I spent some serious time yesterday looking at the financial squeezes moving around the world, trying to get a sense of how much of the current global economic problems/unrest are structural, and therefore very important, vs. psychological, and therefore only important.
The Chinese market decline, I think, was really welcome; 139% YTY growth last year was almost a joke, and someone had to do something to slow down those crazy Chinese as they treat their markets as we did in 2000, one big game of chutes and ladders (or mah jong). Related sympathetic declines around the world were interesting not because of China, but because they revealed how terrifically insecure everyone is, even as the global business press (and world central banks) trumpet security and expansion (with the obvious exception of Fireman Greenspan, who loves to light fires and did it again).
Without doing all the details here (I have a feeling I’ll be doing them in the newsletter at full length sometime quite soon), it struck me that the Bank of Japan is the center of all of the leverage in the global system at the moment.
Given a history that shows a predictable willingness to intervene in international currency markets in order to favor local exporters, maintaining a weak Yen, it is interesting that suddenly the BOJ is talking about increasing rates and strengthening the Yen.
I expect there are two main causes. First, global investors using the “carry trade” are already getting frightened into unwinding their foreign positions, forcing them to buy Yen back in order to pay off their low (zero) interest loans. Second, there may be political pressures on the bank to do at least something as a sign of its belief that the Japanese economy has at last (?) turned convincingly out of deflationary times.
Of course, if this second supposition is not true, making that move would be self-destructive.
In any case, it strikes me that we have a global economy highly leveraged by the actions of a couple of guys in a back room somewhere in downtown Tokyo.