BOJ - 16 Trillion Reasons Why
The Fed dropped to 1% to get this party started, while the BOJ - Bank of Japan really got the hyperinflation going by printing up 35 Trillion Yen to buy US bonds and keep long term rates artifically low, while propping up the dollar.
Jim Jubak at MSN aptly notes what the recent "sopping up" of 16 Trillion Yen in excess liquidity by the BOJ, has done to financial markets.
With another 19 Trillion Yen yet to be sopped up, and potential BOJ interest rate increases, the Yen carry trade that global speculators have come to depend on, is going away.
At the same time, the FED raising 16 straight times has taken the US interest rate and mortgage loan carry trade away.
Bottom line: The excess global liquidity punchbowl created by the Fed's loose monetary policies and the BOJ's actions has gotten speculators around the world drunk with cheap money. Now, the central banks are pulling the punch bowl away.
We have commented in the past regarding this "drunken" party where all asset classes have been hyperinflated (real estate, bonds, equities, commodities)by cheap money chasing yield with little regard for risk premiums or real world valuations.
The last two weeks were just the start of the liquidity drain, witness the recent global market chain reaction where bonds & currencies rose while equities & commodities were let to fall.
And as we have commented before in these pages, we are beginning to see the multiplier effect working in reverse.
As a liquidity drain vortex opens up, money gets tight, risk premiums rise and the vortex starts sucking asset values down, one by one until finally all asset classes will be devalued.
Here are some key excerpts from Jubaks latest: In the last two months, the bank has taken almost 16 trillion yen, or about $140 billion, in cash deposits out of the country's banks. The country's money supply has fallen by almost 10%.
The Bank of Japan isn't finished pumping out the liquidity that it had pumped in. That should take a few more months. And when it is finished, the Bank of Japan is expected to start raising short-term interest rates.
This is bad news to the speculators who have used cheap Japanese cash to make big profits by buying everything from Icelandic bonds to Indian stocks.
The momentum in many of the world's riskier markets was a result of ever increasing floods of cash -- borrowed at 1% in Japan and multiplied by leverage as speculators turned $1 of capital into $3 or more of borrowed money.
With Japanese interest rates so low and Japanese cash so abundant, speculators, traders, and investors have been more and more willing in the last few years to take on risk at increasingly low premiums.
What we've witnessed since May 13 is a global flight out of more leveraged and more speculative investments.
Speculators attracted by the momentum of the gold, copper, and silver markets have sold -- and are still selling -- rushing to get out before other speculators could liquidate their positions.
Emerging equity markets have sold off for the same reason. High-yielding bond markets have collapsed as prices dropped, sending yields soaring and currencies skidding.
In the short term, the financial markets will adjust to new fundamental conditions, such as a change in global liquidity. The correction that began on May 13 is part of the process of resetting risk tolerance and recalibrating risk premiums.
That's what you can expect to see for the rest of 2006 as the Bank of Japan continues to force a recalibration of the risk tolerance of global investors.
Jim Jubak at MSN aptly notes what the recent "sopping up" of 16 Trillion Yen in excess liquidity by the BOJ, has done to financial markets.
With another 19 Trillion Yen yet to be sopped up, and potential BOJ interest rate increases, the Yen carry trade that global speculators have come to depend on, is going away.
At the same time, the FED raising 16 straight times has taken the US interest rate and mortgage loan carry trade away.
Bottom line: The excess global liquidity punchbowl created by the Fed's loose monetary policies and the BOJ's actions has gotten speculators around the world drunk with cheap money. Now, the central banks are pulling the punch bowl away.
We have commented in the past regarding this "drunken" party where all asset classes have been hyperinflated (real estate, bonds, equities, commodities)by cheap money chasing yield with little regard for risk premiums or real world valuations.
The last two weeks were just the start of the liquidity drain, witness the recent global market chain reaction where bonds & currencies rose while equities & commodities were let to fall.
And as we have commented before in these pages, we are beginning to see the multiplier effect working in reverse.
As a liquidity drain vortex opens up, money gets tight, risk premiums rise and the vortex starts sucking asset values down, one by one until finally all asset classes will be devalued.
Here are some key excerpts from Jubaks latest: In the last two months, the bank has taken almost 16 trillion yen, or about $140 billion, in cash deposits out of the country's banks. The country's money supply has fallen by almost 10%.
The Bank of Japan isn't finished pumping out the liquidity that it had pumped in. That should take a few more months. And when it is finished, the Bank of Japan is expected to start raising short-term interest rates.
This is bad news to the speculators who have used cheap Japanese cash to make big profits by buying everything from Icelandic bonds to Indian stocks.
The momentum in many of the world's riskier markets was a result of ever increasing floods of cash -- borrowed at 1% in Japan and multiplied by leverage as speculators turned $1 of capital into $3 or more of borrowed money.
With Japanese interest rates so low and Japanese cash so abundant, speculators, traders, and investors have been more and more willing in the last few years to take on risk at increasingly low premiums.
What we've witnessed since May 13 is a global flight out of more leveraged and more speculative investments.
Speculators attracted by the momentum of the gold, copper, and silver markets have sold -- and are still selling -- rushing to get out before other speculators could liquidate their positions.
Emerging equity markets have sold off for the same reason. High-yielding bond markets have collapsed as prices dropped, sending yields soaring and currencies skidding.
In the short term, the financial markets will adjust to new fundamental conditions, such as a change in global liquidity. The correction that began on May 13 is part of the process of resetting risk tolerance and recalibrating risk premiums.
That's what you can expect to see for the rest of 2006 as the Bank of Japan continues to force a recalibration of the risk tolerance of global investors.
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