Elaine Meinel Supkis
The utter insanity and panic over the fact that the Japanese Carry Trade has died is obvious. Unlike last year, when everyone was so pious about how Japan was in this terrible depression while inflation raged in the streets of Tokyo, the G7 nations hammered China nonstop about raising the value of the yuan. But not a peep about the very weak yen which was dropping against all currencies except Zimbabwe! Well, now that the carry trade has violently unwound, the G7 is demanding it back! They need it for LIQUIDITY. Just as I stated several years ago! And I was right! Wow! Give me the Nobel Prize for Economics!
The entire financial system has been corrupted and corroded. This is a classic situation. Every time a financial system is saved from its own tendency towards deceit and deception, the rules forbidding fraud and follies are dropped or terminated one by one, step by step. Then the bubble/collapse happens again.
Starting with the Tulip Mania, everyone assures each other, this will be prevented. The downside of a bubble economy are painfully obvious and everyone wants to avoid this pain as much as possible. Yet they do it over and over again.
On top of this, the desire to make money in a system that is out of whack with economic health and well-being is very strong so the people who have political and economic power will re-engineer economic rules so they can get rich quickly even if this means outright fraud, theft and the destruction of the core of an economy.
Like my oak tree which dropped off one third of its limbs yesterday, stopping all traffic on my mountain, so it is here with our United States. My oak tree is huge. It used to be twice as big but over the last 20 years, even as it continues to grow and have lots of leaves, it has really been dying.
This is due to two things: when this field was first cleared 250 years ago by the Slatterlys, a colonial family in Berlin, they needed one spot in the field to rest out of the hot sun, a place for the oxen and the people haying that would be cool and also have a nice view of the entire valley. These hard-scrabble famers recently fleeing Europe lived in great poverty but they still appreciated the beauties of nature and so this tree grew greater and greater alongside America's growth into the world's greatest empire.
The single branch that fell this week is at least 4' in diameter. The split in the trunk is over 7' tall. The fallen branch stretched across not only part of the hay field but the entire two lane road I built years ago.
Now the tree, weakened by industrial pollution, namely acid rain, will die rapidly. Already, the crown shows many dead branches. Insects will enter the core of the tree and eat it inside-out.
No longer can one rest at peace in its shade: the tree is no longer shelter but deadly, a hazard. For this great limb fell on a windless day. Silently, it suddenly fell with a tremendous boom. So it is with our empire.
Even if nothing is happening, it can suddenly fall with a boom. The fall itself will be violent but the trigger doesn't have to be any storm or earthquake: like the fall of the British Empire or the Soviet Union, previous storms will shake it and weaken it but the actual fall will take all by surprise.
Economies are like this, too: there doesn't need to be any great event for it to collapse, all it needs is to be sick, overextended, overweighted and weakened by previous storms. Then it falls. We are watching exactly such a fall.
The violent unwinding of the messy and very dangerous Japanese carry trade has now gotten so great, all the G7 nations are dropping all pretense that there really was no such thing as the 'Japanese carry trade' and are now all trying desperately to restart this magical flying piggy bank.
From day one, I have written extensively about Japanese trade and their queer monetary games. The queerest part was their 0% lending. It really offended me back in the mid-1990s. But when they began to amass the world's biggest FOREX reserves in 1998 and onwards, I was astounded.
Astounded that the US was doing nothing at all to stop this! It wasn't even talked about. If the IMF didn't have their web page that shows various national FOREX reserves, I would have not been the wiser. But I hang out at the IMF web site so it came to my attention. China has now far, far surpassed Japan in this matter. But they are merely following the leader in this regard.
Over the years, I have tried to riddle out what the Japanese carry trade was all about. By 2006, I was pretty certain what it was: it was flooding the entire planet with liquidity. It was like some of the very oldest stories told by human beings.
It goes like this: there is this tree, this giant World Tree which top branches go to the stars. The trunk of the tree is earthly life. And the roots go into the Underworld. Now, even back when humans barely had mastered fire and stones, they knew that the dark earth was also the place where all power and wealth came from. Wealth, to them, was life.
Well, the tree gets chopped down and out of the trunk comes all the water that makes all the oceans of the world. Everyone begins to drown. But along comes a god/goddess who says, 'Put this basket/plug/rock on top of the tree trunk and the water will cease welling up. So the water stops. But one cannot remove the basket!
