Will The Japanese Earthquake Be The Straw That Breaks Europe's Back?

Tyler Durden's picture

Two months ago many were scratching their heads when Japan announced it was buying Eurozone bonds.  After all - why would Europe want to have a marginal buyer (or as the case may be seller) of its debt be the country that is known by all to be the most indebted entity in the world? Of course, it became promptly clear that it was not the Japanese government doing the buying, but mostly its financial companies, with an emphasis on its insurance and reinsurance companies. Fast forward to today when Japanese insurance companies are getting pummeled in local trading on concerns the payoffs to the decimated Japanese infrastructure will be unprecedented. So what will happen? Why a scramble for liquidity of course, just like we saw back in September 2008, when cash stricken companies sold all their liquid assets first, resulting in a toxic loop of self-fulfilling prophecy selling which almost tobbled the $25 trillion shadow banking system. And what will said Japanese insurance companies sell first? Why the very same Eurozone bonds they acquired with so much pomp and circumstance, by the minions of the insolvent Eurozone, back in January of course. Furthermore, now that Japan will have no choice but to launch a mini round of Quantitative Easing and flood the market with JGBs, there will be a dramatic spike in supply for sovereign paper, which of course means yields across the board will rise.

Which begs the question: if an earthquake flips its wings in Japan, does the Eurozone go bankrupt, especially in the month when its most insolvent countries face billions in debt rollover requirements, tens of billions in maturity funding needs, even more in deficit funding requirements... and no cash?

h/t Geoffrey Batt

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idea_hamster's picture

Well, it was the Kobe quake that indirectly blew up Barings.

Leeson was financing his 88888 Account by shorting straddles on the Nikkei, and when Kobe hit, that was that....

Ray1968's picture

Quack quack said the Black Swan...

Didn't see this one coming.

Michael's picture

The BOJ will step aside in 7 days.

The Japanese people will not let this crisis go to waste. They will use it as an excuse, and justifiably so, to sell US treasuries to finance reconstruction an eventually default on it's 200% national debt.

Make preparations for this eventuality.

This is an example and warning to the USA when say California or other place has a natural disaster of the magnitude and we can't finance reconstruction. This is a major national security issue that needs to be dealt with.

Bicycle Repairman's picture

"This is a major national security issue that needs to be dealt with."

Damn.  You are right.  Send in the army!!

jmc8888's picture

Great movie with Ewan McGregor on that. 'Rogue Trader'

props2009's picture

That funny. really. By that logic Tyler, US should be shut by the end of year as Japan will have to dump all its treasuries too?


idea_hamster's picture

Actually that point was made in a front-page guest post a few weeks (months?) ago.  That idea was more general, that Japan's demographic issue was bearish for Japan but even worse for the US, where our markets have become accustomed to a steady outflow of capital from Japan.

The general idea of a capital flow reversal causing upheaval in the US markets can be extended to this particular situation, albeit in a shorter-term context.

Besides, with either QE3 or NotQE3 on the horizon, what made you thing the US wouldn't be shut by the end of the year, anyway?  ;-)

superman07's picture

I didnt read anything there about Japanese Insurance companies being net buyers or sellers of UST over the last 6 mo.Do you not understand the coorelation with liquidity concers in the wake of insurance damages, and what they will likely sell first?

Did you read the piece, or just crap on yourself?

Try again.

jus_lite_reading's picture

No need to worry. This is a green shoot. Think of all the infrastucture and products that will need to be bought. These major events are good for the markets as you can see the markets have rallied and are UP! BEnron is very happy this morning. The focus is off of him AND the markets can finally rally.

Oh, and the earth just EFFFFING SHIFTED ITS AXIS 4 INCHES!!!!! Another Green SHOOT!




curbyourrisk's picture

My company is probably already thinking of ways to increase our construction machinery sales into Japan.

bigking12345's picture

Black swan sunami! Great name for a band or global destruction.

Arch Duke Ferdinand's picture

Safest quadrant on our planet...

Canada's four Western Provinces w/ a plethora of natural resources and only 12.5 million citizens...


jus_lite_reading's picture

Does anyone think the Super Full Moon has anything to do with this?

Ahmeexnal's picture

China already has plans for a takeover of Canada's four Western Provinces.


steve2241's picture

A Tsunami of Sushi, playing your favorite Techno dance music, Wednesday's and Friday's. Also, streamed on zerohedge.com.

max2205's picture

Today will mark the end of Japans Deflation Era.....Rebuilding Infrastructure will make Japan the most modern economy

jesse livermoore's picture

the entire country was not leveled  just one or two cities got flooded. lets not get carried away..this will not  mark the end of deflation.  did katrina hiting new orleans jump start the infistructure of the US....?   no

tonyw's picture

Plus as well they already have a pretty good infrastructure, bullet trains, they've built bridges to everywhere, got nuke power....


apberusdisvet's picture

Black swan contagion?

AccreditedEYE's picture

Oh... you mean Volatility isn't just something we short into oblivion without risk of loss? :)

Id fight Gandhi's picture

Black swans are something that's right in front of you and you realize it after it all falls apart.

This is a disaster and unexpected.

How many global issues can be up in the air? Why should stocks surge anymore?

