Sunday, September 19, 2010

Japan's Last Battle

First of all, I've been exceedingly busy with daughters, yard work and work for the last two weeks and so apologize for my lack of attention to this blog. On the good note.. my yard has never looked better !

These last two weeks have seen better than expected numbers from the US; initial claims for unemployment continue to go downwards, a good sign. There was much talk about The Fed doing another trillion dollar QE in the form of "permanent open market operations", or POMO. This means that Bernanke was going to begin purchases of corporate, state, local and foreign sovereign bonds instead of simply purchasing US bonds or MBS. This talk has settled down thanks to the good numbers, though many expect it to get done around the time of the elections. But the talk, coming from "senior Fed officials".. {ie Bernanke telephoning a certain Neil Irwin at the Washington Post}.. had consequences. The USD sunk, especially against the Japanese Yen and Swiss Franc, the favorite whipping boys of currency speculators. One notable event, currency related, is the rise in commodity prices. My idea here is that in the short term, housing prices (and other existing assets) will continue south (deflation) at the same time that the basics of life (grains, metals, softs) are increasing. Go to your local store and check out the price of coffee these days. Bread has also taken a hike. Mercifully, crude has held fast at around $75/bbl.

In Tokyo, where the Yen has already been appreciating to all time levels and where the QE option is limited due to already low yields, Japan's Finance Minister, Yoshihiko Noda, had this to say: "Deflation is continuing, and we are in severe economic conditions. Under these circumstances, recent movements in the yen will have adverse affects on stability of economic and financial conditions. We will continue to monitor foreign currency markets and will take decisive steps, including intervention, when necessary" This followed the August 30th "emergency meeting" that resulted in QE Lite later that day. Sure enough, the BOJ intervened in the currency markets, using Yen to purchase US Treasuries and driving the Yen from 83 to a USD back up to 85.37 at one point, a 3% rise. The Nikkei stock exchange went up as well.

The problem is, these actions were taken by the BOJ alone and not in coordination with other Central Banks, thus making it much more likely to fail. In June of this year the Swiss tried {and failed miserably} to halt the rise in it's currency. Indeed the US actually criticized the move. So far, the BOJ intervention is small.. roughly $10 billion, compared to the $586 billion/day traded in the Yen/USD currency markets. This should give you some idea of the power that currency markets have. The Chinese, rumored to have been recent purchasers of Japanese Bonds, would've also been unhappy at this move by the BOJ as the value of their purchases took a hit. It's likely that this is just the beginning of Japan's battle against deflation's death grip. It's telling, and worrysome, that they are now left without the QE option and are left {all alone apparently} to fight this battle in the currency markets. Should Japan lose this battle and it's currency appreciate to under 75/USD, look for their stock markets.. shortly followed by their economy and ability to pay their debts.. to take a severe hit.

In other news, Ireland neared default this last Friday; apparently the ECB stepped in with a stick save, purchasing Irish Gov't bonds, which had been surging, reaching 6.35%. Anglo-Irish Bank, Ireland's version of AIG, continues to post ugly losses, draining the Irish treasury. Worse, the Irish economy is expected to contract nearly 8% this year. Portugal is also nearing the end; their 10 year bond surged to 6.15%, the same levels of last May when Greece (and the EU) nearly crashed. Portugal's government drafted an "emergency budget", with their high speed train to Madrid being the first casualty. Greece's 10 year bond is still north of 10%. In reality, the only permanent way out of this is debt reduction, which the ECB and European banks oppose because of their own precarious situations. I'm looking for an interesting week in EUtopia.. lets just hope not too interesting.

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