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The Japanese yen is like a global risk thermometer. When it’s going up, investors are nervous.
And now, not only has the yen been going up … but I think the mercury will soon break through the top of the glass.
Reason: The yen carry trade is reversing.
In recent years, international investors borrowed an estimated $1 TRILLION worth of Japanese yen, converted the yen into other currencies, and used that money to buy riskier investments, including U.S. stocks.
But now, with turbulence on the horizon, they’re starting to reverse that transaction — selling the riskier investments and buying back the yen.
Result: The yen is rising. And when U.S. stocks are shaky, the yen rises even more.
The key:
The Stock Market Is Not Just Volatile,
It’s Getting Riskier Day by Day
Despite a rocky road, most investors have convinced themselves that this year has been a good one for equities.
They’ve been willing to overlook a whole litany of problems, and the Federal Reserve has been more than willing to help them out by lowering the fed funds and discount rates.
This “mama-bird-will-save-us” mentality has left investors expecting to be hand-fed easy returns.
But have they really gotten good returns? Consider this table, which shows the stock market’s weekly action over the last year:
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S&P 500 2007 Year-to-Date (48 Weeks) |
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Weeks Up |
Weeks Down |
Weeks Flat |
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26 |
20 |
2 |
As you can see, out of the 48 weeks of trading this year, the winning weeks outnumber the losing weeks by just six.
Moreover, even with this week’s rally, the S&P closed on Friday just 4.6% higher than where it opened up the year. That’s far less than its average annual return!
And prior to this week, the major averages hadn’t been able to string together three consecutive days of gains since September. In fact, November revealed an extreme lack of conviction among stock market bulls.
If you ask me …
Investors Are Starting to Realize
Now Is the Time for Caution!
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As I just showed you, even though the Fed is throwing in the life preservers, the U.S. markets are struggling just to stay afloat.
Meanwhile, the risks keep getting harder and harder to ignore:
- Financial firms all over the U.S. and Europe struggling to cope with the credit crunch, taking write-offs in the tens of billions of dollars
- Subprime mortgage losses and write-downs expected to grow far larger, with cuts and bruises likely to morph into gaping wounds for major lending institutions
- The very real possibility that some banks may not be able to survive the blood loss
- The inability of banks to expand lending thanks to net losses, ratings downgrades, and dwindling assets
Just this week we saw Dubai tossing $6.5 billion to Citigroup … Wells Fargo revealing its expectations for significant losses on home equity loans … Freddie Mac slashing its dividend by 50%.
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This isn’t very reassuring for the rest of the pack, and it’s certainly discomforting for those businesses whose growth depends on access to lending.
There is little doubt: Further losses are set to shake up the markets a heck of a lot more, and every time they do, it will drive more money back into the Japanese yen.
My conclusion …
The Japanese Yen Will Surge
Higher Than Most Think Possible!
We’ve already seen a sharp rally in the yen, and in my opinion, there’s plenty more where that came from.
Sure, it could pull back a bit after its great run. But I believe the long-term trend in the yen has turned from down to UP as the carry trade unravels.
Never forget: An estimated ONE TRILLION dollars worth of Japanese yen has been borrowed and plowed into higher-yielding, higher-risk bets. When the money reverses, and those yen loans get covered, the currency must ricochet back to higher levels.
Best wishes,
Jack
P.S. Our 50-minute blockbuster video on the yen carry trade is back online. To view it now, click here.
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