In some very ancient tales in Asia, the monkey is too curious and removes the basket and dies a terrible death. Sometimes, a crocodile comes along and persuades the monkey to move the basket. There are many variations on this theme.
I view the Japanese carry trade as exactly this sort of deep-religious/magical thing: the Japanese chopped down the entire concept of banking which is rooted firmly in the concept of paying savers to park their money in a bank which then uses this as a basis for lending to people who wish to have loans. The very offensive 0% savings rate is a crime. It has chopped down the banking tree and out of the stump has flowed an endless flood of red ink.
This has covered the entire planet! As Japan merrily did this, the other bankers decided to break all the old rules, too. So they banished risk by chopping down the Insurance tree. And it began to bleed red ink, too. Soon, all systems were awash in red in via the Magical Flying Piggy Bank interacting with the most hideous invention of the monkey kings infesting the banking systems: the Derivatives Beast.
So here we are: the gnomes need the monkey mess in Japan and they are willing to do anything to restart it. So lets' read today's news with all this mythology firmly in the mind:
Japan Trying To Protect Banking System Amid Free-Falling Stocks TOKYO (Nikkei)--
The government is finalizing measures aimed at calming jittery financial markets, with a focus on three goals -- strengthening the financial system, spurring stock investment, and stabilizing the stock market.
Economic Miseries To Dampen Shipping Firms' Profits TOKYO (Nikkei)--
Shipping companies such as Mitsui O.S.K. Lines and Kawasaki Kisen Kaisha have slashed their outlooks for the full fiscal year in the wake of depressed demand, the strong yen and other factors.
Nissan CEO: Car Industry Faces Unprecedented Challenge TOKYO (Nikkei)--
The automobile industry is in the unprecedented situation of being hit by a double whammy of a financial crisis and recession, Nissan President and CEO Carlos Ghosn said at a Tokyo forum on Tuesday.
Govt To Empower FSA To Ban Short-Selling In Times Of Volatility TOKYO (Nikkei)--
The government on Monday began discussing plans to give the Financial Services Agency the power to ban short-selling whenever the financial watchdog deems it necessary as part of emergency market stabilization measures, The Nikkei learned Monday.
M&As By Investment Funds Down 70% Worldwide This Year TOKYO (Nikkei)--With the financial meltdown making it harder for investment funds to raise capital, the aggregate value of mergers and acquisitions by such funds totaled just 218.5 billion dollars between January and September around the globe, a 70% drop from a year earlier.
Currency Markets Dubious Of Joint Intervention TOKYO (Nikkei)--Foreign exchange markets reacted cooly to an effort by Group of Seven nations to talk down the soaring yen Monday, reflecting growing skepticism that even government intervention may be insufficient to ground Japan's currency.
For the last two years, I and a great number of professional hedge fund managers as well as assorted others have figured out the obvious connection between the yen going up and the Nikkei dropping. When the yen rises in relation to the dollar, the Nikkei dies. There is a grave danger when any system becomes this predictable: everyone reacts the same way so it MUST do what they expect since they are doing the things, making these things happen.
Ergo: when traders in London or New York notice that the yen is rising in value, they yell, 'Short sell the Nikkei!' And off it goes: in Japan, the handful of traders do the exact same thing. 'The yen is strong! SELL!!!' they yell on the floor and investors call the brokers or even have standing orders to sell under these circumstances.
Japan has set this system up where the yen and the dollar are on this awful see-saw and there is no escaping via other methods. Once upon a time, gold was used as a counterweight so central bankers as well as investors could shift their money into gold reserves and thus release pressure on asset/stock/bond markets. I am guessing that this was supposed to operate as a release valve or brake on obvious money-generating systems.
The yen/dollar duality is dangerous because it is so obvious, even total idiots could make money off of bets that assumed 'Yen rises in value, dollar drops, sell Nikkei stocks'. Now, the system is breaking down.
Why is this, we ask? Aside from the fact that the monkey that lifted off the basket from the stump of the World Tree is drowning, the other factor is simple: when even idiots figure out any system, it collapses! It doesn't matter if it is tulip bulb growers, Mississippi shares sellers or South Sea Bubble blowers. The minute everyone wants to be part of an obvious money-creation scheme, it collapses totally and NEVER comes back.
