Thursday, October 2, 2008

The Financial Meltdown is Global and It is NOW

The Yen Carry Trade is History

There is increasing reason to think that the "Bailout" will accomplish nothing but a creation of authority over the Financial/Economic life of the nation vested in the Treasury Department and its master, the Federal Reserve Bank.  The overwhelming preponderance of the evidence is that the financial crisis is a global phenomenon which cannot be contained by a limited U.S. government bailout.  There is some question as to whether the situation has spiraled out of the control of the Money Masters or whether the present situation is developing according to the end game strategy.

Today, in spite of the Senate's passing of the Bailout and the anticipated cowing of the House, world markets are falling.  This may be an indication of growing panic and the effects of a severe constriction of credit in the markets.  Significantly, the Euro is taking a severe beating.

Valid reports indicate that credit markets worldwide have seized up.  It is becoming difficult to borrow money at all levels of the world economy.  Reports are trending to anticipate the failure of Municipal and State governments as well as a blow up of the credit card market.  This article from the normally staid Forbes Magazine points in this direction.  It is crystal clear that this crisis far exceeds the limited bounds of the US mortgage market.

Here's my contribution to an understanding of the situation and why I say "The Financial Meltdown is Global and It is NOW".  For some time I have been saying that we would know that the great implosion is upon us when we see panic buying in the Japanese Yen.  I'll try to explain why this is significant and why I think this is happening right now.

First, you need to know that a major, if not primary source of liquidity (availability of funds) has been what's known as the "Yen Carry Trade".  The Japanese have had interest rates at nearly zero for many years.  This engendered the practice of borrowing Yen at very low rates and investing the loan in higher yielding financial instruments.  It's been a BIG trade and has continually supported world markets.  As long as markets keep going up, it's easy money.
However, the carry trade is a short sale of Yen.  That means that an investor sells Yen that he doesn't own to generate the proceeds of the sale to create the investment funds.  The investor must then BUY the Yen back at some point to close the trade.  Generally, the margins on a Yen carry trade are not that big.  That means to make big money with it you have to sell A LOT of Yen.  It also means that it doesn't take a big move in the price of the Yen or in the value of the investment to push the trade into a loss situation.

We now have a situation where the value of the investments financed by the Yen short sale (stocks, commodities, housing, other currencies) are going down and threatened with collapse AND the Yen has passed an important level where those short the Yen will panic to buy it back.  This process, long predicted by many students of the markets, is known as the "unwinding of the Yen carry trade".

The charts below show that the EuroYen has now passed a point of no return.  If you sold Yen and are holding Euro denominated assets, you are panicking right now.  You are going to buy Yen and get out of that trade as fast as possible.  That means that the Yen is going to skyrocket in value.  It means that a major source of liquidity in world markets is removed and a major selling force in world assets is being unleashed.  Once the Yen buying panic sets in, global markets will be in true crash mode.

3 Year EuroYen chart

The crucial 155-150 support zone was violated today.  This chart shows a breakdown out of a long term top.

This is the one year chart of the EuroYen.

The 150 level was tested in September.
The 155 level, formerly support, has now become resistance.  The subsequent breakdown of secondary support at 150 is a very negative indication

Again, there seem to be increasing indications that a major "point of no return" has been transgressed.  It is possible that the crisis may somehow be contained by truly massive inflation of the monetary supply by central banks worldwide.  Look for a global meeting of monetary powers to announce a "World Rescue Package" within the next two weeks.  I do think that the Money Masters have planned for a staged collapse.  However, the forces that they have created may now have escaped from Pandora's Box and it may no longer be fully within their control to contain.  Remember, the total size of the derivatives bomb planted in the building of the world economy exceeds 1.4 Quadrillion dollars, or about 2.5 times the world yearly GDP.  The US mortgage market derivatives totals only about 4% of this.

I reserve the right to be completely or partially wrong in this analysis.  I just call 'em how I see 'em.  At this moment, that's what it looks like to me.

Prepare yourself.

1 comment:

Dave said...

Good thing I was taught how to hunt and survive in the wild by the military... Hello bartering system.