Thursday, June 21, 2007

Mr Yen - "The Yen is Absurdly Cheap"

Some people choose to see the world as it is presently, and some choose to see it as it should be, whilst others choose to look at it as it will be [in the future]. As an idealist with a seriously pragmatic streak, and as a Cassandra, I acknowledge the former though draw mostly upon the intersection of the latter two for my inspiration and feeble insights. This is NOT always to one's benefit (as evidenced by the remnants of my long yen positions that I clung to far too tenaciously during the first quarters of 2006).

Jim Croce, too, recognized its perils, recommending that one never "tug on Superman's cape", "piss into the wind", "pull the mask off that ol' Lone Ranger", (and don't mess around with Jim). In markets, however, the rewards relative to the risks, increase dramatically as one approaches what in hindsight will the inflection point, plain as day for all see to inflection. Some times these happen from pure entropy, sometimes as the result of exogenous factors, while at other times price action is capped and turned as the result of some meaningful change, be it fundamental or perceptual, perhaps similar to the utterances of Dr Eisuke Sakakibara, who in was quoted yesterday in a Bloomberg interview as saying "the Yen is absurdly cheap", and the low rates, and the BoJ's failure to raise them, has sparked a bubble in speculative carry trades.

To say that "Mr.Yen" has been an influential figure at the MoF, and in FX markets, is understatement, unusual as that is for an inconoclast. And though one must take with a grain of salt whatever iconoclasts say in Japan that is contrary to the policy consensus, I must wonder whether this is yet another tell-tale that we are approaching a decisive turning point in the world of the leveraged free-lunch speculative carry trade. And though BWII bears are already writing the system's epitaph, a speculative wash-out in leveraged carry trades, might just add the years to the systems life that are required to transit to the modernity in which we now live, and to which the international monetary system must eventually adapt. I admit that it remains possible that Mr Sakakibara, like Paul Volcker, whose words in days gone by would momentously move markets, but today barely make newspaper copy, is but another talking head in his sunshine years. Yet, so few high-ranking TeamJapan members break ranks in such turncoat fashion against the policy consensus that one would be remiss to not sit up and take notice at its potential meaning to and impact upon, markets.


James said...

I'm suprised that none of the movements in the fixed income markets have forced carry trades to unwind.

Anonymous said...

Around the same time Mr. Sakakibara was making his comments in San Francisco (?) the Asahi newspaper reported that a MoF official was giving a press conference in NY in which he opined that at the present time there was little risk of the yen carry trade unwinding, and even if it did, its scale in relation to the currency markets was small, most of it was long-term investment, and that even simultaneous falls in the world stock markets would have a limited effect on it.

Given officials' ability to delude themselves into believing their own bullshit, I think the MoF press conference is of greater import than Sakakibara's.