May 13

The Market Today 5/13/13: Yen


As of late, there has been one topic that has dominated the financial landscape on a global basis. This is the Japanese Yen. A few months back, Japan elected a new Prime Minister, Shinzo Abe. As soon as he took office, he stated that they would look to begin their Quantitative Easing(QE) program. During this announcement, he mentioned the intention of this program is basically to debase the Yen. The primary reason for this, is two fold. First, drive Japanese exports since their economy is export based. Second, to push their inflation level to the 2% target. Japan, much like us now, has had basically a 0% interest environment for more than a decade. Their inflation has been non-existent. Together with inflation, and driving up of their exports, would revitalize the Japanese economy. The effects however, have not been felt in Japan alone. In fact, the reaction world wide have been swift, and significant. This announcement was made back on February 6th. Since this time, the S&P has been up about 8%!! This is a very large move, in a very short period of time. This is on top of a very large move following the March of 2009 low. Obviously, the Nikkei has been up about 30% in that time frame! This show’s the power that currency movements can have on the equity, as well as bond markets.

Yen: Central Governments

For all intensive purposes, all the major Central Governments from around the world are enacting some sort of QE program. Especially here in the United States, Japan, and the European Central Bank. With all this liquidity in the market place, this money needs to find a return. Where are you going to find returns? The bond market? Sure you will. The only place to find a return is in stocks. There have been numerous reports of Central Banks using their Reserves to invest in stocks. As long as these programs are running, you can feel comfortable buying the dips. Which you can easily see, that the institutions sure feel good about doing this. Which is why we have not seen as much as a 5% correction in the past six months. This is why I feel this market so resembles the market of 1999, during the tech bubble. I remember telling my clients from November of 1998, through March of 1999, to exit stocks, and move into bonds, due to the fact that the market has not seen at least a 5% correction in at least six months or longer. The longer  the period that there is not a correction, the worse the correction will be as soon as it arrives. The major difference between the period then, and the period now, is that we have the Government backstop now. This provides a “put” on the market, and will prevent a crash like move. I believe the only way a crash like move would happen while a QE type of program is effect, is if a European country actually defaults, or we do not act on the debt limit, or something to that affect.

Yen: Where do we go from here

The Yen has been very weak. The Yen has not been above 100 since 2008!! There is no doubt, that the measures taken by the Japanese government, is significantly weakening the Yen. The currency war is on, and this can all turn out bad in the end, which I believe it will. However, for now, this will benefit the stock markets around the globe, especially in Japan, as well as the United States.

Author Sean Rhodes is an expert in financial markets and helping you manage your money. For a no-risk consultation, check out Sean at the following link for more information and expert advice on investing in equities and helping investors participate in the benefits in the move of the Yen!

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