I am sure that you’ve heard the old proverb that a butterfly flapping its wings in Japan can through cause and effect cause a tsunami elsewhere in the world. Over the last 6 trading days, the Nikkei average is down almost 20%. Are there, will there be any global ramifications to this? And why has it happened? As for the “why” part, their interest rates have risen roughly 3 fold (though still under 1%) as a result of Abenomics hyperinflation. Their bond market (2nd biggest in the world) has come unglued and is no longer stable.
As for “Will there be any global ramifications?” there inevitably has to be. Japan for years was the fertile planting ground for the “carry trade.” The carry trade, where you borrowed money at 1/2% or less, and invest in whatever, and reap the yield over this 1/2% cost to carry. It worked. It worked and it worked and it worked. This Yen trade can be cited as the fuel for all sorts of rising asset prices and of course the bubbles that were created.
So, will there be any ramifications? If this “trade” truly starts to unwind then all sorts of asset pricings everywhere will blow up. And since everything is “bet on,” hypothecated, interconnected and derivative instruments placed upon…a collapse in the Nikkei will drag everything with it. There are trillions of dollars in bets on Japanese Yen, bonds and stocks. Extreme volatility will create both winners and losers. The problem is that with such extreme volatility, the winners will be huge and the losers devastated. The question then becomes “Can the losers perform and actually payout to the winners?”
The answer to this is NO, they cannot. But how do I know this? Because all it will take is one loser who is over levered and can’t pay; this will cause a break in the chain and everyone will then start grabbing for “collateral.” “Collateral,” you know…that thing that Europe and the BIS spoke so much about last week? Did you think that the “odd timing” of both Europe and the BIS commenting about collateral was a coincidence? And the BIS coming out with its “simple plan” to re-collateralize insolvent U.S. banks…another coincidence?
How about the new disclaimer at the COMEX website? Why now? Why while all this other “noise” (it’s not if you are really listening and want to hear what they are saying) is being bandied about? The COMEX now says, “We can’t be held liable for anything, the numbers may or may not be real, you pay your money you takes your chances.” This “noise” in reality will be looked at (and actually pointed to) and you will hear “We tried to warn you!” If you have been actually listening to what they have been saying all along, the whole thing is unsustainable. I am not talking about what the mainstream tells you because they walk out clown after clown to keep you in place. If you listen to the actual words that come out OFFICIALLY, they are telling you that game over is being prepared and the plug will be pulled. If you didn’t listen, hear or understand…oh well then…that’s YOUR fault!