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Origin of market collapse developed in Asia

October 28, 1997

NEW YORK (AP) _ The origins of the stock market collapse lie in the excess industrial capacity that has developed in Asia over the past decade, not in the U.S. economy.

That’s a key difference when comparing this market correction _ which culminated in Monday’s 554-point drop in the Dow Jones industrial average, or a 7.2 percent loss in value _ to Black Monday of 1987, when the blue-chip index plunged 508 points, or 22.6 percent.

While the current downturn, long forecast and feared, is partly a result of overpricing _ a big factor for the crash 10 years ago _ its main trigger was the increased awareness that the seemingly robust economies of Asia may be in for a long siege.

The currencies of Thailand, Malaysia and Indonesia recently have come under speculative attack, and the stock markets in those countries have fallen as a result.

Hong Kong came under attack last week, with its stock market falling 10 percent on Thursday before slipping again on Monday. Both instances helped trigger a sell-off in financial markets worldwide.

As confidence in Asian economies falls, reflected in their stock and currency declines, these countries are likely to compete more vigorously. That could push down demand for semiconductors, many of which are produced in Asia.

Such a decline could cause a erosion in prices for U. S. computer chip makers, according to Michael Flament, senior vice president of Wright Investors Service, which handles billions of dollars of investments.

Flament and the Wright investment committee considered these factors at its regular Monday meeting before concluding that ``we wouldn’t be inclined to get back into the market immediately.″

While he had been forecasting a U.S. stock market decline of 15 percent, largely because many shares were overpriced, Flament described the collapse Monday as ``more powerful than an ordinary correction,″ and said it demanded further analysis.

Before last week, he said, the investment committee believed the economy would be insulated from any correction, ``but now it looks like some slowing of our economy.″

Nevertheless, Flament noted there has been no major change in the U.S. economic fundamentals. In fact, he pointed to some of its continuing strengths in productivity, low inflation, and budget-deficit control.

When the market crashed 10 years ago, the federal budget deficit was expanding, interest rates were higher and the dollar was under attack.

Flament says the current market turmoil could result in lower interest rates in the weeks to come, which could help maintain confidence and encourage consumer spending.

He reminded investors that as of the close Monday many of them were still far ahead for the year.

``This has been a slap in the face,″ he said. ``The question is how much worse can it get.″

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