Japan is going into recession for sure now

johny2's picture

It looks like there is a whole flock of Black Swans flying around right now. 

bingaling's picture

We covered this a month or so ago I think we all came to the consensus to call it the aflockalypse.

johny2's picture

aparently it is good for stock markets....After the mankind is wiped out, the HFT robots will push the dow jones to the 36000

Ahmeexnal's picture


No, it was fully expected.  So is "the big one" that will hit California in a few days.

So is the one that will level Mexico City. The one that will decimate Lisbon. The one that will obliterate Berlin. The one that will bury Ankara.


Pseudo Anonym's picture

that will hit California in a few days

1) link please; 2) definition of "a few days"

cosmictrainwreck's picture

he's jivin' you (sort of). fact is, anything could happen any given day. fact is, most major faults are "due" or over-due". that's a fact. we just cross our fingers and go merrily on our ways..... WTF else ya gonna do?

cosmictrainwreck's picture

you forgot the New Madrid that will split USA in half & re-route the Mississippi. and the one in New York....

Larry Darrell's picture

Ben will print the money and backdoor it to the Eurozone banks so they can buy Eurozone country bonds.


Hell, maybe the Eurozone banks can even get in on the "flip that bond" action so American taxpayers can help recapitalize them too.


Nothing to see here.  Move along.

Cash_is_Trash's picture

Why isn't gold going to the fucking moon!?

Larry Darrell's picture

Because right now people are selling their "paper gold" in order to cover losses in their other paper products. 

ZEITGEIST's picture

the manipulation is either off the charts..or the idiot Hedge Funds are running to the so called safety of dollar and US Treasuries....these guys will blow themselves up sooner or later trying to pick up nickels on the trade..cant be any shorter term thinking than these guys.....

johnQpublic's picture

thats what i was thinking....


Pegasus Muse's picture

NAI out with a new piece today.  They've made some pretty good calls lately.  Comparative geniuses, really, compared to CNBC favorite BSer's Dennis "I'm short of gold" Fartman & Dougie "all my 2010 predictions were wrong" Kass.


March 11, 2011

U.S. Dollar Collapse Could Occur at Any Time


John McCloy's picture

If today is not a risk off day between the tsunami, yesterdays dma breach, elevated oil going into a weekend of unknowns in the Middle East I do not know what is.
Makes you question QE 3 if the Japanese are no longer buying Treasuries.

Larry Darrell's picture

QE3 is a done deal, just like QE4ever is already sealed.

It's just a question of whether or not they stack them up back to back or allow for some deflationary pain between issuances.

There will be QE regardless.

MachoMan's picture

If they want to avoid diminishing returns as much as possible, they'll stuff deflationary pain in between...

Apostle of Unknown's picture

so far, the tape suggests you don't know...

clones2's picture

$INDU breaking the 50 DMA this morning.

All 3 indices have broken that support...  This is playing out picture perfectly... After its top a couple weeks back - we got very choppy action right above support...  No a break below support...  I expect some more choppy action below these support levels before another leg down within the next couple weeks.

Interesting note - markets pressured this morning down around -.4% right now... bonds flat.  Not looking like much of a safe haven right now.   And silver getting nailed.   Everyone going to cash or what???

toros's picture

Everyone has debt, but no cash?  Where is all the cash that has been raised by all the debt?  In assests.  Assest liquidation is  coming and with it deflation.  Equities, PM, bonds all up for sale?

falak pema's picture

You forget the excess liquidity held by the world plutocrats, estimated at 80 trillion USD stuffed in tax haven accounts...That money has to travel...like Q's sovereign funds...all sunk in Italy et al. Half of that 80-100 trillion is corporate money on shadow banking investments via HF. Pulling that back into US economy would be the kicker that Obama has up his sleeve by a Homeland investment act...M. Gross must be watching his liquid pile of dough ....wondering which way to go. He's hoping a USD surge and Euro meltdown.

Bastiat's picture

The Japanese will sell some foreign assets, sure. The net effect will be more money printed out of thin air.  Increased demand for commodities required to rebuild. 

Oh regional Indian's picture

This is the event that will cause the Yen carry trade to snap. Back. Hard.

Because this is not even near over yet. + the Japanese were heavily invested in Oz and NZ, both hammered recently.

Japan on the edge, for sure.



wirtschaftswunder's picture

Still wondering how no Variable Annunity providers failed in 2008-09.

falak pema's picture

dollar and euro punching it out to see who goes down first. Looks like a Charlie Chaplin Tramp movie he made on a boxing match. If you ever saw it you wouldn't want to be in the place of the referee! A true classic that WB7 should re-animate for all of us in his wonderworld!

AccreditedEYE's picture

This is what happens when we live in the trailer park trash style that modern policy makers and economists have supported for decades. (read: living beyond means and having zero to negative net worth)Things work fine until you have unaccounted for massive problems... like a massive earth quake.

Did everyone see the big slug Larry Summers out saying that this could be a boost to Japanese GDP from rebuilding? What bull... I'm glad Fat Larry did the calculations of the loss of manpower due to an as of now unknown number of dead. (among a host of other issues that could crimp Japan aside for Debt to GDP ratio)