Thursday, March 13, 2008

kamikazee approaching?

yes, I know everybody is used to seeing the yen over 100... I know it's always been that way and it will never change. but this time, it's different....

for the first time in many years, the US economy is doing worse than the rest of the world.. capital is fleeing the US and dollar assets ... over the past several years, when this entire credit bubble was forming, many of these assets were purchased using cheap money in the so-called yen carry trade... it was pretty simple: you had to pay less than 1% to borrow in yen, and could get many times higher than that in things like CDOs, subprime or simple corporate debt.

this works great as long as the purchased assets hold their value... and, as long as the yen stays weak.. but when the yen rallies, it increases the debt of the hedge funds owning those US assets -- like stocks and bonds.. so, they must sell their holdings and buy back the yen they previously sold.

the unwinding of the yen carry trade has been associated with stock market declines in the US for the past decade or so... it's a very real and directly connected indicator.

so, what happens if the yen goes on a sustained rally for its own reasons... just because it can?

this might sound a bit outlandish, but is entirely possible. as I write this around 530am GMT, the yen has been pushing against 100 for the last 5 hours or so. this is the strongest level since sometime around sept. 1995.

go back 25 years and it was around 240 ... its huge trade surplus and dollar holdings are still in place from that time.... I'm inclined to think the longer term trend towards yen strength may remain in force... we could be ready for another significant move... possibly down to the 80 level reached in july-aug 1995.

yes, its interest rates are low and its economy is weak. but when you consider our insterest rates are on course to approach theirs, it actually starts to make sense. they have the fundamentals on their side -- plus fear and momentum.

if this happens -- a strong USDJPY breakout -- the impact for US stocks would be negative once again.

it's not 2001 when the US was still feeling the euphoric rush of the greatest bull run in stock market history.. it's no longer the world where the US drives growth and controls the agenda. bigger things are happening and history will leave us behind.

people might say: markets don't think about things like that -- all they care about are the numbers.. but the only number that really matters comes from the Fed next week. maybe if they go to 2.25 we'll see that huge run on the dollar take shape ... or if we go to 2.50, we might get a short-term bounce...

overall, it doesn't really matter. the truth is that if we go into the kind of recession I envision, with significant consumption declines, the fed will end up cutting interest rates to BOJ-style levels... this time we'll be in a recession and much of the rest of the world won't be. that hasn't happened in a very long time -- probably not for a century.

so far, the dollar's decline has been orderly and rational. that's how many bubbles start: housing prices, US stocks in the 1990s, etc. all of these things behin with the safe and logical trade. then they gain momentum and more liqudity supports it. over time, the trend continues and, as more people rush into it, it assumes the bubble-like fever pitch.

my fear is we're entering this phase of the anti-dollar trade now. a new anti-dollar movement seems highly likely. with hundreds of billions of wealth and purchasing power being wiped out in housing and our country in recession, people will continue to win the bet against the dollar. all moves like this run their course ... we're nowhere near there yet.

the USDJPY kamikazee is honing in on our economy and our portfolios. does anyone other than me see it coming?

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