In our last post we discussed our views on deflation and how it will be around longer then most investors think. Most people are stuck on the idea that hyper inflation is just around the corner and that you must be buying gold, most other commodities, and Asian stocks and at the same time short the US Dollar, Japanese Yen, US Treasuries, and US stocks. Eventually this may be the right stance, but for now we think, along with the market, that it is the wrong view for the short and medium term.
The main issue stems from the idea that because the government has printed a gazillion dollars that we MUST have hyper inflation tomorrow. The reality is that until that money is actually in circulation it will not cause inflation. If you look at the financial situation of most banks it is obvious that not only are they not lending, but they are still so weak that they can’t lend. Until they have rebuilt their balance sheets they will remain weak and unable to do any large scale lending on anything but bad terms.
Add to this the fact that consumers are saving more and more and you have massive debt deflation. Consumers that are employed are paying down debt while the unemployed are unable to go into much more debt as credit card companies have curtailed their lending and the housing ATM is shut down.
As the global financial markets continue to deflate we have a few trends that are benefiting from this. One that we have already covered is that of going long US Treasury bonds. Another trend that we have shared with our subscribers is that of going long the Japanese Yen. Long viewed as the funding currency for the carry trade , over the past 18 months the Yen has changed course and is now a safe haven currency. Every time that investors have fled risky assets such as stocks and corporate debt then have flocked to the Yen. As investors increasingly realize that the current threat is continued deflation and not inflation we think that they will gravitate out of stocks and into Treasury bonds and the Yen.
In the chart below (click to enlarge) you can see that since 1998 the Yen had been consolidating until breaking out back in March of 2008 as the financial crisis accelerated with the demise of Bear Stearns. This breakout later pulled back before breaking out again and making a large move lower.
Japanese Yen 15-Year Weekly
As you can see in this chart (click to enlarge) the last two pullbacks have found support at the 50% retracement levels. While we don’t think that Fibonacci levels have some mystical power, we do use them to find opportunities to buy pullbacks in a trend.
Japanese Yen 3-Year Weekly With Retracements
Finally as you can see in this daily chart of the last year (click to enlarge) you can see that we finally have broken out of an almost year long consolidation. While not a perfect triangle it obviously contracted more and more until finally breaking out over the last few days.
Japanese Yen 1-Year Daily Chart
Looking at the 15-year long term chart of the Yen we are expecting a move up to 114 and would not be surprised to see it make new highs at 120 in the coming months (If you are looking at the USD/JPY cross the levels would be 88 and 80). Although anyone who is a macro trader is no doubt aware of this move we have found that most equity investors skip over currencies and fixed income themes, thinking that they have nothing to do with them. The reality is that the currency and fixed income markets can give great signals for when risk is high or low and should be followed by all investors.
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Title: Debt Deflation and the Japanese Yen