Everyone read what the BOJ is doing.
IMO trading game is over until after the elections.
BUSH has won. It will be inpossible to know the effect of this action. It will support the US debt and the bubbles could get massive. It could drive the DOW over 15,000.
See you all in a year, I am finished until after the election. Other than my euro hedge.
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The Ministry of Finance Has A Message For You
December 23, 2003
Harry Chernoff is an independent economist in Great Falls, VA
In Wall Street parlance, the heavyweight traders of the 1980s and 1990s were the Masters of the Universe. Well, Wall Street is going to have to come up with a new phrase to describe the universe the men at Japan’s Ministry of Finance are coming from. Forget about the little boys from Liar’s Poker and Long-Term Capital Management. It’s time to think in terms of a full-scale, Japanese-style Master of the Universe -- Godzilla.
On December, 19, 2003 the Financial Times reported that the Ministry of Finance (MOF) “said it would raise the ceiling on the amount it could borrow for intervention by Y21,000bn to Y100,000bn ($930bn) for the period until March, and by Y61,000bn to Y140,000bn for the year starting in April.”
Here’s the story in the Financial Times.
Let’s put 140,000 billion Yen ($1.3 trillion) in a U.S. perspective. In round numbers it is about equal to next year’s Federal budget deficit, next year’s state budget deficits (all 50 states), and next year’s current account deficit, combined -- with enough left over for the pension plans of every hard-pressed steel and automobile manufacturer in the country.
In practical terms, intervention at anything approaching this level means that the dollar / Yen exchange rate and the long-term Treasury bond rate will be whatever the MOF wants them to be. Assuming the MOF locks in the exchange rate and the bond rates at about current levels, it also means that the U.S. Presidential election next November was decided last week in Tokyo. As long as Japan is willing to monetize unlimited American profligacy next year, there is no possibility that the U.S. economy will run out of steam before the election. Even with China cutting back on domestic credit and apparently cutting back on its acquisition of dollar-denominated reserve assets, it won’t make a difference. Alan Greenspan can sit on his hands for all that it matters to Godzilla. When the largest creditor in the world with the largest current account surplus in the world calls the tune, you dance.
Of course, the MOF doesn’t have to use the whole 140,000 billion Yen to get its message across. The mere potential of intervention at that level has to freeze the trigger of any mini-master considering selling the dollar against the Yen. The MOF has already spent (or, more correctly, directed the Bank of Japan to spend) something in the neighborhood of twenty-thousand billion Yen this year in an effort to slow the decline of the dollar against the Yen. What’s another hundred-thousand billion Yen among friends?
What should a trader do? A few things are obvious. First, if Japan is determined to debase the Yen against the rapidly debasing dollar, then you have to consider the Euro, the GBP, and the Swiss Franc. Those currencies, as well as the commodity currencies (C$, A$, NZ$), may appear expensive but if Japan floods the world with Yen to support the U.S. dollar, there isn’t any alternative. Second, commodities, especially industrial commodities, will extend their bull run. Look for OPEC to either maintain oil prices well above the official dollar range (to offset the weak dollar) or quietly switch to some form of market-basket pricing based on the dollar, Euro, and Yen. While this will cause well-deserved pain for the U.S. it will not lead to anything resembling a prudent energy policy. Not as long as Japan is lending us the money to pay the bills. Third, inflation-protected assets, such as Treasury Inflation-Indexed Securities (TIPS), will eventually do well. We all know that the long-run implications of massive Japanese exchange rate intervention and U.S. Fed policy are highly inflationary (remember Fed Governor Bernanke and his printing press?) but the United States as a nation isn’t going anywhere. The bills will be paid, albeit after our elected officials inflate away as much of them as they can. Inflation protection doesn’t seem necessary now but it will be necessary not too far in the future.
A few things are less obvious. First, gold prices are soaring but only when expressed in dollars. Express gold in terms of the Euro or Swiss Franc and the performance looks a lot more pedestrian. Second, real estate bubbles are brewing in large sections of numerous countries, including the U.S., China, Spain, Australia, and England. But real estate is local and it is illiquid. A global inflationary event is not the same as local knowledge, and liquidity in a topping market dries up real fast. The greater fool theory is about to be proven once again in many bubbling and topping markets.
Now, one last time, try to grasp the meaning of one-hundred and forty-thousand billion Yen. Because the Ministry of Finance is too polite to put that figure in a typically crude American context, I will do it for you. You may trade with Godzilla or you may trade against Godzilla. Good luck and domo arigato. |
