4/24/2013 7:45 PM ET|
Has the next crisis begun?
The Bank of Japan's latest economy-saving efforts seem likely to trigger another Asian currency crunch. And that, along with a weakening US economy, will blindside a lot of investors.
This is a befuddling time for investors. The economic data have been consistently disappointing. Growth and job creation are stalling again. Commodities, especially copper, are warning of a serious global slump. Corporate profit margins have dropped back to 2010 levels. And in a few weeks, Washington will be embroiled in another budget battle as the Treasury once again hits its debt ceiling.
Yet Wall Street has barely noticed.
The Russell 2000 Small Cap Index (RUT.X) is just 3.1% off of its recent high. The Dow Jones Industrial Average ($INDU) is down just 1.2% from recent all-time highs. Hope and enthusiasm are feeding on themselves as a self-reinforcing cycle of greed replaces careful consideration of fundamentals. Just as it did in 2000, when dot-com mania captivated investors. Just as it did in 2007, when housing seemed so bulletproof.
But the reality on the ground is changing, proving cheap money from central banks cannot solve the problems that ail us. Key industry groups have already rolled over. And soon, investor sentiment will break -- unleashing a long-postponed wave of selling pressure.
The real wild card that could set this wave off is something nobody is talking about: the specter of a new currency crisis in Asia.
A singular motive
It's worth remembering that the market's recent surge has been driven, almost exclusively, by the Bank of Japan's decision last month to double its monetary base over the next two years, in an effort to restore some vigor to a deeply indebted, deflation-plagued Japanese economy.
This extreme monetary policy easing -- going all-in on the same strategy being used by the Federal Reserve, the Bank of England, and, to a lesser extent, the European Central Bank -- has crushed the Japanese yen and made it attractive as a funding currency for hedge fund "carry trades." Carry trades are simply two-sided trades. First, you sell yen "short" in the futures market. Then, with the cash raised, you buy things like Spanish or Italian bonds (denominated in euros) or U.S. stocks (denominated in dollars). The trade pays when the yen falls, the assets you bought rise, or the currencies your assets are denominated in rise against the yen.
Thus, the U.S. stock market has moved, tick-for-tick, with the yen-dollar and yen-euro exchange rates over the past few weeks as hedge funds buy and sell stocks based on currency fluctuations.
This is the situation we're in: It doesn't matter that Dow heavyweight McDonald's (MCD) posted its first year-over-year sales decline in a decade or that IBM (IBM) posted its worst quarterly result in eight years or that Caterpillar (CAT) posted its weakest quarter of operating cash flow since early 2010. All that matters is that the yen continues to weaken against the dollar and the euro in order to keep the carry trade alive.
If only it were that easy.
Japan's endgame isn't pretty. Let's not sugarcoat it: The BOJ's efforts are a last-ditch Hail Mary attempt.
Japan's ratio of debt to gross domestic product stands at 245%, the highest in the developed world and more than twice the size of U.S. relative indebtedness. And like America, Japan's fiscal woes are being fueled mainly by an aging population and the welfare entitlements promised to seniors.
The country is already in fiscal quicksand. Tax revenues currently don't even cover the government's required expenditures on social security programs, education and debt service. And that's with 10-year government bond yields at just 0.59%.
Now, what happens if the BOJ achieves its target of boosting inflation to 2%? Bond yields and interest expense would more than quadruple, effectively bankrupting Japan and forcing the BOJ to monetize government debt outright. The result would be a rout in the yen and turbulence in the foreign exchange markets.
But it would be great news for carry-trade hedge funds, right? Possibly.
Yet this ignores an important dynamic. As the Dow has surged to new highs, Chinese stocks have been crushed as China's currency, the renminbi, has soared relative to the dollar. This damages China's export competitiveness, which is critical to Chinese companies. The iShares FTSE China 25 (FXI) exchange-traded fund is down 14% from its January high. South Korea has also been hit, with the iSharesSouth Korea Capped Index (EWY) down 14% from its January high.
