT ACCOUNT: Japans

current account surplus halved inOctober, a consequence of aplunge in the rate of growths ofexports to US and Asian countries.

The surplus shrank by a fargreater-than-expected 51.8% to$4.3 billion in the year to October,according to preliminary figuresfrom the Finance Ministry, the sec-ond monthly decline in a row.

This is the biggest drop in thecurrent account gap for five years.Finance ministry officials expectedthe declining surplus to continue.

Within the total surplus, the gapin trade in manufactured goods fell32.7% to $7.6 billion, reflecting a

fall in car exports to the US, whilethe deficit on the services, whereJapan is traditionally in the red, ex-panded 43% to $2.49 billion, on asurge of overseas travel.

Exports overall rose 1.3% to$33.8 billion, the slowest growthrate in three years; imports racedahead 18.5% to $26.3 billion.

The rise in Japans foreign pur-chases came across a wide range:office equipment, up 82%; elec-

tronic equipment, up 75%; andcars, up 12.2%.

On the services account, thetourism deficit grew 43% to an Oc-tober record of $3.08 billion, as anall-time monthly record of 1.3 mil-lion Japanese took foreign trips.The outflow of long-term capital ac-count increased to $10.69 billion,reflecting a rise in purchases for-eign bonds.

GDP: Japans economy grewless feebly than expected in thethree months to September, aheadan annualized 0.6% in real terms,avoiding a depression but still wellshort of a recovery. According toMr. Makato Kobayashi, vice-minis-ter of economic planning, the resultputs Japans GDP on track to ex-pand 1% in the fiscal year to nextMarch.

On a nominal basis, not adjustedfor inflation, GDP fell 0.4% year onyear, the third consecutive quarterof decline, the longest since thesecond world war.

The latest growth figure reducespolitical pressure on the govern-ment to add to the record fiscal andmonetary stimulus it has deliveredsince August. A meager 0.2%growth in GDP compared with theprevious three months camechiefly because of a stronger -than-expected rise in private spending.


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Private consumption rose by1.2% over the previous quarter, ledby increased spending on cars andclothes, to contribute 0.7% to theoverall growth rate. a decline in ex-ports, led by a falling car sales tothe US, removed 0.5% from GDPgrowth.

P L ANS TO INCRE AS ESPENDING: The governmentsdraft budget for 1996 proposed thesharpest rise in Japanese publicspending for five years , to coverthe rising debt costs and the con-troversial rescue of housing loancompanies.

The draft envisages a 5.8% in-crease in spending to Y75,105 bil-lion ($735 billion) in the fiscal yearstarting in April, funded by the larg-

est annual issue of state bonds inthe countrys history.

The government plans to borrowY21,029 billion next year, bringingthe central government debt to arecord Y240,000 billion, an in-crease that economists believe willput upward pressure on interestrates. If local government debt isincluded, that would bring Japansgeneral government deficit nearlylevel with its gross domestic prod-uct, well above the average for in-dustrialized nations.

Mr Masayoshi Takemura, fi-nance minister, expressed "deepregret" over the rise in debt andwarned that drastic reform of thetax and government spending sys-tems was unavoidable.

The budget estimates that nextyears tax revenue will fall by 4.4%to Y51,345 billion because of theslowness of the economic recov-ery. On spending, the governmentexpects to pay Y13,221 billion toservice existing debts next year, upnearly a quarter on the previousyear to stand at 28% of spending,the highest in 15 years. Generalspending on government programsis to rise 2.4% to Y42,141 billion.The biggest chunk goes to socialsecurity, also up 2.4% to Y13,942billion, a result of the growing de-mands of an aging society.

Most of the budget was i line withexpectations except for the hous-ing loan rescue. As well as theY685 billion to be earmarked now,the government is committed to un-derwriting a proportion of any otherdebts of the housing lenders thatprove to be irrevocable. That will

require at least another Y600 bil-lion. The lenders have more thanY6,000 billion in uncollectibleloans, representing half their totalloan books.

