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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Mark Adams who wrote (41173)	11/9/2003 4:12:49 PM
From: Mark Adams	Respond to of 74559

The Insurance pool manager buys Worldcom debt. When Worldcom blows up, the insurance company raises rates due to 'low returns' on their float. Rates paid by individuals mandated by law to buy their products. (auto liability, homeowners) In a perfect world, more than one insurance company hires managers skilled enough to negotiate the icebergs (Enron/Worldcom/Adephia/Globalstar) of the world. These companies are able to offer lower rates due to superior investment acumen, resulting in a competitive pricing environment. If only one insurance company engages the talent to avoid these icebergs, then the resulting pricing improvements falls to their bottom line as profits. Global yield convergence- could it happen on planet Earth? www2.jpmorgan.com (see the graph 1/3 of the way down, or search the term convergence, which gets you to the scenic vista pronto )

To: Mark Adams who wrote (41173)	11/9/2003 4:31:13 PM
From: Seeker of Truth	Read Replies (2) \| Respond to of 74559

Hello Mark, "Someone would arbitrage the rate differences." It has been done on a large scale in recent years. But every once in a while the yen goes up in value bringing sudden scary losses to the heavily leveraged folks. One can only make noticeable money on an arbitrage like yen bonds/dollar bonds if one leverages a lot. The yen carry trade "carries" a risk. Neither the yen nor the US dollar have a future vis a vis gold or, particularly, oil, but they oscillate with respect to each other. I don't know about hedge costs. What goes on in Japan is this: Most people are saving yen like mad, into the post office mainly. Disinclination to buy, proliferation of much more efficient modern retailers, and opening the barriers to Chinese goods, have all cancelled out the inflation which one would think is inevitable for a government that has such an unbalanced budget, year after year. But the patient Japanese people are fairly confident that they will get their original purchasing power plus interest from their yen deposits. As long as the confidence is retained and the above deflationary forces are around, the government can keep out inflation, even though promises to pay in the form of government yen bonds are multiplying like bacteria. Actually, the current deflation is only of the order of -1% per year; it's not like the CPI is cheapening fast. Like most of these things it's hard to predict the date of the inflationary explosion. My belief is it will be quite slow coming in Japan because people will keep their faith in the currency long after they have begun to see their savings decrease somewhat in purchasing power. It's like some people and tech stocks. I have good friends who are soon to retire in Japan and I do think financing their final days will ultimately be difficult. They don't think so yet and I have no intention of depressing them with this kind of talk. There might be money to be made in Japan by buying a company which has predominant investments in China. In a way, I don't see the point; why not directly invest in China? It's not as if the P/E of Japanese shares is very low.

To: Mark Adams who wrote (41173)	11/10/2003 3:41:11 AM
From: macavity	Read Replies (1) \| Respond to of 74559

Arbitrage and other fairy stories. There is The Carry Trade - borrowing in one currency to buy assets in another, and there is arbitrage. If you hedge everything your return is the risk-free rate - equivalent to you making a simple deposit/loan. The Carry Trade is an acceptance of a yield differential for price risk (in this case fx). Typical FX volatilities are roughly 7-10% p.a. Therefore the FX risk far outstrips the yield differential. The Carry trade only works if you are right about the FX direction. Remember USDJPY going to 79 level - well that was the unwinding of the Yen Carry Trade. I am always amazed at the leverage community that does this. Arbitrage, my eye! This was in 94 - I think. For USD vs Fiat - $USD - I am sure there is enough dollar-bearishness at the mo to give USD some support in the coming months. Watch the 1 year stoch - it is hinting that there may well be support for $USD. The ECB will defend EURJPY=1.20 and the MOF will defend USDJPY=105.00 for a while here. -macavity

To: Mark Adams who wrote (41173)	11/24/2003 2:34:33 AM
From: Mark Adams	Read Replies (1) \| Respond to of 74559