China's Flash PMI manufacturing activity report fell to 50.5 in April versus the 51.5 expected, with the new-export-orders subcomponent falling to 48.6 versus 50.5 -- indicating month-over-month contraction. This slowdown in China is real. It's growing. And it's happening to an area that, not too long ago, was expected to lift the world economy out of its funk.
This has Société Générale strategist Albert Edwards concerned that we could be looking at another 1997-style Asian currency crisis, this time focused on China. A slowdown in exports and a strengthening renminbi have caused growth in China's foreign exchange reserves to stall, sucking liquidity out of a country that has grown increasingly dependent on credit-fueled infrastructure projects and housing development.
Growth in Capital Economics' China Activity Proxy -- which uses indicators such as passenger transport volumes and trade volumes to track Chinese growth without relying on manipulated official GDP numbers -- has already plunged to levels not seen since the depths of the 2008 financial crisis. The decline is being driven by a fall in construction activity and a rise in developers' inventories -- both credit-dependent areas.
Already, there are signs foreign investors are pulling cash out of China as growth slows, building new factories become less desirable and the housing bubble there prepares to burst. As a result, the country ran its first balance-of-payments deficit since 1988 last year -- an accounting concept that indicates wealth is beginning to leave the Middle Kingdom for the first time since the Reagan administration.
All of this risks throwing many of the dynamics that have supported the global economy over the past decade-and-a-half into reverse -- with unknowable social and political consequences for China. The other big question? With China out, the eurozone still a mess and Japan scraping the bottom, can the U.S. economy grow enough keep the world out of a new recession?
I don't think it can. Not with taxes rising. Not with new health care regulations. Not with job growth stalling. Not with consumers as tapped out as they are.
VIDEO ON MSN MONEY
Really? So we can blame the seniors for all this? Social Security is tantamount to Welfare?
Social Security is insolvent because of the politicians raiding it's coffers, which were stuffed by these very seniors now being equated with welfare recipients. When I reach retirement age, I will receive a mere fraction (if anything at all) of what I paid in. Welfare recipients on the other hand contribute nothing to either support themselves, their children or any other American.
Let's place the blame where it belongs, on these useless politicians who have pillaged and robbed the American tax paying citizens of their hard earned money.
I believe Tony puts up some good information to back what he is saying.Our elected officials just want us to think it is one big ray of sunshine out there.We are going to see the truth very soon and that is what a lot of people are worried about.
"Social Security, let’s lay it to rest once in for all…Social Security has nothing to do with the deficit. Social Security is totally funded by the payroll tax levied on employer and employee. If you reduce the outgo of Social Security, that money would not go into the general fund to reduce the deficit. It would go into the Social Security trust fund. So Social Security has nothing to do with balancing the budget or erasing or lowering the deficit." - end quote
Yes, Ronald Reagan said this in 1984
His rationale makes sense for a major downturn, however, the herd mentality is viewing this as a sustained bull market. It's feeding off perception....not financial reality.
Anthony, my money and I are with you on this one.
The facts are simple both Democrats and Republicans have gotten us into this mess.
Fact, Clinton and the Democrats and Republicans pushed for the changes to the Banking Regulations in 1998. These changes are what allowed the banks to get "Too Big To Fail". Clinton weakened the SEC so that large companies did not have proper over site regarding how the books of these business were being kept. Do the names Enron and WorldCom ring any bells? Clinton was the President that required the Banks and FANNY and FREDDIE to give loans with zero down to people who could not afford to make the payments. Clinton was too busy sticking the interns to know what he was really doing.
Fact Bush was never a great leader of people. He did not understand what was happening with economy and therefore could not take steps to change anything. Lets not forget that the Democrats controlled both the house and senate and would not allow any changes to the Clinton Plan.
Fact Obama makes Bush look like a great leader of people. He can't bring both parties together and work out a deal on any topic.. The ability to get both parties to come together and reach an agreement is the one thing that made both Reagan and Clinton successful. We are 5 years into the Obama Plan and things have not improved.
The time has come for all voters to take off their blinders and start holding all of government accountable for their actions.
