Why markets are shaking

Headlines pin recent volatility on fears of less stimulus from the Federal Reserve. But the deeper driver is what was responsible for the 1997 Asian financial crisis.

By Anthony Mirhaydari Jun 12, 2013 2:12PM

Japan copyright Stockbyte, SuperStockIf you read the papers or scan the headlines, folks are dismissing recent market volatility as a tepid reaction to the potential for the Federal Reserve to cut back on its $85 billion-a-month QE3 stimulus at its policy meeting next week. As if $10 billion or $20 billion less in liquidity dumping each month, when the banks are sitting on $1.8 trillion in excess reserves, is going to make a bit of difference.

 

The real reason is something I previewed in a recent column: Japan's efforts to destroy the yen in a last-gasp attempt to revitalize its stagnant economy. There were unintended consequences as investors realize that, in economics as in life, there is no such thing as a free lunch.

 

The Japanese didn't think things through, didn't account for the fact that higher inflation (their goal) would rattle its bond market (threatening insolvency if interest rates rise too much) before providing any lift to its deflation-addled economy. As a result, Japan's stock market recently flirted with bear market territory as the government risks losing control.

 

The yen's rapid decline and subsequent reversal has put massive pressure on emerging market economies. Stocks in these areas have been shaken. As have currency rates, forcing Brazil, Turkey, India, and Indonesia to all take direct action recently to control the situation. Stock markets in Thailand and the Philippines just suffered their worst one-day losses on Tuesday since 2011.

 

 

My recommendation to bet against the area via the Direxion 3x Inverse Emerging Markets (EDZ) is up 23% since May 23 as a result.

 

That's because, as I warned in the column, Japan was essentially stealing export competitiveness from its neighbors. The world's major economies, desperate to keep markets calm and keep alive the promise that cheap money solves everything, looked the other way and didn't reprimand Tokyo for clear and blatant currency manipulation in pursuit of mercantilist policies.

 

That's already starting to drag down emerging economies. The Philippines suffered a 7% drop in exports in April. Industrial production in India came in below expectations. And over the weekend, China reported poor retail sales and industrial production numbers.

 

Even Japan's economy has yet to see a benefit from its currency destruction. Machine orders fell nearly 9%, missing consensus estimates. Its trade deficit widened as energy and commodity import prices rose faster than exports gained.

 

 

In response to the ongoing weakness, I'm adding a short against CEMEX (CX) to my Edge Letter Sample Portfolio. Material stocks like CX are leading the latest phase of market weakness.

 

 

Disclosure: Anthony has recommended CX short and EDZ long to his clients.

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​om​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.



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35Comments
Jun 12, 2013 3:22PM
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Lets face reality.  The Dow would be at only about 10,000 if it only relied on the listed stocks thereunder and the economics thereof.  The propping up of the market by the Fed should never have been done in the first place.  A significant number of the listed companies are only making a profit because of one -time events, laying people off and any accounting loophole they can find.  It is very difficult to make a profit when your revenues have been declining for a long time.  The "evrything is getting better" crowd is in for a major letdown very soon.
Jun 12, 2013 4:43PM
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The "world's major economies, desperate to keep markets calm and keep alive the promise that cheap money solves everything,"  Isn't that what this article is trying to do, Mr. M.?  The Japanese sealed their own fate when they tried Keynesian economics in the  1990s (leading to a quarter of a century malaise).  We sealed ours when we followed suit. in 2009.
Jun 12, 2013 3:43PM
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Anthony, I never read your article where you recommended to bet against the area via the Direxion 3X Inverse Emerging Markets. All I've read from you for the past year and a half is how the US stock market is going to take a dump any day now. If I had listened to you from the beginning, I would've sat around and missed out on 20% growth and possibly lost a lot more on funds shorting the market. Stop picking and choosing (or probably flat-out making up in this case) which advice you want to take credit for.
Jun 12, 2013 4:47PM
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Let the big boys eat it this time!!!!  Anthony is a good economist his articles make since. America needs to be a tax haven. There is 5 trillion dollars in oversea money we need to get back into America. That is 2.75 times what the fed is holding. Move jobs and money back to America, take taxes off business. The fed needs to keep the real inflation rate between a deflationary 1% and 0% inflation, no more real inflation. Start paying off the federal debt. Final  consumption sale tax only - no person or item exempt. Then give the American people the direct right to decide what they buy thru government (bypass congress). The value of the dollar would rise unbelievably. Money would move to America because money would earn real interest, not that inflation adjusted crap. A lot of jobs would move to America, our consumer purchasing power and or standard of living would improve. More jobs more people to pay taxes. In 15 years we could have a 40 to 50% improvement in our standard of living. We would have 2 to 3 years of tough times, but we could get it done.
Jun 12, 2013 5:35PM
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hey IQ168,

 

You nailed Keynesian non-sense.  Krugman said about the stimulus "it does not matter what we spend the money on"!  That is a somewhat logical conclusion to be drawn from Keynesian Economics if you are an idiot.  But hey that conclusion, however, twisted, fits the Progressive-Big-government agenda so run with it.  Ok, so all we need to do is spend 1 trillion dollars hiring millions of people to dig holes in the ground and millions more to fill them back up!  Gee problem solved, economic growth, and wealth creation will be ours!  Now, most people would say that is non-sense.  But hay That is what Krugman and many supporters of Keynesian Economic SAY.  You say, well Krugman did not mean that.  Well, what he actually did say was is that "we could spend the money preparing for an alien invasion which will never come'!!!  HE SAID it!  That is no different than the digging hole senerio, no economic growth, no wealth created, just a pile of debt.  These people believe this non-sense and govern that way.