There seldom is anything left after the collapse to sell for even the original investments. We already are seeing 90% losses on those goofy Credit Default Swaps that were triggered by the collapse of Lehman Brothers! The collapse of the Japanese carry trade/yen/dollar see saw is very similar. When everyone crawls out of the wreckage, they will wonder why they did this silly business in the first place. But by then, it will be too late. The flood of red ink will recede after the Goddess of Deflation comes into the game and simply makes it all vanish.
THE ASAHI SHIMBUN
Megabanks to raise capital amid stock plunge
Once seen as the saviors of struggling foreign financial institutions, Japanese megabanks now plan to prop up their own financial bases to avoid disaster from the recent plunges of stock prices. Mitsubishi UFJ Financial Group Inc. (MUFG) on Monday announced plans to increase its capital by 990 billion yen through measures including the issuing of new shares. Sumitomo Mitsui Financial Group Inc. (SMFG) is mulling a maximum 500-billion-yen increase.
Mizuho Financial Group Inc. is likely to follow suit. Until recently, Japanese megabanks were believed to have staved off serious damage from the U.S. subprime loan crisis and were in a position to provide capital for their less-fortunate counterparts in the United States and Europe.
Japan boasted last year, they were not in trouble. Even after, just a month earlier, whining at China about being in this terrible depression which is why they had to have 0% interest rates. Last July, they boasted to the Chinese, they could drive the value of the yen down to 130 to the dollar by October.
China was very irritable last July and warned Japan, they would shift gears and begin hoarding yen. The yen began to strengthen. Japan said to China, they would flood China with liquidity from the magical World Tree. China said, 'We are the Dragon. Try it and you will die.'
And so it was. The yen has been slowly and now, swiftly rising in value. Not because global currency traders want it to rise. But because China wanted it to rise. This is China's first real monetary power play: muscling Japan successfully. The Japanese got the message. They want desperately to swim above this sea of red ink they created but this depends on everyone buying Toyotas and Sony stuff.
And this is no longer happening. So all the goofy trades based on these debts churned out by Japan are now being paid off and all those dollars from Australia or New Zealand or the US are flowing into Japan to pay off all those goofy loans at nearly 0%. This is all very mysterious and obvious at the same time. People can't borrow any more. They have to make margin calls due to stocks falling.
And since the Nikkei always falls when the yen gets strong, the banks and business hedges in Japan are collapsing because stocks are collapsing. Anything below 10,000 in the Nikkei is bad news. Tonight, it has fallen all the way to 7,000 and threatens to go much further. After all, even idiots know that 'If the yen rises, the Nikkei falls.' So gravity is working just perfectly.
Bank of Japan Governor Toshihiko Fukui met with his Chinese counterpart Zhou Xiaochuan on Thursday to discuss a wide range of international economic and monetary issues, BOJ officials said. Although the BOJ officials did not disclose the details of their talks, the U.S. subprime mortgage crisis and its repercussions across the world are believed to have been high on their agenda. Fukui briefed Zhou, governor of the People's Bank of China, on why the BOJ decided not to raise interest rates at its Policy Board meeting Wednesday as well as his take on the outlook for the Japanese economy, according to the officials.
My comments to this story: 'Between us, we hold over $12 trillion in US wealth, money, bonds, stocks and other things,' says the Dragon, hauling out its acabus and clicking the wooden markers up and down as it adds up everything.
'I don't like losing this investment. I doubt you want to lose, either. As you know,' continued the Dragon, giving Miz Japan a very dark look, 'I have an interest in buying yen suddenly. But if you want to cooperate with me, we can keep the foreign demon bank accounts running for a while longer but you must do as I say and not run off and double deal me when the G8 meet, understand? No more calls for me to change the value of the yuan and we will let the yen drop in value against the dollar again.'
Well? We shall see if I am right about this. So far, when it comes to figuring out these people, I am right so the chances of the present status quo STRENGTHENING is VERY HIGH!
The collapse of the West will be put off, the battle between the Dragon and Miz Japan will evaporate and all will be well until we are disposed of. For loading us up with debts is the whole point here! And if this is what WE want, it will happen! And we will find some means of doing this, somehow.
Beggars at Beijing's Gates, we will continue to pretend to be an emperor while being in reality, the beggar. Until the Wheel of Fortune grinds us under its iron bound rims.