I haven't agreed with much of what Anthony has written in the past but I'm in total agreement with his opinions here with this article. The one important point that Anthony failed to mention and I think actually illustrates why his opinion is spot one...is what has actually happened in the precious metal markets in the last month. The recent manipulative takedown of the PM's in overnight trading tells you the Central Banks are running scared. You are seeing Countries starting to ask for physical possession of their metal..and to me that is the sign BIG trouble is on the horizon. Anthony's recommendation to nip at the beaten-down precious metals is a great piece of advise, but don't expect to realistically pay under 20% of spot...and if you buy on Ebay it will be closer to 40% over spot. Like I said..I haven't agreed with half of what Anthony has written in the past, but he's on target here!
My strategy has been to try to be balanced: reduce debt--mainly mortgage, stockpile some cash & by modest amounts of gold and silver (rounds, bars). Modest investments.
The long term goal (ten years) is going off the grid completely in terms of food, water & energy.
Doing a lot with food now, have this so far:
fruit trees (7 jujube, 6 fig, 5 pear, 4 cherry, 4 apple, 2 plum, 2 peach, 2 quince, 2 persimmon, 2 medlar, 2 pomegranate)
fruit bushes (34 blueberry, 7 aronia, 5 goji, 3 triofoliate orange, 2 winterberry, 1 hawthorn)
fruit vines (7 grape-red&green&purple, 5 kiwi, 4 hops, 2 schisandra)
hedge & small fruit: (ludicrous amounts of strawberries-mainly sequoia but some tarpan, Rosa rugosa, cranberries, loganberries, boysenberries, blackberries, wineberries, also various raspberries-red,yellow,orange,black, bearberry, teaberry)
nuts (2 pecans, 5 hazelnuts & unknown number of native hazelnuts and black walnut trees)
herbs & spices (2 Japanese pepper bush, 2 Sechuan pepper bush, oregano, yarrow, western mugwort, wormwood, common mugwort, spearmint, peppermint, chocolate mint, orange mint, apple mint, oswego mint, catnip, sweet woodruff)
perennial vegetables & root crops (sunchokes, asparagus, rhubarb, horseradish, cattail)
annual crops (rice, potatoes)
Adding more this year (like perennial edible legumes & climbing perennial spinach). All on about an acre--about another acre is woods, for firewood. I figure if you don't have any energy or grocery bills & your mortgage is paid off, that will only leave potential medical bills--somewhat reduced by being in shape by doing so much physical work. Of course this requires sacrifices, such as not watching the idiot box (TV).
"... And they shall be led by the flawed Excel spreadsheet concocted by two Harvard professors... and with it, they shall do great irreparable harm... And much cocaine shall be snorted by this trash, as they commit the greatest nation on Earth to be forever crippled by an economic crash like no other..."
We will be pulling back all of our troops from everywhere on Earth and redeploying right here. The War on Terror was never further away than New York City and Dallas... who the Hell reads a spreadsheet and never double-checks the data before mass-terminating MILLIONS of actually skilled experienced people, and hands those jobs and incomes to psychopaths. You will be slaughtered because you DID DO THIS. Surrender now and except the lowest, you were never the highest... just high.
True Jerry Mac, the low rates are counter productive at this point. Killing savers from bank and CD rates that lose you money through inflation. Total money being loaned out is declining. Most of the money printed is resting with the banks and financial institutions where it goes first. The biggest inequality by far for the richest of the rich, much more so than any tax burden. That's why we haven't had big inflation, YET, because it hasn't reached the masses yet. Regulations are making them sit on it and only give loans to the sure bets.
There are only 2 advantages at this point to his printing...... propping up the markets and keeping national debt interest low. We owed less in debt interest last year than we did in 2007, while we had 60 or 70% higher debt last year. If we paid Clinton rates we would be paying 3 times what we pay now. If we paid what Reagan had as rates we would be well past a trillion a year in interest right now, approaching a trillion and a half. It is a sure thing he can't print forever so what happens when it stops and our debt reaches 20 trillion soon? This trillion a year in deficit spending and a trillion a year in money printing out of thin air is going to blow up at some point. Debt bubble and dollar bubble coming to a theater near you.
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Equity indices were pressured from the get-go after several heavyweights disappointed the market with their earnings and/or guidance, which led to some broader profit-taking. After ... More
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