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The Collapse of the Yen: The Party Has Started
“Oh, how I despise the yen, let me count the ways.” I’m sure Shakespeare would have come up with this line of iambic pentameter if he were a foreign exchange trader. I firmly believe that a short position in the yen (FXY) should be at the core of any hedged portfolio for the next decade.
To remind you why you should hate the Japanese currency, I’ll refresh your memory with this short list:
* With the world’s weakest major economy, Japan is certain to be the last country to raise interest rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world’s worst demographic outlook that assures its problems will only get worse. They’re not making Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt approaching 200% of GDP, or 100% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of a scant 1%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country’s beleaguered exporters.
When the big turn is inevitably confirmed, we’re going from ¥83 to the initial target of ¥85, then ¥90, ¥100, ¥120, eventually ¥150 (remember to think in inverse terms). That means that the 200% short play on the yen (YCS), could soar from $16 today to as high as $40, a potential gain of 250%. But it might take a few years to get there. The Japanese government has come on my side with this trade, not that this is any great comfort. Four intervention attempts have so been able to weaken the Japanese currency only for a few nanoseconds.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ¥305, and had just been revalued from the Peace Treaty Dodge line rate of ¥360. To me the ¥83 I see on my screen today is unbelievable. If the recent high print of 80.20 is the top of the current move, then we have just made a neat 15 year double top on the charts, a technical analysts dream come true. Sell the yen on rallies, with a ¥79.40 stop for insurance.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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I like the post right up to the choice of instruments. The Japanese population is inside the event horizon on recovery. They don't allow immigration in Japan. They're geriatric tribe has been net savers for all these years and are now going to be trying to cash-in the savings. In order to fund 2011 spending they must: 1) Sell JGB's to foreigners, or 2) print yen. All of these points are old news on ZH, I haven't added anything new.
For all these reasons I would choose to be short yen and short JGB, but shorting with respect to what? FXY is the stock market version of the USD/JPY pair. Will JPY devalue faster than USD? I don't know.
Same for YCS - 2x inverse USD/JPY. The yen is facing a tsunami - but so is the dollar.
A trade of yen against a basket of currencies with reasonable budget deficits would appeal to me more. A synthesis of CAD/JPY and AUD/JPY? I think all the fiat currencies will implode once the dollar and the Euro go, but I think they'll go out in a sequence.
Curious about your opinions - I want to be short JPY and JGB, but to what?
I might be naive, but is it reasonable to assume that currency traders give a $hit about fundamentals, or do they just react to each other like a pulsating mass of swallows in flight, or a school of fish, a cloud of mosquitoes, or a SWARM OF LOCUSTS........... ?
:D
For this site, the whole world will colapse soon... dollars, euro and now the yen... so nothing new.
Alot of folks will be sad if it dosen't happen... LOL!
I cant take anyone seriously who actually recommends Double Inverse ETFs!!!
Eg:
If underlying goes up 10% on Monday and down 10% on Tuesday - the two day return on the underlying is ..... Minus 1% ( 1.1X0.9=.99).
The Double Inverse will go down 20% on day1 and up 20% on day2 for a return of.... Minus 4%! ( 0.8 X 1.2 = 0.96).
So you would have been right to want to shaort the underlying - and still lost money actually twice as badly!!
I loved John Mauldin's statement a few months back that Japan is a bug looking for a windshield! Perhaps it has finally found one!
Wake me when their BOP goes negative.
Till then its all noise.
Some immediate thought experiments, chaotic/not logical, yet totally cause/effect related, come to mind...associated with long trend Yen devaluation:
Far East major 'trade-decoupling' from Europe/USA totally self sustaining, the Japanese Far East War (1933-1945) Goals of extricating the British from Singapore, of getting their own oil from Indonesia (the Dutch colony), of obtaining control over the (slave-labor) Korean workforce, of obtaining a 'deEuropeanized' China Mainland market, and (as with NAZI-Germany)'living space, expansion' .... and more
'Decolonization from Europe and the British Empire...was the underlying theme of the Japanese 1933-1945 war effort....hence the killings of English Speaking Chinese in Singapore/rape of Nanking...the germ warfare tests in preparation for de-populating parts of China....but "that was a long long time ago.." yes the grudges can be wiped from the history books as in USA/Vietnam, now good buddies (despite the 2 million + USA destroyed 1964-1974)
How long a time? Yen half and near half again @ say 5%/yr 12+8 = 20 years or so => 2030 all done...
