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Pilgrim said:Someone explain this to me: Between 11:30 and 12:00 today, EAFE (on YAHOO page) nosedived. Foreign markets were closed and the dollar was just wiggling around over a small range during that time. What makes this happen??
roguewave said:For those who may not know or understand, this arrangement has been in place for a very long time(approx. 2 decades) and is now beginning to unwind. Yes, this will affect the Nikkei in a very negative way. In todays financial market environment, those individuals who think they can predict longer then a week's time frame, what will occur in these "markets" are so clueless that anyone listening to them would do well to run from them. Good luck.
http://www.moneyweek.com/file/13563/where-should-you-put-your-money-as-the-carry-trade-ends.html
Wimpy said:I read the article very closely and while he offers some general information that gives food for thought, his conclusions are lacking substance. I was also more than a little disappointed the Daily Reckoning saw fit to send it out via email the other day.
One of the biggest assumptions in his article relates to condition (4) of 6 that he feels represents the nightmare scenario associated with the Yen/dollar carry trade. Condition (4) assumes interest rates are falling in the U.S. He immediately goes into each of the conditions and states his case, but when he comes to condition (4) he alters his position and implies a ‘pause’ in interest rates versus ‘falling rates’. So, what is it? A pause or will interest rates be falling in this nightmare scenario? He lost a little credibility with me on that one.
In reality, the interest rate spread between the two currencies would indeed cause an ‘unwinding’ of those carry positions if the spreads narrowed to the extent profitability was eroded. But what would be the mechanics of this ‘unwinding’? Essentially, to reverse these positions the hedge funds would have to SELL the U.S. Treasuries and repay the loan in Yen. The Yen loan would be paid back in Yen. In other words, the dollar (Treasury) is sold and the Yen is purchased for the loan payback. The dollar (Treasuries) becomes weaker and the Yen becomes stronger. When these Treasures become weaker they tend to drive interest rates higher NOT LOWER. Someone might ask, “Yes, but won’t the increase in Treasury rates draw that foreign money back?” The answer is sometimes, but not always. The reason being that in a dollar bear market investors become increasingly leary of buying back too soon and feel that if they wait a little longer they can get a better deal when interest rates are higher. This waiting causes even more bearish dollar signals and they begin feeding off each others bearish signals causing a further decline in the dollar and even higher interest rates. This is what happened in the early eighties and it is upon us again.
Another assumption the author makes is that the fantastic rise in commodities is a result of the carry trade. The assumption being that Yen were borrowed at very low interest rates to purchase base and precious metals. He totally ignores the fact that China and other countries are smack dab in the middle of industrializing their nations and expanding their infrastructures. Our era of industrializaton was spread out over 50 years or so. China and India will accomplish the same feat in a fifth of that amount of time because of the technological advances. Someone might ask, “What does that have to do with the I-Fund…China isn’t one of the represented countries on the I-Fund sheet?” No, but they trade with those that do. Japan and others are providing China with the needed technology to expand their infrastructure.
There are three reasons the I-Fund is the place to park our TSP funds:
- The dollar is doomed along with common equities.
- The industrialization and internal growth of Asian economies and the positive ripple effect to their regional trading partners.
- The Asians are SAVERS. All real economic growth is based on SAVINGS not consumption.
JOVARN said:Asian Economy
Apr 9, 2005
SPEAKING FREELY
Oil for dollars, and dollars for US deficit
By Richard Benson
The Asians remain shocked and in disbelief. Just when Japan, China, Taiwan and Hong Kong had accumulated enough dollars to buy oil to keep them warm for many winters, it's all over. In broad daylight, the Americans and the Organization of Petroleum Exporting Countries (OPEC) cheered as the price of oil popped up from US$30 a barrel to more than $50...
...The United States is extracting tribute on oil from the world. If the world wants Middle Eastern oil, it can pay for it through the Saudi branch of the US Treasury. Why do the heads of Saudi Arabia, Kuwait, Abu Dhabi, Bahrain, Qatar, etc, hold dollars? Because they want to keep the money and the power. The ruling family of Saudi Arabia controls 25% of the world oil reserves and is completely dependent on oil revenues for its survival. Tens of thousands of Saudi princes live off lavish royal stipends. Think of Arabia as a family firm. If the dollar goes down in value, the Saudi royal family still gets to keep hundreds of billions of dollars. But, if they don't buy dollars, why would the US keep them in power? It would simply not be in our interests to do so. Remember when Saddam Hussein talked about pricing Iraq's oil in euros? "Shock and awe" quietly followed. !!!!!!!!!!!!!!!!!!!!!!!!!!
----------------------------------------
This program of oil for dollars and dollars for the US Treasury deficit is the simple tribute that we, as the superpower, can expect. The United States is well paid for keeping the world's supply of black gold safe and available to all. Unlike the Vietnam era - when the US was trying to finance guns and butter - getting others to pay now for our guns allows us to milk the oil out of the sand and turn it into butter.
The next question will be how the Asians respond to a 60% hike in the price of oil. Please stay tuned.
Notice in the chart below there are some big, smart, anonymous dollar holders (such as hedge funds) located in the Caribbean. No one knows who they really are.
Major foreign holders of US Treasury securities (in billions of dollars)
Japan 702
Mainland China 194
England 163
Caribbean 93
Korea 68
Taiwan 59
Hong Kong 59
Total (including other countries with fewer holdings) 1,960
sugarandspice said:And 11 of the 19 WTC bombers were Saudis. And Saudi Arabia is an ally of the U.S.