As I read the G7 statements coming out, it is shocking, really shocking, to see them openly talk about the need to flood the US with imports and the US must strengthen the dollar to enable Japan to flourish. They even admit that 0% Japan is the world's second strongest economy. But they don't call for us to flood Japan with our exports. Oh, no, not even slightly.
Bloomberg) -- French Finance Minister Christine Lagarde said Japanese authorities may sell the yen for the first time since 2004 after the currency surged to its strongest in almost 13 years. Speaking hours after the Group of Seven nations warned against the yen's ``excessive volatility,'' Lagarde foreshadowed a ``purely Japanese'' intervention to weaken it, saying in an interview that the G-7 had no plans to help. That leaves investors testing Japan's resolve as the yen's advance threatens to erode the earnings of exporters such as Canon Inc. and pushes stocks to a 26-year low.
Poor Japanese exporters! For the last 5 years, they have enjoyed record export profits! They got more and more powerful. Toyota is now outstripping General Motors as the biggest auto manufacturer on earth. Now, the silly yen is killing this fine game! The yen is making it impossible for Japan to undersell competitors or to penetrate the US markets. Rats.
Pay attention, please: Japan has the world's biggest trade profits. Not China. China imports a lot of stuff, so China has a huge trade surplus with the US but not with the world. Per capita, it isn't even slightly as well off as Japan. The other G7 nations all want the US to enable, help and assist Japan in destroying us in trade because they ALL want to destroy us via trade! This is the whole point: the G7 is NOT some solid organization with common goals.
It is a one-way street whereby all our trade partners assist each other in keeping trade with the US as unbalanced as possible. The crisis is NOT the end of the terrible, stupid and dangerous Japanese carry trade.
The crisis is the bankruptcy of the US, the world's biggest consumer nation. We cannot go half a trillion dollars+ in the red every year to all our trade partners. This has to end, the sooner, the better. None of our allies want this to end. Thus, the open lust to restart the carry trade con game.
Euro Slides to 2-Year Low on Rate Outlook, Recession Concern
(Bloomberg) -- The euro dropped to its lowest in more than two years against the dollar on speculation European interest rates will slide as recession looms.
The currency approached a six-year low versus the yen after European Central Bank President Jean-Claude Trichet said yesterday he may cut interest rates next week, less than a month after slashing the key rate by half a point.
Europe's economy is on the brink of a recession, with the region's manufacturing and service industries contracting at a record pace in October and German business confidence dropping to a five-year low.
I heard that German auto manufacturers like Mercedes Benz is going to force all the workers to take nearly one month off this winter! These cutbacks are due to one thing: the US isn't buying.
Last year, I visited the deep sea port in New Jersey to photograph the foreign ships pouring into our docks to unload massive numbers of cars. As far as the eye could see were parking lots surrounding these docks. But not ONE of the ships docking had any names on them that could be seen easily! I went from the Japanese ports of call to the German ones and it was the same: the ships were anonymous.
And huge! I couldn't believe how gigantic they have swollen over the last decade! They were all basically immense boxes that floated. The need to restart this flotilla's invasion is very important for our allies. So they will shrug as General Motors dies. They don't care. They want us to buy their stuff, of course.
I seriously doubt there are ANY American ships with even ONE car on it, sailing to either Hamburg or Yokohama.
G-7 countries express concern about excessive volatility in Japanese currency
(AP) - The yen rose to a 13-year high against the dollar in trading Friday, raising concerns in Japan that it could harm its exports of cars and other products because they will now cost more in U.S. markets.
The statement by the G-7 finance officials was released in Washington, Tokyo and other G-7 capitals. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 finance officials said.
Any American reporter writing this story should be yelling with fury. 'What the HELL???' Oh, Japanese cars will cost more than Fords? Well! We can't have that happen! We must make it easier for Japan to undersell US autos. Right? And traitors are usually shot at sunrise, too.
Note here that the G7 Europeans are demanding 'stability' and this means: the US buys and everyone profits while we accumulate debts. Via the carry trade, of course. Now for a good article from last year about this business:
The ‘Carry Trade’ and the Current Financial Turmoil By Michael MH Lim
In the simplest case, speculators and investors borrow yen at 0.5% and invest in US treasuries at 5%, earning a spread of 4.5%. In theory, this is not supposed to happen as the difference in interest rate between the two currencies is equal to the difference between the spot and forward rates of the two currencies.