COMPUTER CHIPS: Foreigncompanies share of the Japanesecomputer chip market hit a record26.2% in the third quarter, the USgovernment said. The previous re-cord was 23.7% in the fourth quar-ter of 1994.

Foreign chip makers marketshare was 22.9% in the 1995 sec-ond quarter, according to the UStrade representatives office.Mickey Cantor, the US trade repre-sentative said the rise in foreigncompanies share of the Japanesesemiconductor market since a1991 agreement to open up thatmarket to US and other foreign pro-ducers showed that the renewal ofthe agreement was needed tomaintain progress.

The Japanese chip industry hasurged that the agreement be al-lowed to expire next summer. USindustry has called for it to be re-newed.

INCREASE IN BUSINESSS P E NDING BUT BUS INE S SFAILURES GROW: Japanesecompanies have started to spendmore on plant and equipment, butthe number of business collapsescontinue to rise. Corporate capitalspending in the three months toSeptember rose 5.1% against thesame period last year, according tothe finance ministry. That came af-ter a 1.9% year-on-year rise in thethree months to June, the first suchincrease in 3 1/2 years and proofthat capital investment may havehit bottom, an official said.

Teikoku Data Bank, a credit re-search agency, said there were1,257 corporate bankruptcies in

November, up 5.2% on the samemonth last year and the 10thmonthly increase running.

Corporate casualties liabilitiesof Y971 billion ($9.6 billion) in No-vember brings total liabilities left bycollapsed companies to just over

Y7,960 billion in the first 11 monthsof this year - a record. Cost-cuttingby big companies continues to de-press profits at their subcontrac-tors, the backbone of the industrialeconomy.

CONSUMER PRICES: Con-sumer prices in Tokyo, an advanceindicator for Japanese inflation, fellby 1% in the year to November, thebiggest drop in 40 years, accordingto the governments managementand coordination agency.

The decline was entirely due toa one-time 27% fall in fresh vege-table prices after an unusuallysharp rise in November last year.But even adjusting for this, the un-derlying trend is for prices to bestable or falling slightly, a continuedconstraint on economic growth.

If fresh food is excluded, Tokyoconsumer prices fell by 0.1%, inline with the previous trend. Officialfigures, however, include risingprices in such regulated sectors astransport and utilities and excludediscount retailing

Falling import prices, a conse-quence of the falling yen, havebeen one factor in deflation.

MOTOR INDUSTRY BUYS US.COMPONENTS: Japans motor in-dustry bought US componentsworth a record $10.3 billion in thesix months to September 30, ac-cording to the Japan AutomobileManufacturers Association. Thepurchases, an 8.3% increase in thesame period in 1994, may help toease trade frictions between thetwo countries, which agreed on apackage of measures to encouragepurchases of US made motor com-ponents last August. The April-September 1995 figure is wellahead of the previous record of$9.5 billion for the same period in1994. But only $1.7 billion of this


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represents direct sales of US com-ponents to the domestic motor in-dustry, an increase of 9.8% overthe same period in 1994.

MACHINERY ORDERS: Japa-nese producers of computers andsemiconductors went on a machin-

ery buying binge in October, ac-cording to the governments Eco-nomic Planning Agency. Their pur-chases led an 11.8% rise in overallprivate sector machinery orders toY1,100 billion (10.9 billion), thehighest in four months. Machinerypurchases are closely watched byJapans economic policy makers,as an advance indicator of corpo-rate capital spending.

Machinery orders rose 4.6% inthe year to October. That more than

made up for the 0.9% drop in theprevious month, which marked apause in 15 consecutive months ofincrease.

UNEMPLOYMENT: Japansunemployment rate hit a record3.4% in November, increasingpressure on the government to de-liver economic recovery before the1996 election.

The main reasons for the in-crease from 3.2% in October was asharp rise in joblessness amongyoung people and the continueddecline of manufacturing jobs ascompanies sh i f t capaci ty tocheaper locations overseas.

