πΊπΈπ―π΅ It is becoming increasingly clear that the weakest link in the global dollar system is Japan and that the meltdown of the Japanese financial system might cause the unwinding of the whole system. -Phillip Pilkington
Last week the US Treasury used every trick in the book to try to maximise the impact of its intervention in the market for yen - including "accidentally" leaking Bessent's memo to the press to try to get markets to do some heavy lifting.
Bessent really is fighting gravity here. The markets are convinced that the yen has entered a doom spiral and are heavily short.
Can you blame the shorts? Going short yen and long other currencies with higher interest rates has been a trade that has given double the returns of the S&P500 since 2022. The Japanese are offering seriously cheap capital to export and invest elsewhere.
Why doesn't the Bank of Japan stop this easy yen flow by raising interest rates? Japan watchers are starting to realise that if the Japanese raised interest rates it might trigger a massive financial crisis in Japan.
Because it has run such low interest rates for so long Japanese companies have become addicted to debt. Around 14% of Japanese companies are "zombie companies" that pay more in debt interest than they make in profit. Interest rate increases will cause a mass default event.
The problem for the US is that US Treasury yields have become correlated with Japanese yields. Bessent is worried that yen instability will spill over into the market for US Treasuries.
The reason for this is simple enough: Japan is the largest foreign holder of US Treasuries. If Japan starts going broke it will be forced to sell these US Treasuries to prop up the yen. This would flood the market for US Treasuries.
US borrowing costs are already far too high for comfort. Inflation-adjusted borrowing at the long-end of the curve is at levels last seen just before the Global Financial Crisis of 2008.
Bessent's intervention may calm the yen market for a few weeks. Or it may not. Either way, the problem here is structural. Japan is about to go through a massive energy crisis that will put further pressure on the yen.
At a certain point, yen interventions will become ineffective, Japan will slip into crisis, and that crisis will spread into the market for US Treasuries. From there it could take down the AI sector and the equity markets. At that point we're at endgame for the USD system.
Last week the US Treasury used every trick in the book to try to maximise the impact of its intervention in the market for yen - including "accidentally" leaking Bessent's memo to the press to try to get markets to do some heavy lifting.
Bessent really is fighting gravity here. The markets are convinced that the yen has entered a doom spiral and are heavily short.
Can you blame the shorts? Going short yen and long other currencies with higher interest rates has been a trade that has given double the returns of the S&P500 since 2022. The Japanese are offering seriously cheap capital to export and invest elsewhere.
Why doesn't the Bank of Japan stop this easy yen flow by raising interest rates? Japan watchers are starting to realise that if the Japanese raised interest rates it might trigger a massive financial crisis in Japan.
Because it has run such low interest rates for so long Japanese companies have become addicted to debt. Around 14% of Japanese companies are "zombie companies" that pay more in debt interest than they make in profit. Interest rate increases will cause a mass default event.
The problem for the US is that US Treasury yields have become correlated with Japanese yields. Bessent is worried that yen instability will spill over into the market for US Treasuries.
The reason for this is simple enough: Japan is the largest foreign holder of US Treasuries. If Japan starts going broke it will be forced to sell these US Treasuries to prop up the yen. This would flood the market for US Treasuries.
US borrowing costs are already far too high for comfort. Inflation-adjusted borrowing at the long-end of the curve is at levels last seen just before the Global Financial Crisis of 2008.
Bessent's intervention may calm the yen market for a few weeks. Or it may not. Either way, the problem here is structural. Japan is about to go through a massive energy crisis that will put further pressure on the yen.
At a certain point, yen interventions will become ineffective, Japan will slip into crisis, and that crisis will spread into the market for US Treasuries. From there it could take down the AI sector and the equity markets. At that point we're at endgame for the USD system.
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