It all makes sense now: Say you're a company specialized in "making money". You've got your investors assets, and since your business is good, you decide to leverage the returns through some debt. So, you take your dollars, euros, whatever, and take a loan - the cheaper, the better. And noones cheaper than the BoJ, so let's borrow (i.e. short) a couple of billions of yen. Hey, this way, you can make more profit on the same net assets, right? But what shall you invest the money into?what about stocks? Or commodities? Or Bonds? Real estate in Hong Kong, anyone? What about T-Bonds? As long as the yield you receive is higher than the one you pay, you make money. And if your leverage is, say, 10:1, you make more money. And if your net8 capital is, say, 1 bln $, you make some freakin money. All you need is a profit margin - the yield you pay must be lower than the interest you receive. Soooooo..... If your US-stock portfolio stops rising, while your yen debts appreciate (either through higher yields or appreciation towards the $), you're in trouble. And if your stock portfolio decreases, while your debts increase (=yen continues getting stronger towards the $), you're in some big trouble. To cut a long story short: USDJPY is approaching the extremely important 0.85 level, and the BoJ already announced, that they're gonna defend it. Like the Brits in the 90s. If 85 breaks, we're in some major trouble, cause the yen is the root of all evil - it wasn't Greenspan. It's the carry traders. USDJPY Vs. DJIA correllatipn astounded me throughout the past days. Interesting times ahead...
Please explain your points as they seem to be inconsistent. USD/JPY has been declining which means that people are NOT borrowing JPY but rather covering their debt in yen. Is this your point? In addition JPY and Pound are not in the same case. Britain defended from weakness, while Japan wants from to "defend" from strength (which is NOT defense).
That's exactly my point. If your debts are yen-denominated, and your assets in dollars, rising debts may force you to liquidate your assets, which adds more fuel into the fire. A spiral of a dramatically strengthening yen and declining asset prices (stocks, commodities, whatever). Might get out of control quickly. This could result in the mother of all margin calls: on a global scale.
Clear and present danger, guys. I'm not saying usdjpy is gonna break the 0.85 level - but it could. You can make money on both sides: if it holds - long equities. If it breaks - short equities. However, if you're a big hedge fund, and yen strengthens, you may be forced to liquidate your stock portfolio. And if your stock portfolio weakens, you may be forced to repay your yen debts. Catch 22.
Why would these funds not simply shift the borrowing to USD, by shorting USD/JPY? Would that not solve the problem, and if yes the effect on assets would not there?
If this just started making sense to you, you should stop throwing around your matter-of-fact comments and advice. This is called the yen-carry trade, and the entire world knows about it...welcome to the club Mr. Watanabe. Great observation, but curb your freshly-acquired market loins, you're just stating the obvious here. It ain't THAT easy, partner.
Outside of JGB's I don't see the Yen as a significant positive or negative correlator to other markets when compared to other instruments like Gold or Crude Oil. In terms of other currencies, I find the Swiss Franc, the Euro, the Remnibi, and natural resources names like the Aussie Dollar or the S.A. Rand to be more relevant. For about thiry years the Yen was the shit, but for the past couple of years I personally view it as far less relevant than it used to be - especially as it relates to STIRs.
-------------------------- (actual Yen holdings in spades in real life non-trading scenario for 3+ years continuous now. Currently and for the last 3+ years hold only 3 currencies, $, Yen and Thai Baht. The Baht is currently the strongest in the world and has been so since 1998, but my holdings are 40% USD, 40% Yen, 20% Baht) posted 11-3-09 when brand new at ET sorry for the lame answer. Here's what I've done, am doing ..... all simple stuff ... premise is: Cash is champion for the first time in 80 years. A total drying up of DEMAND is the environment for years any investment real estate ... adios long time ago (2006) business sold off. Will not start a new one till Depression ends. No debts for the last several years .. only a pot to _ in but its free and clear. Ditto for everythng else I have, autos (2) etc., same, same. All monies owed to me have been called in and collected. Closed BAC & other accounts at large banks. Expect all to go under. Cash stashed in multiple locations equal to 3-yr supply of emergency funds that require no access permission from any clowns. NO to expensive purchases. All items of value that I don't think we need, have been dumped already. Credit cards - only 1 and requested the limit be dropped to 5k. Minimal gold coins, mostly Yen and $. If the latter has bottomed for sure, things can only get better. Just simple stuff ...... and of course as you know the USD did bottom. So what happens if USDJPY goes up or down? I don't give a fck because I have them both. The reason I have them both is because of my premise that they're both the sole beneficiaries of the 2007-2016 BEAR http://www.elitetrader.com/vb/showthread.php?s=&threadid=179613&highlight=Yen http://www.elitetrader.com/vb/showthread.php?s=&threadid=179167&highlight=DX
posted 5-28-2010 .... here ... http://www.elitetrader.com/vb/showthread.php?s=&threadid=168825 Reminders refer to my Forex and TA threads for details. http://www.elitetrader.com/vb/showt...threadid=179613 http://www.elitetrader.com/vb/showt...threadid=179167 ---------------------------------- She saw her husband go into the motel with another girl. That's PRICE. Months and months of agonizing events and news followed. But PRICE in one glance told the outcome would be deep shit. Tha's all one needs to know, the details of the shit are irrelevant. Therefore all the crap on CNBC is totally bollox. PRICE foretold already. My Vix monthly double-bottom or cup with handle EMPIRE busting neckline breakout in 2008 is now ready for take-off. The Daily as you already know has blasted out the gate already like a fckin rocket. Also note the comments on BEAR having named HIS beneficiaries in leg #1 down, namely the $ and Yen. If I'm right that the next leg down is now underway, then its clear from the rampage Yen is causing that BEAR hasn't changed a thing. Get your cash out of the large banks, hold $ and Yen, dump all others. Keep at least a 2-yr supply of hard cash on hand and defo not in any safe deposit box. In addition to the Vix, my fav indicator I spoke of in the TA thread has also broken out. (Moodys BAA Corp. bond yield minus 30-yr T-Bond yield). If this breakout holds, it is serious because it goes right to the heart of BEAR w.r.t. RISK. The breakout occurred on May 6, only a few days after the Dow april 26 top. And now the indicator has broken out above the 200-day m.a. with the 50 about to golden cross. Its bad enough I gotta listen to ET's stubborn baron but be prepared for other barons telling you the bottom is in bla bla like these other barons did 80 years ago. http://bigpicture.typepad.com/writi...-vs-2008-1.html