-- Posted Friday, 21 September 2007 | Digg This Article
Jack Crooks at MoneyandMarkets.com innocently asks, "Just how much money is tied to the yen carry trade?" Because I do not know, I am instantly defensive. "Why in the hell are you asking me?" I think to myself. "Are you trying to embarrass me? Is that what you are thinking, punk? You want to mix it up with me, you little bastard?"
But I was, as usual, too quick to anger, as this was apparently just a rhetorical question, and he immediately supplies the answer as, "Some estimates put the total value of yen-denominated borrowing at more than one trillion U.S. dollars! And those estimates don't account for the hundreds of billions in loans that are linked to these investments via margin credit and derivatives."
Well, since I have seen this "huge yen carry-trade" thing and this derivatives thing so many times before, I am immediately getting bored and my mind is wandering, wandering, idly wandering towards thoughts of tacos and naked ladies, and then to naked ladies bringing me tacos ("And a cold, frosty beverage, babe!") and then I was wondering what would happen if I had to choose between tacos and beautiful naked ladies, and how that brings up a very interesting twist on that whole "marginal utility" thing, and I realize I have forgotten the whole point of "marginal utility" and then I'm starting to bore myself to death when, suddenly, my ears prick up as he says, "Indeed, I think it's fair to say that this is the biggest one-way bet in the history of the financial markets."
Oooh! I love the idea of the one-way bet! Naturally, I am confused, and my mind is whirling at the concept of "the one-way bet", because I have never actually seen any real "one-way bets", and so this sounds suspiciously like the old Zen classic, "What is the sound of one hand clapping?", to which the Transcendent Mogambo Answer (TMA) is "The sound of a handgun cocking in the other hand if you don't watch your step, chump."
Mr. Crooks is apparently not interested in my weird and oddly homicidal misinterpretation of the Tao, and blithely goes on to say that borrowing Japanese yen (JPY) to convert to dollars to invest in American debt and asset markets means that when the Japanese interest rates go up (and the dollar correspondingly goes down), "These borrowers will be squeezed from both sides. They'll be forced to close out their bets because of the sudden increase in risk. And they'll come under even greater pressure to close them out because of the higher financing costs."
Huh? Well, if all this sounds confusing, join the club, bub. I think I got an inkling of maybe what he is talking about when he went on, "But remember: BEFORE they can pay back all those loans to Japanese lenders, they first have to convert their dollars (and other home currencies) back into yen."
Alas, it turns out that it didn't really help, and now I have no idea what we are even talking about anymore, although I seem to remember that it had something to do with tacos and hot naked chicks, but looking around the room I see that I was mistaken, as I see none of either, and I am crestfallen, completely demoralized, and more confused than ever.
Perhaps the way my eyes were glazed over or the way my mouth is hanging open in utter, bewildered stupefaction tipped him off that some more explanation was needed. So he says, "You can probably see where this is going: The unraveling of all these bets against the yen would trigger a massive yen rally."
Then, tantalizingly, he says, "Even WITHOUT the explosive buying from the huge payback of borrowed yen, it is the most undervalued major currency in the world." In the whole world!
Intrigued, I ask, "How undervalued?" He answers, "Measured in terms of purchasing power parity (PPP), the yen is more than 30% undervalued against the dollar, and even more undervalued compared to the world's other major currencies." Wow!
Perhaps it was all this talk about currencies and their values and exchanges rates that prompted JMR Mikael M. Karlsson, who is a Professor at the University of Iceland, to write to me. Normally, I don't read mail from professors as they all similarly tend to start out, "If you were in my class, I'd have you expelled!" unless the professor is from Duke University, in which case the message would have continued "And then thrown in jail for the rest of your life because you are a guilty white man!"
But, thankfully, his email did not follow this timeless formula, a fact that I freely interpreted to mean that he thinks my message is crucially important and I am not as stupid as people think.
In case you forgot this message, just the first part of the first sentence of the preamble to the Mighty Mogambo Message (MMM) starts off, "We're freaking doomed because the stupid Supreme Court let the stupid Congress and President ignore the Constitution of the United States by letting the Federal Reserve create excessive amounts of fiat money and credit that is going to make prices rise in a horrible price inflation, and it is inflation that is the killer of economies, and to prevent such a catastrophe of anyone creating excessive amounts of money and credit, the Founding Fathers wrote into the Constitution the absolute, letter-of-the-law requirement that our money shall only be made of silver and gold to prevent the government from even getting the chance of creating excessive amounts of money, but now with our stupid fiat currency and insane degrees of fractional-reserve banking, the inflation in consumer prices has gotten so high that now I can't afford to buy a lousy bucket of fried chicken, or even an 'Economy Meal', which is a hell of a misnomer in that that it consists of, you know, like one scrawny chicken drumstick, one lousy roll and a crappy watered-down soft drink, giving you a 'meal' which is so small that it should be called 'Tiny Rip-off Snack', but when you complain to the stupid manager about how you are getting ripped off, you get a load of their stupid crap like…").
Well, it turns out that the professor's email was neither, and he just kindly sent a link to Paul Grignon's famous video "Money as Debt", at Google. In case you've never seen it, it does a pretty good, and pretty entertaining job, of showing what a piece of crap the U.S. dollar is, and why.
This is much nicer than all the sites that show what a piece of crap I am, but never "why."
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Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.
-- Posted Friday, 21 September 2007 | Digg This Article