japanese people own most of their debt, not external...indeed, 'externally', massive holders of USA debt
Yen drop of ~70% against 'basket of currencies' results (internally)..... yen denominated massive Japanese stock market boom, massive 'relative advantage'...with industries already mostly high tech, 'robotized' 'smart labor-force intensive'
Japanese peoples pensions-burdens suddenly trivialized problem...Japanese housing-payment burdens suddenly non-issue...not needed multigeneration in same house
Japanese, import costs - WAS USA, will be direct from China, and Australian/Indonesian Oil/LNG Gas
Japan/China Political/Economic Sphere the Yuan, paradoxically COULD use the YEN as a bridge to Reserve Currency Status.....regards the eventual self-contained FarEastAsian Economic Block
And, the Yen devaluation would be by agreement and totally planned Far East central bank collusion, Bank of China in particular working with japan....and thats the 'investor/speculator' attraction...a long term central bank guaranteed trend on which we can depend...retail traders need only figure the 'fractal-time-frames' of the 'inevitable adverse waves, in the great 20 year long wall of worry...5%/year starting guess...
A revamp of yen 150, cooked months ago... Same fate as the previous one.
There will never be another crisis-all will be smoothed over. Ben has shown the way-just QE all those Japnese bonds, Euro country bonds, etc, to keep us in Nirvana!
Put all the financial reasons aside.
Socially, societally, mentally... Japan is a basket-case. Mad as hatter's. Really, I've worked with them and in there intensively for years.
Japan is unique, no other country in the world like it. But the people are going mad. Decaying, buried in the virtual world of kawaai (cute) and Otaku (obsessed) emptiness.
And people make Japan, not it's landmass.
It's a basket-case, only way, given all major trends, is down!
ORI
http://aadivaahan.wordpress.com
stupid as usual
# With the world’s weakest major economy, Japan is c
weak.. huh... no resources.. not much food, not much usable land
and still 2d best economy in world, credit surplus..
top infrastructure, half of boeing made by Japanese,
NASA after stoping using shuttles gonna use Japan made space ship..
financial streets around world are in dead bodies of people who shorted the Japan..
only problem is demographics. .well its very use to fix.. you know old man
as man used to do it... ++ immigration..
alx
Interesting opinion. I don't necessarily agree that 1% yield is a disaster waiting to happen. I don't see a run on Japan bonds, who would do it? Unlike the Eurozone, most Japanese debt is held by Japanese themselves who have a vested interest in managing maturities.
I disagree w/ the demographic disaster opinion, either. Once the large bulge of post- war baby boomers check out the Japanese population will be smaller and younger ... and richer. Since the world's economies will be by necessity zero growth the fewer demands on capital the better.
The countries with the demo prob are China (1.3b), India (1.2b), USA (.35b) and Indonesia (.24b). The collection of Middle East countries (.39b) faces a demo nightmare because of limited agricultural output and a lack of diversified exports. Believe it or not, oil for food is not a good trade. Let the carz starve!
With stagnant economies the only 'way to wealth' for countries will be by population collapse. Since Japan is ahead of the 'collapse' curve it will fare much better than 'youthful' countries such as Iran or Saudi Arabia.
I suspect currency traders using yen as a proxy for yuan, in this case the yen will remain strong against the dollar.
Yes.
""""could soar from $16 today to as high as $40, a potential gain of 250%.""""
[[[ $16 to $40 a 150% Gain ]]]
$16 to $40 is a %250 gain; as stated. How did you pass the "captur" test.?
40/16 - 1 = 1.5 = gain of 150%. I guess there weren't any math questions on your IQ test?