Within the total, the jobless ratefor males aged 15 to 24 rose by 1.1percentage points in the year toNovember to reach 6.3%, nearlydouble the average unemploymentrate. Japans high youth unemploy-ment is a consequence of recruitingcurbs by companies to cut costs.

CONSUMER CONFIDENCE:According to the Newspoll con-ducted by the Australian newspa-per, Australian consumer confi-dence has changed little in the pastsix months. The opinion poll shows

56% of consumers expect theirstandard of living will be littlechanged in next six months,against 58% in a similar poll inJune. Those expecting an improve-ment were 20%, up from 17%, andthose that expected their standardof living to deteriorate dropped to

20% from 22%. Those who wereuncommitted rose to 4% from 3%.

ECONOMIC GROWTH PRE-DICTED: Mr Ralph Willis, Austra-lias federal treasurer, released thetreasurys updated budget forecastshowing a soft, but still growingeconomy for the 1995-96 financialyear.

Gross domestic product growthis forecast to be 3.25% during the12 months against an estimated

3.75% in the original forecasts inMay. Headline inflation is predictedto emerge at 4.75%, a significantupward revision from the previous4% figure.

Unemployment is now expectedto be about 8.25% by the Juneyear- end, against 8% previously.

The current account deficit hasundergone a sharp downward revi-sion: the forecast now stands atA$21 billion (US$15.5 billion) -A$27 billion last May - reflecting therecent pickup in export perform-ance and the decline in imports.The new figure would amount toabout 4.5% of GDP, from 5.5%.

The slowdown in growth stemspartly from a more moderate rise inprivate consumption expenditure -3.25% against an estimated 3.75%previously - and partly from amarked fall-off in business invest-ment, expected to grow 8% (13%).

Mr. Willis said the governmentstill expected a nominal budget sur-plus during the year, but the figureis now put at A$115 million, com-pared with A$718 million when the1995-96 budget numbers were firstunveiled in May.

STABLE RATES EXPECTED:

Australian Treasurer Ralph Willissaid there are no implications forinterest rates in estimates for

slower growth and accelerating in-flation in the year ending June 30,1996. However, he said recent cutsin interest rates in the US, the UKand in Europe are a factor for do-mestic rates.

NEW VEHICLE REGISTRA-

TION: Australian new motor vehi-cle registrations in November fell5.4% from October, the Bureau ofStatistics. Registrations were down5.2% on the year. The monthly de-cline followed a 4.0% increase inOctober. The Bureau said registra-tions for all vehicles in Novemberfell to 49,288 from a revised 52,117in October. Registrations of othervehicles, including commercialvans, fell 7.5% in November to7,700. That was a drop of 16.5% onthe year.

WESTPAC LEADING INDEX:

A widely watched leading indicatoron the Australian economy fell0.6% in October, underscoring ex-pectations economic growth willslow into 1996.

The Westpac-Melbourne Insti-tute monthly index measureswhere the economy is likely to be inthe next six months. The leadingindex has posted below average ornegative growth rates the past 10months. That compares with theearly 1990s when the growth ratewas negative for 26 months and themid 1980s when growth was nega-tive for nine months, according toWestpac Bank General ManagerEconomic Strategy Bill Evans.

MERCHANDISE IMPORTS: Alarger-than-expected increase inmerchandise imports in Novemberindicated economic activity re-mains robust. Imports rose toA$6.30 billion (US$4.67 billion).That is the highest value importshave reached since July and com-pares with A$6.08 billion in Octo-ber. Forecasts were for an increaseof about 1.8%.

CURRENT ACCOUNT: Austra-lias current account deficit wid-ened slightly in October to A$1.6billion seasonally adjusted, largelybecause of the downward revisionin the September figure to A$1.48


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billion. The September deficit hadpreviously been put at A$1.57 bil-lion. In October, exports wereslightly weaker at A$5.96 billion,against A$6.03 billion the previousmonth and A$5.52 billion a yearearlier. Imports were A$6.075 bil-lion against A$6.06 billion in Sep-

tember. The figures were in linewith expectations, but revisionstaking the August and Septemberfigures below A$1.5 billion werewelcomed by government minis-ters.

