The Fall of the Yen Leads the Crash - NCCG.ORG Ning Network Archive 2008-10

The views expressed in this article are not necessarily those of MLT

Rob Miller - 11/04/09

I think this whole scenario is going to take place very soon. The following is an excerpt by Harold Eatmon.

I saw the Stock Market soar and then crash. After the [first] crash, many big business corporations and private parties bought up stocks because of the low cost to buy in. Then I saw the market begin to climb again in a short period of time. Then it crashed again, bringing tremendous loss, ruin and devastation to all who bought in the first time. This is what I have labeled "Two Black Mondays." The time period between the Two Black Mondays was very close together. I could not tell exactly how close. It could be a couple of days to a couple of months. There are some tell-tale signs indicating the season and the setting. I saw the season to be when the leaves fall to the ground, then the first crash would occur. I also saw the Yen fall dramatically just before this sudden and inexplicable crash.

The following article shows the mess that Japan, the second largest economy, is in, which could cause the yen to fall, as Harold saw.

It is Japan we should be worrying about, not America
By Ambrose Evans-Pritchard
Published:5:33PM GMT 01 Nov 2009

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany, France, the US, and even Britain .

Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.

Tokyo's price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions.

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.

"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."

Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l'outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps.

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

The following is an excerpt from an excellent article on the market crash mentioned by Harold.

The Risks of a Catastrophic Deflationary Collapse
by Lawrence Tout |November 3, 2009

...

Will the Next Wave Sink The Ship?

As we have mentioned, this current combination of high levels of interconnected toxic derivatives and systemic fraud make for very unstable market foundations. Yet these are foundations that have already been weakened by the first wave of the credit crisis where we saw write downs, bankruptcies and bailouts of major institutions. With this systemic fragility already in place, we must ask ourselves if the markets can survive another wave of failures? A wave which is looking increasingly likely to hit pretty soon.

There are already indications that CIT, Capmark Financial and Citigroup are in serious trouble This Friday CIT alone lost 24% from its share price and finally filed for Chapter 11. Capmark is bankrupt and was a leader in the Commercial Real Estate derivatives markets. What will be the knock-on effect? Failure of large derivative holders could act as potent collapse triggers affecting under-insured and under-capitalized counterparties. Or will we see a sovereign debt default be the trigger just like the 1998 Russian financial crisis sparked the LTCM meltdown. Ambrose Evans-Pritchard views Japan as a possible disaster waiting to happen.

Terminal Warning – Speed kills! – A Catastrophic Deflationary Collapse Scenario
Quants are forever trying to define and predict market behavior with complex formulae and black box algorithms, however complexity is not required when dealing with fundamentals. If we do receive an apt trigger for a market crash, the huge mass of debt multiplied by the high velocity of forced liquidations and bankruptcies will create massive momentum to the downside (P = m x v).

Economics may be based on a number of things but it is ruled by confidence. The worldwide stock markets and most especially the DOW are our confidence barometers. When the DOW makes a sudden and concerted turn down, the smell of fear will once again be in the air just as it was one short year ago. Confidence in this latest (bear-market) rally is misguided at best and in reality unfounded. The ephemeral nature of this confidence, the five second attention span of wall street traders, with the crushing Dow6500 drop still embedded in the collective Wall Street psyche, and the fact that fear for most people is a far stronger emotion than greed, all combine to make a potent fuse waiting to be lit by one of any number of now ripened and impending triggers. No matter which trigger, a single one will activate all the others, as the interconnectedness within markets means no hierarchy is required. One will push all the others, so it is just a matter of which is the weakest link in the system.

An increasing likely possible hair-trigger could be the failure of a major corporation initiating a greater derivative chain melt-down. With the DOW being a most public measure of confidence in our world reserve currency, a decisive turn down in this index would be the global siren that signals a very large cliff ahead. The only pertinent question is how far will it have to fall until the passengers start bailing en masse?

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