Wednesday, November 28, 2012

Bearish yen talk from the same guys that got everything else wrong

There's a lot of bearish yen talk going around and I can understand the traders' mind of wanting to short a currency that has been so strong for so long (think Jim Rogers or Kyle Bass or Peter Schiff shorting Treasuries for years and years and years) and I also understand that this time it could be different as Japan has shown an inclination recently to sell yen for euros in an effort to support exports to the Eurozone. However, what makes me suspicious about this short yen trade is that it's coming from all the same people and they are making all the same, stupid and failied arguments that they made for Treasuries (and JGBs) and QE and hyperinflation, etc.

Here's an example of what I am talking about. Axel Merk, who runs a currency fund, who's been predicting a dollar collapse for years (like Schiff) because of Fed "money printing" is bearish on the yen now (presumably because none of his other trades worked out) and he wrote this:

The size of the current account deficit represents the amount foreigners need to buy in assets (local financial assets or real assets) to keep a currency from falling. With a current account deficit, Japan's debt to GDP ratio of over 200% may suddenly matter, as Japan may need to offer higher rates to attract foreigners to buy local assets (e.g., Japanese government bonds). The trouble is that Japan’s debt might be unsustainable at higher interest rates. To the extent that Japan has a current account surplus, it doesn't matter whether foreigners buy the yen, but those surpluses have fallen to deficits recently and that trend looks set to continue.

Once again Merk is showing his lack of understanding of macro. Lets have a look. Take thus sentence, for example:

"The size of the current account deficit represents the amount foreigners need to buy in assets (local financial assets or real assets) to keep a currency from falling."

Those assets that Merk says foreigners need to buy, well, they've already bought. A nation's current account balance is equal but opposite to its capital account. So if a country has a current account deficit it has a capital account surplus of the same magnitude. In practical terms it means that it paid for those imports in yen, and those yen sit at the Bank of Japan, parked in Japanese gov't instruments. They're the very financial assets Merk worries that foreigners will have to buy, but they've already been bought. It's all just accounting.

Merk has this notion that Japan needs to go looking around for investors to "finance" this trade deficit, but that's already done in the capital (or, cash) side of the transaction.

Furthermore, the current account balance has no impact on interest rates whatsoever (as Merk suggests) as we clearly have seen with th U.S. which runs HUGE current account deficits and interest rates are at historic lows. And even if the BOJ were to raise its interest rates it doesn't make Japan's debt "unsustainable." They can pay any rate because they print yen, just like the US can pay any rate because it prints dollars. The debt never becomes unsustainable.

And on and on it goes. Another example of clueless idiots who just keep repeating the same, old, tired, misinformed crap even as they are proven wrong over and over and over and over and over.

For what it's worth, I am long yen.


y said...

the yen could fall if people sell it on a large enough scale. The question is a) why would they want to do that, and b) how far would it fall before it stabilises?

y said...

"Merk has this notion that Japan needs to go looking around for investors to "finance" this trade deficit"

I agree, but I think that what he means is if foreigners don't want to hold yen or JGBs etc, and sell them, the result will be depreciation of the yen, which he presumably thinks could be pretty sharp and severe.

Tom Hickey said...

So far everyone that has shorted the yen based on this thinking has gotten whacked. I guess another group needs to learn a lesson the hard way.

Ryan Harris said...

The only case I can make for shorting the Yen is if Japan goes through with shutting down their nukes permanently and then has a big increase in the amount of imported energy. That would likely their balance of payments with the rest of the world.
I'm long Yen too as I figure the huge increase in speculative shorts recently will have to unwind shortly.

JD said...

I think the Japanese issue is really interesting because so much of what's happened in Japan seems to invalidate the "traditional" economic theories .... e.g. I believe Japans credit rating is below Botswanas - big deal! And, at the same time, I sometimes wonder what the big problem actually is with Japan - their unemployment rate is around 4%, not bad at all!

So, looking at the Yen, it seems to me that what drove its strength in the last 3 years was not just massive short covering but also the complete erosion of relatively higher interest rates in other regions. For that reason I can't see the Yen undergoing sustained relative weakening until relative interest rates are higher. That's unlikely considering current monetary thinking.

SchittReport said...

peter schiff invites squawk box asia viewers to invest with him in asia:

etfguy said...

The value of the yen or dollar or euro or whatever is based on the society that uses it. The Japanese are arguably the most hard working, community oriented, stable society in the world.