Japan’s stock market got crushed over 6% last night and I expected to see some further weakness in our stock market this morning.  As I left this morning to go riding the futures were down but not by much…when I got back after the open the Dow was UP!?!  Japan is the world’s 2nd or 3rd largest economy and the 2nd largest equity market by market capitalization.  I mention this because “they matter.”  They “matter” to everything all over the world.  I would also like to mention that Japan is more interconnected and “Ponzied” than any other system in the world.  Their banks and insurance companies have “cross ownership” of each other and there are “pools” very similar to those back in the 1920’s in the U.S., and we all know how that worked out.

Another minor detail about Japan is that their banks/banking system is THE largest in the world.  They dominate spots in the “Top 20” banks by size globally.  They DO matter and no large bank in Japan can go down without taking others with it and …thus the rest of the world.  Deny or pooh pooh this statement all you’d like (just like our market is doing today.) When all is said and done, Japan’s interconnected financial Ponzi scheme will come down like all others before it and very possibly could be the spark for the entire financial system coming down.

Will they be the spark that takes it all down?  Who knows, but they do have the capacity to do it.  Will they fall because of a forest fire somewhere else?  Again, who knows…what I do know is that they have gone “all in” to prevent this from happening yet it’s not working.  Their market is now down well over 20% in roughly 3 weeks, were they a good “value” 3 weeks ago?  Are they a good “value” now?  And what of all the interconnected derivatives in Japan?  If you bet on “black” and “red” (pun intended) comes up, what then?  What if you bet on “red” but the institution on the other side of the trade goes belly up?  What if your “win” that doesn’t get paid out that was a hedge against a position that lost?  Looking at their bond market, 10 yr. yields pushed .9% last night which is more than a triple off of the lows.

To break this whole thing down in a nutshell, the world is overleveraged and needs to “de” leverage.  But guess what?  Since the ’08-’09 disaster we have done the opposite.  Japan plans to “print” two trillion over 2 years fly’s in the face of what is needed.  In fact, if you go back a week or two, Europe and the IMF threw the towel in and said that “austerity” must be postponed.  And why is this?  Why postpone something that everyone including Mother Nature had agreed was necessary?  Because they can’t do it that’s why!

“They can’t do it” …also pertains to stopping or even slowing QE here in the U.S. They can’t do it because what is happening in Japan right now will arrive here.  Actually no matter what they do, Japan’s current action will arrive here.  Sooner or later, with more QE or with less, Japan has no options available nor does the U.S. or Europe.  But for now at least… do not to worry.  It’s all under control and our stock market is up, the banks are open and all is well…until it isn’t.