Monday, November 12, 2007

Article in Question: Sharp Sell-Off Sweeps Asian Markets

Here is a classic fallacy in the media - "Sharp Sell-Off Sweeps Asian Markets," published on the New York Times on November 12, 2007.

The statement: “Rising fears of a slowdown in the
United States economy sparked a sharp sell-off in Asian stock markets today, driving a leading Japanese index to a two-year low.”

It is impossible to identify, in this one instance, what the exact cause is. The behavior of savers is driven by many factors: current labor market conditions, nominal interest rates, expected inflation rates, consumption patterns, relative price indices, prices of related assets, random economic shocks, productivity levels, and current monetary policy (among others). Is the sell-off driven by the
U.S.? I don't know. I guess that Martin Falcker, the author of the article, interviewed all managers investing in the Japanese markets. He must know something that I don’t know.

The statement: "The dollar’s decline reflected broader pessimism about the outlook for the American economy, and particularly whether slowing growth will force the United States Federal Reserve to cut interest rates again."

If the Asian market sell-off was really driven by American investors, then the dollar should have appreciated. The sell-off would reduce demand for the Yen by American investors, and increase the demand for alternate currencies. One of these currencies may be the dollar (although they don't say). The sell-off by Americans of the Yen would cause the Yen to depreciate against the USD, and the USD to appreciate against the Yen (provided the Yen is converted back to USD).

You can see my confusion - and this on a New York Times article featured in the print version of the business section.

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