So The Yen Remains A Safe Haven: Really?

by: Ralph Shell

It looks like the market bears are not an endangered species. For months the bears supporters had been warning their day would come and markets again would tumble. The spark for this sell off seemed to be weakness in emerging markets and culminated with a devaluation in Argentina, plus distrust of the leaders of the Turkish government.

Yet the contagion is spreading. On Friday afternoon the US Dow was down over 250. The S&P 500 dropped below 1800, a level where the momentum players say the bull market is over. Usually when markets are this distressed at week's end, the dour speculator mood spreads over the weekend. We will see.

In the midst of the market confusion, the Fed will meet next week and provide guidance for the unwashed masses. A sideline feature of this meeting will be Chairman Bernanke passing the leadership baton to Lady Yellen. The market's worry is the future rate of reduction of bond buying known as QE3.

A more important issue might be the negative results of the zero interest policies. An ample supply of free money turns an army of savers into speculators. An interesting article by Charles Hugh Smith is a good read:

"The elimination of low-risk interest income in favor of risky speculative credit/asset bubbles has led to a monumental misallocation of capital and the institutionalization of perverse and highly corrosive incentives.

This credit/debt boom was fueled by financialization, a term for the broadening commoditization of debt and debt instruments....(and) ...This enables the generation of vast profits not from producing goods and services but from financial churning.

The problem is that speculative financialization only benefits speculators with access to nearly free money and the securitization markets - Wall Street financiers, corporate raiders, hedge funds and other financial Elites. These Elites pocketed immense fortunes but very little of this wealth trickled down to households for the simple reason that there is no mechanism for such a transfer except taxes - and this mechanism is controlled by the central state, which is easily influenced by wealth (campaign contributions, lobbying, etc.)"

Recent US surveys have found over 65% of US citizens have said the US remains in a recession. While the friends of those in Washington have benefited some immensely, average income for the middle and lower classes has been reduced.

This comes at a time when the US cost of living has increased. Since 2009 the US, gasoline prices have doubled and there has been a sharp increase in food costs. Taxes, state and government fees as well as government regulations have all hurt most of the US population. During the past few years the number of families has grown to 20%. At the same time many government bodies are enjoying record tax receipts.

With new voters on the FOMC, will they acknowledge any of the problems caused by their policies? Markets expect the Fed's taper to continue, but uncertainty remains. That is disturbing for all markets.

In this environment it is natural for specs to run for cover. The usual safe havens have included increased interest in quality bonds. US 10 year bonds, after yielding as much as 3.0%, have now appreciated as the yield has dropped to 2.72%. In Germany, yields have dropped 5 basis points, while the Club Med yields are up 5 to 17 bps. We must carefully monitor week end developments for if the European spreads between creditor/debtor continue this trend can seriously harm the euro.

Is the Yen Still A Safe Haven

Financial market writers are touting the Yen strength as a flight to a safe haven, but how safe is a haven that lost over 15% to the USD in the last year. And, if low interest rates cause nasty bubbles, the Japanese 10-year, priced to yield. 62% should be a prime candidate for a monster bubble.

For the Japanese Government, which needs to borrow over 50% of its budget to meet yearly deficits, this is not a bad deal. For Mrs Watanabe, a former saver, forced to become a speculator in the stock markets because of low rates, how will she react? The risk in Japan remains.

The yen has attracted many sellers, and according to the new COT report, it shows they continue to hold their short positions. In my opinion the safe haven buyers of the yen are myopic, and are testing the resolve of the yen shorts.

The set up is for more panic safe haven buying in the yen, combined with a squeeze on existing shorts. The yen is far from a safe haven. A USD sell off to 1.00/1.01 versus the JPY should be an opportunity to buy the USDJPY (UUP- FXY, UDN).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.