On 8/2, I spoke extensively about the importance of the Japanese yen on the U.S. and international markets. Specifically, I talked about the yen being the single greatest predictor of market distress. (Unfortunately, the yen’s rise is coming at the expense of stock investors everywhere.)
What has helped the stock market for years has been the practice of institutional investors borrowing the Japanese currency at a very inexpensive rate (0.5%) and investing in high yielding instruments of other countries. Many invest in the US currency (5.25%), British pound, Australian dollar (6.5%) or New Zealand dollar (8.0%).
Of course, this only works when investors do not get rattled by the price of the yen going up. And lately, the yen has been rising rapidly.
This has finally taken its toll on the individual investors pursuit of currency discrepancies through the Powershares DB Currency Harvest Fund (DBV). Just a few days ago, it was still holding up better than the market. And I discussed DBV in the context of lessening portfolio shrinkage.
Not now! DBV has succumbed as well, leaving very few safe havens outside of U.S. Treasuries and cash.
For the moment, streetTracks Gold Shares (GLD) and the AIG Commodity Index (DJP) are still acting as buffers for a diversified portfolio. However, they may soon give in as well. When the last shoe drops, the only place for safety seems to be U.S. government-backed bonds and cash.
Here’s what I pointed out on July 23, near Dow 14000. (My, how that seems like ages ago!)
"What if the yen really did make a significant run? Certainly, the PowerShares DB G10 Currency Harvest (DBV) would be in harm’s way. Similarly, high-yielding currency ETFs like the Australian Dollar Trust (FXA) and high-yielding stock destinations like the iShares MSCI Australia Index (EWA) could be hit hard by a fast growing yen."
Indeed, this is precisely what is happening.
Rather than present a complete gloom-n-doom aura, let me make several points. Bear markets are more typically associated with long, drawn-out affairs. Usually, a recession is involved. We don’t have that at all.
What we have here is a panic. (And a failure to communicate.)
For those looking for a suitable analogy, the collapse of world-famous Long-Term Capital in 1998 caused a severe panic worldwide. The Fed eventually stepped in… both privately and publicly. The panicky correction turned to opportunity… 18 months of stock market gains from September 1998-March 2000.
The question is… when will the Fed finally step in?