M1 MONEY SUPPLY: Can-adas M1 money supply roseC$584 million (US$428.34 million)

to C$60.375 billion in Decemberfrom November, according to theBank of Canada. M1, which in-cludes currency in circulation anddemand deposits, to taledC$59.791 billion in October.

M2 money supply, all the com-ponents of M2 as well as savingsdeposits, fell C$202 million toC$381.694 billion from C$381.896billion.

Canadas M3 money supply inNovember totaled C$468.727 bil-lion, up C$5.216 billion from Octo-bers C$463.511 billion, the banksaid. M3 consists of M2 along withnon-personal fixed-term depositsand foreign currency deposits ofCanadian residents deposited inCanada.

GROSS DOMESTIC PROD-UCT: Canadas GDP fell 0.3% inOctober from September becauseof reduced consumer spending, ac-cording to Statistics Canada. Octo-bers report was worse than econo-mists had expected. All figures areseasonally adjusted.

Real gross domestic product fellto C$542.348 billion in September,the federal statistics office said.Statscan said Octobers report washampered by a weakness in con-sumer spending. Reduced domes-tic demand also acted as a drag on

business and personal services,and a drop in home resales re-strained growth in the financegroup, Statscan said.

WHOLESALE TRADE: Cana-dian wholesale merchants salesfell 1.9% to C$20.092 (US$14.72

billion) in October from Septemberbecause of plunging auto sales,StatsCan said. The decrease fol-lowed two monthly sales gains andcountered economists expecta-tions of a 0.3% increase. Septem-bers sales were revised higher toC$20.449 billion. All figures areseasonally adjusted.

Among the biggest monthlysales declines was a 5.3% de-crease in wholesale sales of motorvehicle and parts. Such sales ac-

count for 10% of total sales. Salesof household goods fell 6.6% andwholesale sales of computers andsoftware dropped 3.6%, the federalstatistics agency said.

StatsCan said wholesale saleshave shrunk 3.2% since theypeaked in February. Before then,sales had been on a two-year ac-celerating trend, climbing 25% fromJanuary 1993.

Inventory levels climbed for a20th consecutive month to a recordhigh of C$31.732 billion, up 0.9%from Septembers C$31.441 billionand 9% higher than the year-earliermonth. Septembers inventories

were originally reported atC$31.315 billion.

DE PART M E NT S TORESALES: Canadas departmentstore sales rose 0.4% in Novemberto C$1.181 billion (US$865.2 mil-lion) from October, according to

StatsCan. In the first 10 months ofthe year, department store salesrose 4.6% compared with the yearearlier period. All figures are sea-sonally adjusted.

Statscan said sales at discountdepartment stores have gained atmajor department stores expensesuch that they now account for 55%of total sales.

JOBLESS CLAIMS: The num-ber of people receiving unemploy-

ment insurance in Canada rose0.8% in October to 740,000 fromthe previous month, StatsCan said.The number of Canadians filingnew claims rose 1.6% to 260,000.All figures are seasonally adjusted.

On an unadjusted basis, unem-ployment insurance benefits paidout in October totaled C$963.372million (US$705.8 million), up 12%from the month earlier C$859.302million. Such payments were down6.5% from a year ago. StatsCansaid Octobers average weekly job-less benefits payment edged up0.7% from their year-earlier monththe C$254.34.

Bruce Allen in London(44) 171-583-5556 FAX (44) 171-583-0021

Harry Groenert in London(44) 171-583-5556 FAX (44) 171-583-0021

Yusaku Tohgo in Tokyo(81) 3-3- 664-0559 FAX (81) 3-5-695-1278


Documents

1996 Issue # 1