How Important Is the Yen Carry Trade?

Fairly significant, at least for US equity markets.

We show the relationship of the SP 500 in our Yen chart every night.
But we like this format from our friends at The ContraryInvestor.com
who are true masters of the pictorial display.

This does not imply cause and effect per se. As equities decline, the trade goes off, and as equities rally the trade is on.

Is this use of international currency exchange rates arbitrage the types of thing that one had in mind when discussing competitive advantage and global trade?

Did Michael Porter fail to consider the sheer amount of gambling that can overtake markets?

Are the currency market relationships reflecting international trade balances, soundness of national economics, and relative returns based on ... Forex Roulette?

As you may recall in the short term markets given over to speculation may have little or no relationship to fundamentals, which assert themselves in the long term trends.

In the short run, the market is a voting machine but in the long run it is a weighing machine.

This is how equity markets can shake themselves apart. We had always looked to the bond and currency markets as better and more stable indicators of values. Certainly with large short term moves, but always showing more sense when the equity market punters were frothing.

Those trying to conduct productive business with 'real things' in this environment must feel like they are trying to play a game of chess on a roller coaster.

We appear to be in times of general speculation, with wide reversions to the means creating resonances that might shake the world. These are the types of markets that give rise to new powers and great fortunes, test the fabric of relationships, and bring down old institutions.

Is the tail wagging the dog? Again? It appears to be.

The Next Bubble: Treasury Borrowing for Quarter to be $408 Billion More Than Expected

A tsunami of reserve currency debt issuance, coming soon to an economy near you.


MarketWatch
Treasury expects to borrow record $550 billion
By Rex Nutting
3:00 p.m. EST Nov. 3, 2008

WASHINGTON -- The U.S. government is expected to borrow a record $550 billion in the current quarter, including $260 billion in special funding for the Federal Reserve's extraordinary liquidity programs, the Treasury Department said Monday.

The borrowing estimate is $408 billion more than estimated three months ago. For the first three months of 2009, the government is expected to borrow $368 billion, the government said.

In the three months ending September, the government borrowed $530 billion. The Treasury will announce on Wednesday the sizes and terms of its quarterly refunding auction.

AP
$900 billion in gov't borrowing seen through March
Goverment, raising cash for rescue, projects borrowing of more than $900 billion through March
November 03, 2008: 6:23 PM EST

NEW YORK (Associated Press) - The government, raising cash to pay for the array of financial rescue packages, said Monday it plans to borrow $550 billion in the last three months of this year --- and that's just a down payment.

Treasury Department officials also projected the government would need to borrow $368 billion more in the first three months of 2009, meaning the next president will confront an ocean of red ink.

The nonpartisan Committee for a Responsible Budget estimates all the government economic and rescue initiatives, starting with the $168 billion in stimulus checks issued earlier this year, total even more -- an eye-popping $2.6 trillion.

One day before voters set out to elect the 44th president, new economic reports brought more bad news...

In addition to the borrowing numbers, Treasury released estimates by major Wall Street bond firms projecting that total borrowing for this budget year, which began Oct. 1, will total $1.4 trillion, nearly double the previous record.

Major Wall Street firms were equally pessimistic about the size of the federal deficit this year. They projected it will hit $988 billion for the current budget year, more than twice the record. In July, the administration projected a deficit for this year of $482 billion, but that was before the financial crisis erupted in September.

Supporters of the government rescue packages argue that the ultimate cost to taxpayers should end up being a lot smaller, partly because the Federal Reserve is extending loans to banks that should be paid back.

And in the case of the $700 billion rescue package, the government is buying assets - either bank stock or distressed mortgage-backed assets _ that it hopes will rebound in value once the crisis has passed.

But the government still needs to borrow massive amounts to buy the assets, an effort that has driven up borrowing costs to levels never before contemplated....

On Economics and the Crisis with James K. Galbraith

James K. Galbraith teaches economics at the University of Texas at Austin.

"There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless."

That could prove to be a real ice-breaker in the faculty lounge.

"Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance."

None dare call it tenure.

NY Times
Questions for James K. Galbraith
The Populist
Interview by DEBORAH SOLOMON
October 31, 2008

Do you find it odd that so few economists foresaw the current credit disaster?
Some did. The person with the most serious claim for seeing it coming is Dean Baker, the Washington economist. I saw it coming in general terms.

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?
Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?
It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

You’re referring to the Washington-based conservative philosophy that rejects government regulation in favor of free-market worship?
Reagan’s economists worshiped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

So you claim in your recent book, “The Predator State,” but will President Bush actually be leaving Washington a richer man?
Presidents don’t make money in office; they do so afterward. In his case, I hope he won’t. Maybe his friends will abandon him.

What do you think the future holds for Vice President Cheney?
I suspect that Cheney will spend much of his life fending off legal challenges, but that is a different area. I’m quite sure that the human rights issues will follow him for the rest of his life.

Any thoughts on Treasury Secretary Henry Paulson, who engineered the bailout?
He is clearly not a superman. This is the guy who had the financial crisis on his plate for a year, and when it finally became so pervasive that he couldn’t handle it on a case-by-case basis, the best he could do was send Congress a bill that was three pages long.

What’s wrong with that? Maybe he’s pithy.
It shows he wasn’t adequately prepared. The bill did not contain protections for the public that Congress had to put in.

Regulation is the new mantra, and even Alan Greenspan in his mea culpa before Congress seemed to regret he hadn’t used more of it.
I would say a day late and a dollar short. Greenspan blotted his copybook disastrously with his support of deregulated finance. This is a follower of Ayn Rand, an old Objectivist. His belief was you can’t really regulate and discipline the market and you shouldn’t try. I think Greenspan bears a high, high degree of responsibility for what has happened....

