Wednesday, March 16, 2011

Yen Soars After Hours as the Global Economic/Political Chaos Intensifies

They always say:  Leverage is a bitch when it goes against you.   Just take a look at the Yen after hours if you want to see what it can lead to:

My Take:

Before I get to the leverage point let me point out that the Nikkei futures are down over 1000 points before the open(that is if they decide to trade today).  Rumors have been flying around that the Nikkei might shut down for the rest of the week.


All hell essentially broke loose after the Yen broke 80 against the dollar.  This is the first time the Yen has seen this level since 1995.  When it broke firmly through 79 it almost immediately triggered a violent unwind as seen in the chart above.

After hours the Yen SOARED to a whopping 76.39 before pulling back into the 78 area.  My guess is someone(hedge fund perhaps) likely was liquidated after today's trade.

Currencies can be leveraged 100-1 so it doesn't take much of a move to literally wipe out your capital when you are on the wrong side of a violent move in currencies.  This move after hours was literally breathtaking towatch.  We seem to be rallying back as I type here.

The Bottom Line

My posts are going to be brief and to the point in the near term following this one because things are happening so quickly.  

US futures are down again sharply once again after hours following the move in the Yen.  This is a disaster scenario for the Japanese economy because the soaring Yen makes their exports much more expensive.  Japan is EXTREMELY dependant on their exports...Toyota, Honda, Sony, Hitachi anyone??  The cost of imports soars as their currency rises.

At this rate you will be able to buy two Mercedes for the cost of a Toyota 1 month from now!

Folks, things are bad and getting worse.  I am starting to get concerned that we might see some panic selling in the oncoming days.  The Middle East is spiralling out of control, Japan is an absolute mess, and the economic data coming out of the US looks awful.

The housing starts "y on y" were the worst numbers seen since 1984, and the PPI came in smoking hot at a 1.6% increase versus the .7 that was expected.  Making matters worse is the fact that our government is in danger of shutting down because Congress cannot come up with a budget. 

My advice?  Put yourself mainly in cash and ride out this frightening storm.  The "buy the dip" suckers have gotten their teeth kicked in since this crisis started.

The biggest shame here in my view is Japan will be blamed for creating this economic crisis.  The reality here is the crisis was caused by the same crap that put us in the soup back in 2008.   It's easy money and highly leveraged gambling (not earthquakes) that got us here.

You should blame the bubble blowing Fed and their printing press for creating this mess.  Japan was the trigger not the cause.

Don't get me wrong, there is no doubt that the Japanese crisis would have hurt the global economy in either scenario.  However, risk taking and leverage are what makes these corrections so much more violent and painful than they would be if this extreme speculation was taken out of the system.

The way I see it hings are just getting started folks.  Expect more aftershocks(and no I am not talking about ones that are created by earthquakes).   Why?  Because our speculative quants can't handle these economic shocks.

The trading robots weren't prepared to handle the Black Swan of "subprime" back in 2008, and they aren't prepared to handle the "Japanese" Swan either.  As a result, many quants/hedge funds likely just got caught with their pants down just like they did when thehousing bubble came crashing down.  

The Yen trade after hours is a prelude of things to come IMO.

What keeps me up at night about this crisis is it's going to cause the bursting of a much larger bubble.   The bubble that ends up popping this go around will be much worse than 2008 because it's a broad based credit bubble.  Unlike housing, EVERYONE is involved in this one including governments.

There is only one outcome the way I see it.  The "easy money inflation genie" is about to be released  and it's going to wreak havoc on our society.  It's already stared, and I don't think there is any governmental policy that can stop it.  The proper response here would be to raise rates, but this is not an option for us right now because it would take down the entire banking system.

As a result, the only other option is for the government to print dollars in order to pay our enormous debt load which is about to be further burdened as we spend enourmous amounts of money bailing out Japan.  

This will lead to catastrophic inflation down the road.  I don't see any other way out.  Please be very careful right now.  Things are happening on an unprecedented pace.  Protect your investments the best you can and prepare to ride out this horrific economic storm.  


Intrinsic Value said...

What a mess, markets going be to volatile going forward. Hasnt been this bad since Lehman collapse.

BOJ has expanded the QE program to 10T Yen to aid the recovery. However it needs to be signficantly bigger to have a meaningful impact.

Intrinsic Value

Herb said...

Some how I'm afraid we are going to end up bailing out some hedge funds in the near future....

Jeff said...


Agreed. Has that Lehman feel doesn't it? I wanted to go long the VIXX a few weeks ago but I passed.

Looking to short treasuries tomorrow. Japan should start selling soon to finance their recovery.

Jeff said...


Yeah its gonna get ugly.

Central banking intervention will hold things together for now but it won't last.

Crazy times

intrinsic value said...

Ya thats a good way of taking advantage of their selling. I am actually looking to go short the VIX etf once the panic sets in.

Good luck and stay safe