In other words, the interest rate differential is theoretically offset by the appreciation of the yen over the dollar over the same period. Perversely, however, borrowing the yen puts downward pressure on the yen value. Furthermore, a confluence of factors in Japan, including a high savings rate and the government’s policy to reflate the economy out of recession and deflation through cheap exports, result in an undervalued yen and a low interest rate environment.
The yen has traditionally been undervalued, and the relative stability of the interest rate spread between the yen and other currencies has allowed investors to enjoy the ride from the carry trade for a long time. Japanese yen is reputed to be the most undervalued currency, even more than the renminbi.
It is estimated that the yen is 40% undervalued against the euro. To enhance their yield, investors could invest in bonds, equities, real estate, sub-prime mortgage loans or any other instruments. In short, the carry trade has become a major source of low-cost funds for the world, with money flowing into everything from Wall Street stocks, to main-street home mortgages, to emerging-market stocks and bonds. The yen carry trade amplifies the already serious distortions in the global economy.
Japanese excess liquidity is supporting asset inflation and bubbles across the world.
And Mr. Lim is correct. The carry trade is extremely distorting. So we have to question the friendship of our G7 partners who are flipping out because it is ending. They obviously don't have our best interests at heart.
Group of 7 Meeting in Tokyo Tackles Yen’s Rise
The statement from the G-7 officials and a surprise rate cut in South Korea highlighted the depth of concern over the latest wave of financial turmoil, which has wreaked havoc not only in the debt and stock markets, but also in the currency markets.
In the last few months, the yen has appreciated dramatically, while the euro and won have dived. The statement, which said the G-7 would “monitor the markets closely and cooperate as appropriate,” came as countries in Asia, spooked by the relentless sell-offs in the stock markets, scrambled to support their economies.
Japan’s prime minister, Taro Aso, said the government would expand a plan that gives banks access to public funds and would strengthen regulation on the short-selling of shares.
In South Korea, the central bank staged its deepest-ever interest rate cut during an emergency session in Seoul, while the Australian central bank intervened in the currency markets for a second day.
In Japan, the world’s second-biggest economy after the United States, the yen’s rise has hit the key export industry, as corporate giants like Sony are seeing their goods become more expensive in the crucial markets in Europe and the United States.
All countries trading one way with the US and in steep competition with each other are all dropping rates to 0% rapidly. Last summer, China raised both the reserve ratio rates as well as overall interest rates because they correctly foresaw a burst of hyperinflation. They should be praised for a good call.
The communists decided the hot stock market was too hot, incidentally, back then. They want generous trade deals but are not going to allow things to get out of hand. But now, everyone is racing to the bottom. The carry trade dies if everyone collapses global banking totally. But then, we won't have any banking anymore once this happens.
If everyone is at 0%, the monetary system will be officially dead. Like, the World Tree: chopped down.
GM is dying so we have to open the gates to more Toyotas! Right? This news is horrifying. And we have NO need to boost Japan's auto industry. None what so ever. Got that, everyone? Can you hear me, Bush? Anyone running for President? Good grief!
(Bloomberg) -- Gulf Bank KSC, Kuwait's fourth- biggest lender by market value, may suffer losses after some clients defaulted on derivative contracts linked to the euro, sparking concern regional banks may be further hit by the global financial crisis.
The losses were incurred on currency derivatives after a decline in the value of the euro versus the dollar, state-run Kuwait News Agency said today, citing central bank governor Salim al-Sabah. Gulf Bank will have to absorb the losses until an agreement can be worked out between the bank and its clients, the news agency cited the central bank governor as saying.
The Derivatives Beast is having quite a dinner. Yummy. I expect him to return to eating the banking systems in the West this week. Stocks are falling, this is weakening everyone playing markets with leverage and banks can't attract savings. Only more funny money from central banks. And Bernanke is handing out more of that to regional banks, now. The list of banks needing rescue is longer and longer.
And they are going to flourish under a 0% regime? HAHAHA. And now, for fun, we can go to yet another video that one of the readers posted here yesterday:
Marketplace Senior Editor Paddy Hirsch explains how banks have gotten frozen in their tracks, awaiting a rescue. More coverage of the financial crisis at Marketplace.org
The credit crisis as Antarctic expedition from Marketplace on Vimeo.