China and Russia Moving Away from the US Dollar?

The headline of this news piece greatly overstates the extent of any deal between Russia and China to stop using dollars. It seems to be a bilateral trading agreement. But it is credible since Russia and China have mutual trading interests that do not involve dollars; Russia is rich in resources and China is strong in manufacturing. Choosing to trade in the rouble makes sense, especially as China remains under currency controls.

It would be even more interesting if they chose some neutral currency such as the euro or even gold and silver since that would invite other countries to join in more readily, especially in the mideast and AsiaPac. We recall that both Russia and China have significant supplies of each of the metals. They might even fix a ratio of value between them, perhaps 16:1? There seems to be an historical precedent.

The problem becomes what should the value of any external standard be to the dollar? In the case of gold and silver, their prices are obviously far too low if they were to assume their roles as international trading currencies again. And the adjustment might prove painful for the three or four western banks that have been dominated the prices of several commodities, including the precious metals, at least on paper. It would be almost as if they had tied a noose around their necks and sold it to their rivals. But they would likely be made whole in cash dollar settlements.

Russia and China are not renouncing dollars overall. But watch for this to become a trend as the US continues to prove that it is no longer capable of managing the world's reserve currency on its own.

The month of November following an October dislocation in the financial markets such as we have just experienced has often proven to be filled with interesting developments.

Global Research
China, Russia, Belarus Renounce the US Dollar?
by Anatoly Gorev
RIA Novosti - 2008-10-30

The recent meeting between Russian Prime Minister Vladimir Putin and his Chinese counterpart, Wen Jiabao, created a financial sensation. Wen said that the two nations could withstand the global financial crisis if they joined forces; Putin urged him to go farther and stop using U.S. dollars in Russian-Chinese settlements.

This idea is nothing new. Russia and China reached a "framework" agreement in November 2007, which was followed by China's similar agreement with Belarus.

Earlier this year, Iranian President Mahmoud Ahmadinejad and Venezuelan leader Hugo Chavez turned against the dollar as well when they asked their OPEC partners to stop using the dollar for oil settlements. They argued that the "green" currency was no longer reliable and it was high time they look for a more stable and predictable alternative. (No one has followed them yet it should be noted, and the dollar has strengthened remarkably - Jesse)

Curiously, unlike the Ahmadinejad and Chavez appeal, Putin's proposal came as the dollar was on the rebound and even began pushing the euro. Economists even started talking in terms of a reversal of the global currency trends, rather than the temporary appreciation of the dollar.

Analysts predict that the dollar will regain its value in the next few months. They do not see anything which could hinder its steady growth.

Yet, Putin proposed that Russia and China stop using it as a settlement instrument. What is it - lack of confidence in the dollar's prospects or a political move? (The dollar has proven to be unstable, and the US preoccupied with its own internal troubles. The dollar is not a substitute for an external standard - Jesse)

Experts differ on this count. Igor Nikolayev, chief strategic analyst at FBK private auditing firm, sounded skeptical: "I think it was a political statement rather than an economic decision. There is a dominant public sentiment that the United States is the source of all evil, so let's stop using the dollar," he explained. (It was political, but it is also a warning and a preface to the November 15 meeting in Washington - Jesse)

One has to bear in mind, though, that some other currency will need to be found to replace the dollar for international settlements. China is unlikely to use the ruble, and Russia would be equally reluctant to accept the yuan. (The rouble would be more viable if it was backed by gold - Jesse)

"They could opt for the euro, but its future is uncertain, especially considering current developments on global financial markets. It is also unclear whether China would be happy to start using the euro while most of its international reserves are held in dollars," he added. (The euro has the same drawbacks as the dollar; it is too vulnerable to domestic policy priorities - Jesse)

There are more questions than answers here, Nikolayev concluded.

To be objective, one has to admit that other analysts are not as skeptical about the possibility of using other currency units between Russian and Chinese companies. (The use of gold and silver between these two countries seems logical if the trade can be 'balanced.' - Jesse)

Andrei Marinchenko, director general of the Kalita-Finance company, said the idea was quite realistic. Moreover, he thinks that the ruble stands a good chance of being selected as a reserve currency, primarily because the Chinese are disappointed in the dollar but aren't yet accustomed to the euro. (Yes but the rouble has a limited reach among other countries that do not wish to trade one empire for another - Jesse)

Only time will show who is right. But to stop using the dollar in Russian-Chinese settlements is too important a decision to make for purely political reasons - that much is obvious. (We're shocked it lasted as long as it did. It makes absolutely no sense to cede that much power to someone whose interests are not aligned with your own - Jesse)

Suppose we do it; what will be the implications for Russian businesses, how will the new financial and political reality affect their incomes and savings?

Marinchenko is convinced of a beneficial impact. According to Marinchenko, once the ruble is recognized as a settlement unit, it will enjoy growing demand with Chinese companies and individuals. The Russian currency will consequently grow stronger and more influential globally. (Its nice to dream, but there is an obvious flaw that needs to be resolved as we noted. Russia is no more stable nor trustworthy than the US for certain Physical gold and silver are beyond the control of a single country. - Jesse)

Russia will also become immune to many shocks from stock market meltdowns and won't have to fear future devaluation or revaluation of the ruble. It will happen because the role of the U.S. dollar, which has earned a reputation as an unstable and unreliable currency lately, will be much less important. (They are not able to do that now for certain. This highlights the risks of a single currency as the world's reserve currency. It is amazing that it has held together for as long as it has. - Jesse)