The Great Japanese Unwind and How It Will Play Out Globally

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 |  Includes: DBA, EWJ, FXY, GLD, IEF, PHYS, SLV, SPY, TIP, TLT, URA
by: Bo Peng

My last crystal ball reading of market aftershocks from the tragedy in Japan has been mostly correct, in retrospect, with one big mistake: the Yen keeps surging. Apparently I underestimated the extent of Japanese repatriation, which has probably been sustained by the worsening of the nuclear situation.

FT Alphaville just posted a table listing overseas holdings by Japanese investment trusts. It doesn't provide any direct trading guidelines. For example, Japanese investment trusts own 7% of the Vietnam stock market, which has barely budged since the earthquake. But at least it provides a partial picture of the potential extent of the ongoing Great Japanese Unwind. Nobody knows how big the carry trade unwind by Mrs. Watanabe is. But it's prudent to assume that, given the high savings rate in Japan, repatriation may continue for awhile if the nuclear situation keeps worsening. Too bad for Japan Inc., since a strong yen is exactly what they don't need.

This changes the short-term (days) trade. If the situation improves, stocks would rebound strongly while the yen may drop; otherwise more of the same -- tanking stocks and surging Yen. Whether this will impact U.S. Treasuries or not remains to be seen.

But it doesn't change the longer-term outlook. Japan will surely go into recession, possibly a severe and painful one. And, since central bankers all over the world are 100% confident they can eliminate business cycles that are the healthy, evolutionary mechanism, self-correcting the fundamental flaws of the free market system, much like a forest fire, BoJ will continue printing their way into disaster. Where JGB has been at the peripheral of the bond vigilantes' radar so far, it will be at the center soon (could be in months). On this side of the pond, the Fed will of course continue printing as the economic fallout trickles in.

A big question is whether this unwind will be contagious and trigger a global one comparable to the panic in 2008. My answer is no. It is very unlikely that a nuclear meltdown, as terrible as it may be for Japan, would cause much global direct damage. A Japanese recession would have global implications, but it would come later and slower. Precious metals and commodities will enjoy strong support by the suicidal central bankers. Granted, commodities inflation driven by excess money will kill all economies; but that's of no concern for central bankers since their goal in life is to create inflation, and their inflation detector is designed not to detect any until too late.

A commodities rebound may be delayed compared to precious metals, though, because the supply-demand argument may cause some hesitation. But people have no choice other than to continue on the moronic, suicidal path of commodities inflation, driven by moronic central bankers around the world. No doubt central bankers are very intelligent people. Problem with very intelligent people is that they can screw up much bigger and for much longer than others are capable of.

And a few things we can say are not:

  • The earthquake/tsunami/nuclear-meltdown triple whammy is not bullish for Japan nor the world at large. It's hard to imagine a more idiotic argument.
  • The commodities market is not driven by supply-demand at the time-scale longer than days at most.
  • The yen's surge is not because it's a safe haven.

Disclosure: I am long GLD, PHYS, SLV, DBA.