 

One of the main problems with applying Keynesian Economics in this manner is that for spending to be stimulitive (if, and a big if, spending is ever really stimulitive, which I doubt) AND make Economic sense; the money has to be spent on useful, productive, wealth producing stuff.  Roads and Bridges MIGHT qualify for this, but only a tiny fraction of the stimulus was spent this way.  And if those roads and bridges go "nowhere" .... Well .....  I challenge anyone to come up with ONE TRILLION dollars in such productive expenditures in any 12 month period.  Therefore, applying Keynesian economics this way guarantees a waste and actually a drag to the nation, since the money is borrowed and we get to pay for the waste in interests FOREVER.

 

What Keynes actually said about government spending being stimulative, is that since people save say 5 cent of every dollar and spend only 95 cents it is less stimulitive than if the government taxed and took the dollar from the individual and spend 100 cents.  100 cents being greater economic activity than 95 cents.  Secondly, Keynes suggested that we borrow money in bad times and RUN SURPLUSES in boom times.  See a problem here?  Progressives are quick to talk about the spending part, but have you EVER heard one talk about NOT SPENDING in boom times?  Of course not!

Jun 12, 2013 5:57PM
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Do know something about the Japan deal with the US in treasuries.  Since, 1986 or so they bought everything up and this continued for about 20 years.  They hit a wall and tried to deflate.  They still have a ton of US treasuries and want out.  They cannot go anywhere with this and they know and we cannot pick them up as we have nothing to pick them up with.  Broke is broke.  Time to pay the piper for all. 

Jun 12, 2013 5:59PM
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Better fire up the $$$$$$$$$$$$   PRESSES
Jun 12, 2013 6:14PM
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(In economics as in life there is no free lunch)  Some day when people in this country wake up and stop feeding the freeloaders that statement may ring true. Until then the markets are going to be shored up with easy money until it runs out. 
Jun 12, 2013 10:06PM
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You must be drinking the Kool-aid again.  I think you are not even close to reality here with your remarks.
Jun 12, 2013 4:22PM
Jun 12, 2013 6:28PM
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tic toc tic toc tic toc, hmmm wonder how much more of this stimuli the idiotic fed is going to pump into an economy that's in ZERO recovery without it??? hmmmm, eventually the well of phony money printing will run dry then what????? blame Bush, no, he's been outta the picture for 5yrs now, that's not gonna work anymore, .......I'm sure some blame game rhetoric will surface but....

and obviously this idiotic Stalinist regime doesn't know or care what it's doing to get the economy going but I'll tell you filthy democraps what to do:

 

get the hell outta the way of the free market system that what you do!!!!!

hmmmm, what else..... let's face it people, the idiots that voted for this regime not once but TWICE are responsible for this utter and complete disaster of a economy, the Stalinist machine in overdrive with the IRS targeting conservative groups, the NSA data mining not for , terrorist activity bullshiiiiiiiiiiit, didn't that pig messiah say the war on terror is over???? so what's the META data for exactly?? I'll tell you but shhhhhhhhhhh! it's a secret between me and you here it is:

 

that META data is just another extension of the tyrannical IRS scam, deliberately targeting, on purpose conservative groups, now this META data is going to be used to target any group, media or otherwise to get info on Republican/Independent's and get this: even the liberal media like the AP to get dirt on anyone in case they should stray from the osama agenda, or any such group that opposes that piece of shiiiit vermin that's in the white house, simple as that, and those of you that voted for that pig may you all burn in the deepest pit in hell. enjoy

Jun 13, 2013 3:55AM
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America sealed it's FATE and the FATE of other countries long before Japan was on the Verge of Monetary Collapse. When the Global Big Banks over a decade ago thought it was clever to lever UP their Balance Sheets via Derivatives this and Derivatives that,  the FATE of the Global Economies were effectively Doomed. Aka now all the Global Feds buying Assets, including their own Treasury Bonds. If Derivatives were never cooked up in the math laboratory of crooked Big Banks, no Great Recession and no continual Global Feds Printing Presses gone Mad. By some estimates, the Global Derivative Markets range anywhere from 500 Trillion to over 750 Trillion Dollars. And it's mostly Bogus mathematical junk devised to scam investors. That's what 100% sealed the FATE of not only the United States, but Japan and the Euro-Zone as well.
Jun 17, 2013 8:01PM
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was he bullish a couple of weeks ago? He changed positions so much I lost track of his stance.
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Japan's economy has finally collasped

 

Europe's economy is soon to follow

 

USA's economy will collapse before Sept 13 2015

 

Pretty much the western economic system has become a failure and is doomed to the hyper inflation that Germany saw before W.W. II

Jun 12, 2013 2:28PM
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Rushing to sign up to your 'newsletter'.
The check is in the mail.
Love the charts.

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