Greenspan speech; ... increased demand for dollar assets may lower interest rates and equity premiums in the United States ... Aargh! Higher foreign savings coupled with declining home bias translates to lower real returns. Help! Import quotas for capital! Legislated minimum real returns! Do you think lil ol me can survive in a world of global capital flows? Compete against a global pool of full time talent? >>Will they lend us more money in the future? I hope not. They are pushing interest rates down, and I would like a fair return on my savings if I'm going to live without a speedboat, or $150/pair of Nikes. Message 19475301 More on 'Home Bias' from Greenspan; How much further can international financial intermediation stretch the capacity of world finance to move national savings across borders? A major inhibitor appears to be what economists call "home bias." Virtually all our trading partners share our inclination to invest a disproportionate percentage of domestic savings in domestic capital assets, irrespective of the differential rates of return. People seem to prefer to invest in familiar local businesses even where currency and country risks do not exist. For the United States, studies have shown that individual investors and even professional money managers have a slight preference for investments in their own communities and states. Trust, so crucial an aspect of investing, is most likely to be fostered by the familiarity of local communities. As a consequence, home bias will likely continue to constrain the movement of world savings into its optimum use as capital investment, thus limiting the internationalization of financial intermediation and hence the growth of external assets and liabilities.8 Nonetheless, during the past decade, home bias has apparently declined significantly. For most of the earlier postwar era, the correlation between domestic saving rates and domestic investment rates across the world's major trading partners, a conventional measure of home bias, was exceptionally high.9 {statistical stuff zapped} The decline in home bias probably reflects an increased international tendency for financial systems to be more transparent, open, and supportive of strong investor protection.10 Moreover, vast improvements in information and communication technologies have broadened investors' scope to the point that foreign investment appears less exotic and risky. Accordingly, the trend of declining home bias and expanding international financial intermediation will likely continue as globalization proceeds. 10. Research indicates that home bias in investment toward a foreign country is likely to be diminished to the extent that the country's financial system offers transparency, accessibility, and investor safeguards. See Alan Ahearne, William Griever, and Frank Warnock, "Information Costs and Home Bias" Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 691, December 2000. Return to text federalreserve.gov

To: Mark Adams who wrote (41173)	3/2/2004 5:08:00 PM
From: Mark Adams	Read Replies (1) \| Respond to of 74559

Greenspan tidbits on 'Home Bias' & Japan; One factor boosting the yen is a significant yen bias on the part of Japanese investors. This propensity, in my judgment, runs far beyond the normal tendency of investors worldwide to buy familiar domestic assets and eschew foreign-exchange risk. Nowhere else in the world will investors voluntarily purchase ten-year government obligations at an interest rate of 1 percent or less, especially given a rate of increase in the outstanding supply of government debt that has generally been running at 9 percent over the past year. Not surprisingly, very few Japanese government bonds (JGBs) are held outside of Japan. Aside from the holdings of the Bank of Japan, almost all JGBs are held by Japanese households, banks, insurance companies and the postal saving system. And none of them holds significant amounts of foreign assets; 99 percent of household assets are in yen, and, including the postal saving system, about 91 percent of the assets of financial institutions are in yen. Japanese nonfinancial corporations do hold a larger share of foreign assets in their securities' portfolios, but the absolute amounts are small. The Japanese have made significant foreign direct investments, especially in the United States, and the Ministry of Finance does, of course, hold large dollar balances as a consequence of exchange rate intervention. But the Japanese private sector, by and large, has exhibited limited interest in accumulating dollar or other foreign assets, removing what in other large trading economies would be a significant segment of demand for foreign assets. The degree of domestic currency bias in Japan, which far exceeds that of its trading partners, may thus have contributed to a foreign exchange rate for the yen that appears to be elevated relative to the dollar and possibly other internationally traded currencies as well.1 Of course, this preference for yen assets, while a persistent influence on the value of the yen, has at times been overwhelmed by other factors. Granted the level of intervention pursued by the Japanese monetary authorities has influenced the market value of the yen, but the size of the impact is difficult to judge. In any event, it must be presumed that the rate of accumulation of dollar assets by the Japanese government will have to slow at some point and eventually cease. For now, partially unsterilized intervention is perceived as a means of expanding the monetary base of Japan, a basic element of monetary policy. (The same effect, of course, is available through the purchase of domestic assets.) In time, however, as the present deflationary situation abates, the monetary consequences of continued intervention could become problematic. The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan. Footnotes 1. The yen bias certainly existed in earlier decades, but it has become more evident as Japanese growth slowed. federalreserve.gov