Has The First Currency Crisis Begun?
Toby Connor: As many of you who have read my work in the past know, I expect the eventual endgame to this whole Keynesian monetary experiment that has been going on ever since World War II, to finally terminate in a global currency crisis. I’m starting to wonder if we aren’t seeing the first domino start to topple.
I’m talking about the Japanese Yen of course.
I think everyone just naturally assumes that the Yen is dropping in response to Prime Minister Abe’s intent to imitate US policy and print it’s way out of its troubles. The problem with this strategy is of course, eventually you will break your currency. Japan is in a particularly tenuous situation in that their debt to GDP dwarfs most of the rest of the world. The only hope they have of servicing this debt is for interest rates to stay basically at zero.
Any move by interest rates above this artificially low level and Japan’s debt becomes unserviceable, without resorting to a greater and greater debasement of the currency. Unfortunately that will also result in an acceleration of the collapse of the currency, which would just cause Japanese bonds to be sold even more aggressively. A nasty catch-22 situation.
At this point there is no way out for Japan. The only question is when will the endgame arrive. Japanese bond bears have been asking themselves that question for almost 2 decades.
The recent move in the Yen has started me wondering if that end game hasn’t now begun.
In the chart below I have marked the successive yearly cycle lows with blue arrows. As you can see this major cycle bottom tends to arrive between March and May most years. If the 2013 yearly cycle low arrives in the normal timing band, then there may be a big problem developing with the Japanese currency. The reason I say that is because the Japanese Yen is basically already in free fall and we may still have another one-three months to go before a final bottom.
Another warning sign is the fact that this decline cut through not only the 2012 yearly cycle low, but also the 2011 yearly cycle low and never even blinked. In an orderly decline both of these levels should have generated at least a decent bear market rally. In my opinion, it’s very worrisome that the Yen didn’t even slow down as it moved through these major support levels.
The next major support level is at the 2010 yearly cycle pivot. If the Yen slices through this support level also, then I think we have a major currency crisis on our hands.
Needless to say if the world sees a major currency collapse, which up to this point I think most people would consider to be an absurd idea, it’s going to spark a panic for protection. Despite stocks entering the euphoria stage of this bull market, stocks are not going to protect one from a currency crisis. Only hard assets will do that, and the two hard assets that are best at protecting one’s wealth are gold and silver.
Wouldn’t it be fitting that at a time when gold and silver are about to be most cherished, they are now completely loathed by the market?
Related Tickers: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver ETF (NYSEARCA:SLV), ProShares Ultra Short Yen (NYSEARCA:YCS), Japanese Yen (NYSEARCA:FXY), Japan ETF (NYSEARCA:EWJ), Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO).
Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market. Mr. Connor’s analysis skill of the markets is largely self-taught, though he admits to being an avid reader of Richard Russell and Jim Rogers, among several others.