- It’s a miracle!…
- Why the Bank of Japan threatens global markets…
- Robert Kiyosaki’s latest book shows you the compounding power of weekly income…
Dear Reader,
The CEASEFIRE remains in effect.
Thus all is peace — for the present at least.
The brief feud between Iran and Israel has even produced a miracle.
A man has risen from the dead. That is correct… a man has risen from the dead.
On June 13 Israel’s Defense Ministry announced it had “killed” Iranian general Ismail Qaani.
Yet yesterday this present-day Lazarus was observed among the quick — and strolling the city of Tehran.
Thus ours is an Age of Miracles.
A Modern Miracle of the Multitudes?
Meantime, the North Atlantic Treaty Organization has concluded a summit meeting at The Hague.
Member nations therein pledged to elevate defense spending to 5% of their gross domestic product.
Today most strain to attain 2%.
How could they purchase so many guns… while simultaneously purchasing so much butter?
Are we to expect a modern Miracle of the Multitudes?
Should the member states fulfill their 5% pledge I will be convinced — beyond all convincing — that we inhabit the miraculous age.
I submit that today’s financial system already constitutes very substantial proof that we do inhabit the Age of Miracles.
This foundationless card house has yet to collapse. That it has not — I submit — constitutes direct proof it is a miracle of God.
Thus I propose that the Vatican open a formal inquest into the topic.
Yet could this market miracle transition into a sort of anti-miracle?
It Starts With Japan
Read a Reuters headline yesterday:
“Hawkish BOJ policymaker puts market on notice for ‘decisive’ rate hikes.”
Beneath which we were informed that:
- The Bank of Japan may need to raise interest rates “decisively” to address inflation risks even if uncertainties over U.S. tariffs persist, a hawkish member of its board said, highlighting the bank’s attention to growing price pressures.
- Board member Naoki Tamura said inflation was speeding up and moving faster than the pace he had projected at the BOJ’s previous policy meeting on May 1, adding that companies may start to pass on labour costs more substantially by hiking services prices.
- “If upward inflation risks heighten, the BOJ may need to act decisively as a guardian of price stability,” Tamura told a news conference on Wednesday.
Why could “decisive” Bank of Japan rate increases menace the American financial miracle?
The “Carry Trade”
The answer begins with the yen “carry trade.”
What is the carry trade? ChatGPT is kind of enough to answer the question:
- The yen carry trade is an investment strategy where traders borrow Japanese Yen at low interest rates and then convert it to another currency, like the US dollar, to invest in higher-yielding assets. This strategy is based on the difference between the low Japanese interest rates and the higher rates available elsewhere, aiming to profit from this interest rate differential.
For over three decades, Japan has spent money like the intoxicated mariner ashore on leave.
It borrowed much of it.
The Bank of Japan printed money to purchase government debt… and depressed interest rates to zero.
And so the carry trade was birthed. It has proven fantastically lucrative.
Yet the carry trade requires severely depressed Japanese interest rates.
Should they increase “decisively” — which is under present consideration — the carry trade collapses at its foundations.
The Spiral of Doom
Reports CNN Business:
- The carry trade relies on borrowing, which means it’s a leveraged position. (As a general rule, whenever you hear of leverage in finance, think “high risk”).
- Once even minor losses start to accrue, lenders are going to demand that you pony up more cash to cover your potential losses, a process known as a margin call. That may mean selling stocks to raise cash, or closing out the position completely.
- “Not everybody will have a margin call at once, but the riskiest people might, and then they start to liquidate,” John Sedunov, a finance professor at the Villanova School of Business said. “And then that creates losses for people down the chain, and then they have to sell things, and then it’s just this kind of spiral.”
We witnessed a partial spiraling last year… when the Bank of Japan elevated rates for the first occasion in 17 years.
Now the carry trade confronts additional spiraling should the Bank of Japan “decisively” elevate rates.
Shockwaves Through Global Markets
In today’s interlocking markets the foot bone is connected to the thigh bone is connected to the hip bone is connected to the backbone.
Before a fellow knows what has struck him, a rumpus in his foot bone has his backbone in siege.
Financial commentator Mr. Lau Vegys:
Rising rates in Japan spell trouble for the U.S….
- It would send shockwaves through global markets — driving up interest rates and making borrowing far more expensive for everyone. And because Japan has its fingers in so many pies, it wouldn’t just rattle Wall Street… it could light the fuse for the next global recession…
- Losing America’s biggest creditor would crush America’s global credit standing, hammer the dollar, and drive up borrowing costs across the board. That would translate into higher interest rates for consumers, a paralyzed economy, and a brutal market collapse.
The Wages of Monetary Sin
Poor Japan. Poor, poor Japan.
It has squirmed itself into a lovely pickle jar.
It has engorged itself upon cheap money for so long… it cannot even withstand an interest rate increase against inflation… without harpooning global markets.
Thus Japan pays a steep, steep price for decades and decades of currency debasement, interest rate manipulation and kicking cans down roadways.
Yesterday’s difficult choice becomes today’s harder choice becomes tomorrow’s impossible choice.
Japan is in an impossible fix today because it refused to confront yesterday’s difficult choice.
It may even bring the financial Age of Miracles to a thudding end.
Brian Maher
for Freedom Financial News
