Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7631)	3/5/2007 9:27:48 PM
From: Hawkmoon	Read Replies (1) \| Respond to of 33421

We have seen big hits in carry trade currencies periodically over the past several years. What is different this time is that Japan has ended the ZIRP (Zero interest rate policy) rates in Japan have started to rise, If, as Cashin implies, the recent volatility is driven by unwinding of speculative positions sponsored and financed by cheap JPY, and the ZIRP, we have to assume the Japanese CB and government are going to do whatever they have to do to prevent the unwinding of these trades from "unraveling" Japan's economic recovery. Now correct me if my logic is incorrect but, IMO, Japan has faced a severe problem with finding useful purposes for the EXCESSIVE savings of it's population (Certainly above $30 Trillion US eqivalent, although exactly recent figures are hard to come by). They either have to move these deposits into JGBs (as most Postal Savings go to) or be lent to other borrowers JUST to maintain near zero interest rates and maintain their overall money supply balance. Thus, any borrowing of Yen to purchase other financial/equity/commodity instruments represents a percentage of Japanese money supply and a "sopping up" of excess depositor money by Japanese banks. So the "carry-trade" has worked to the benefit of BOTH the borrowers (who reinvest the funds in higher return instruments), AND the Japanese government (who is trying to just keep their heads floating above this liquidity trap they face..) Thus, the carry-trade has been critical in maintaining their money supply and finding a "profitable" use for all of those personal savings. Now, should they permit the carry-trade to unwind, it will represent a deflationary influence in Japan, causing their Yen to trend towards where it should be for a country stuck in an liquidity trap where internal consumer demand does not match economic production. The bottom line is that Japan, from its ZIRP policy, has relied upon foreigners to borrow all that money it receives from depositors because the Japanese economy cannot sop it up by itself. IT HAS TO LEND to foreigners in order to maintain its monetary base, or face DEPRESSION. Thus, the major question is whether all the money that Japan is lending can be invested in other locations for a greater return. Are we seeing that the world has become devoid of places where you can borrow money at less than 1% and invest it somewhere else for a greater real return? My view is that much of this has to do with the annual closing of Japanese financial books and flushing out short-term excess liquidity that is sensitive to fluctuations in Japanese FX markets vis-a-vis other currencies. BUT I DO NOT SEE Japan totally abandoning their carry-trade policy, nor permitting this current strengthening of the Yen to continue. What I do see is the Japanese CB engaging in a tremendous repurchasing program to flood Yen into the markets, and the Japanese government announcing a renewal of its "pump priming" efforts in order to maintain the monetary base. To dump the carry-trade policy means Japan would be required to either reduce its monetary base, or find domestic consumers of debt sufficient to maintain it. To permit the Yen to dramatically strengthen threatens their economic recovery and is deflationary. So the question is really just how much of this carry-trade activity has found itself reinvested in overly speculative areas, such as commodities and stocks (both US and emerging markets). And one last point. If the US dollars goes down in value as as result of selling US denominated instruments to pay off Yen based carry-trade loans, does this not represent a potential inflationary threat to the Fed? Yes.. and it would put the Fed on hold in such a case to maintain incentive to invest in the USD. But if dollar denominated sales of stocks and commodities increase to the extent that we see liquidation of equities and a run to cash, then the USD will strengthen. But primarily I'm counting upon the well-earned propensity of the Japanese government to avoid the inevitable pain of recession/depression, or the necessary massive promotion of internal consumption, required to shift its monetary base toward internally, rather than externally, driven influences. Let's not forget that Japan national debt is currently around 140% of its GDP, far more than the US or other countries. We MUST NOT forget that the Japanese government is notorious for intervening when it fits its plan. And right now, we're probably seeing some real panic in Tokyo over whether to abandon the ZIRP. Maybe I've been overly simplistic, but I'm looking to get a grip on macroeconomic trends. As always, I appreciate other views on this to indicate where my logic is flawed. Hawk