40/16= 250% gain
40/16-1=150% ROI
apple meet orange
The take home message from this article for me is the striking instability of all major world currencies whose outlook changes on a daily basis. I'm getting whiplash. So much debt everywhere makes none of them any good.
It's great if you're a trader, but bad if you just want to safely store value.
Euro- no. Yen- no. USD- no. Pound- no.
Sui/Can/Aus - maybe?
Greenspan was right, no place for fiat to go but gold.
But individual entities can go to Silver.
Insert your quarter into the slot and pull the arm.
I put a quarter in and got two Japanese cherries and an English nut.
http://www.youtube.com/watch?v=OOLBZr3UXmA
The yen correlates with our short term interest rates, if there is another deleveraging smash in risk assets, the Yen will again rally against the USD.
Short the Yen vs what? The Dollar? Amazing how tiny technical Dollar bounce clouds everyone's eyes over. If this is a trade on fundamentals, I don't see a clear case for a long term Dollar Yen trade either way.
So the JPY carry is back. Great. After everyone unwound, strengthening the yen, it is back to the races. But the bogey could be the PIIGS debt crises which prevented the push back into yen carry earlier this year (Greece) due to risk aversion and could postpone a bit again. But what the heck.
Been watching for a top to enter. Thx
I think its extreme.
The U.S. more screwed fundamentally, and its slightly more closer to the eventual clusterfuck that will also arrive to Japan.
I wouldn't be surprised if the purchasing power of JPY went down by a half or more, but declining that far against the USD?
I don't think that is going to happen.....at least not any time soon.
Of course, if the Japanese market was rational, it would already have collapsed.
But I would not underestimate the irrationality of Japanese markets.
It is much, much, much more irrational than other markets.
I would rather just trade technically or simply stay out.
This implies a significant rise in the Nikkei? -exports going up, but imports too- not sure.
Isn;t it a really bad idea ot hold a double ETF for anything more than a few months due to the ETF charges?
You pay for convenience, like buying milk and eggs at a korean mini-mart. As long as the trade is going your way, its not really a problem.
Absolutely right BG. In addition to charges there also is time decay. Actually, I don't hold the darned things more than a few days.
Money is changing form currently. It is impossible to predict how this is going to turn out but it will be a party. Please serve rum at yours if you want to be safe.
I agree, a trend on which we can depend
" If the recent high print of 80.20 is the top of the current move, then we have just made a neat 15 year double top on the charts, a technical analysts dream come true. Sell the yen on rallies, with a ¥79.40 stop for insurance"
N/S Korea an earthtrembler, historic 1940 Far East New Co-prosperity Sphere 70 years in the preparation, NOW begins, China centered/ Japan, Korea, Taiwan, PI, Indonesia, Sumatra, Vietnam, Thailand, Singapore synergetic condensation finally 2010....yes...currency re-alignments, cooperation...Japan awakes from a deep slumber....
Yeah - but if those damned Japanese didn't make such damned good, high quality products I might be willing to dump them. But not yet.
LOL - and if it was at 5%+ like Greece or Ireland you'd be calling it a disaster too!
So according to you it's a disaster no matter what the long term yield is! Cute :-)
In another universe, somewhere far, far away from yours a 1% long term yield means that deflation has been hardcoded into Japan's economy, and that lenders are willing to lend at even such low rates.
The thing is, monetarists have been predicting Japan's hyperinflation for the last 15 years and counting - in their limited 'everything is money' world view they just cannot fathom how an expanding monetary base can reduce yields - they don't understand nor model ZIRP and its effects properly, so the only rational explanation they can come up with is that "hyperinflation is just around the corner!!" or "this is a global conspiracy!!".
The planet just does not care about such idiotic arguments and keeps rotating.
He said its a disaster WAITING TO HAPPEN, moron...
That's my point: according to him we can be in one of two states: either 'in a disaster' (high interest rates, like Ireland or Portugal), or 'disaster waiting to happen' (low interest rates, Japan).
That's really convenient if you want to use negatives terms only, regardless of how much the actual yield is! :-)