Market Report - Is the Stock Market About to Drop?

In previous letters I’ve explained how this stock market and real estate market have created bubbles.  Much of it can be explained by the excess cash being put into the financial markets by governments printing excess paper currency.  When will it all end?  One supply of excess cash comes from the Bank of Japan.  Then ask yourself, “When will this silliness end and our markets have a severe drop?”  Is it time for you to have some of your money safer?

The Yen Carry Trade
From the Financial Intelligence Report, March 21, 2007

One of the most important, unintentional providers of this international liquidity has been the Bank of Japan. Japan’s economy, the second largest in the world, went into a prolonged slump starting in the late 1990’s. In order to stimulate domestic demand and help the economy climb out of its’ nosedive, the Bank of Japan reduced its interest rates to zero percent. This was 3 percent below the cost of credit in other major currencies at the time. It caused the value of the yen to fall.

In other words, Japan was providing credit at zero percent to borrowers (it hiked rates in late February to half a percent), in a currency that was dropping. Such a move was welcomed by both domestic and overseas institutional borrowers, including (hot money) hedge funds. The Bank of Japan therefore became the “kind banker” to the outside world, providing massive additional liquidity to the world.

For example, Japanese yen, borrowed at virtually zero percent, could now be borrowed, converted into dollars (putting further downward pressure on the yen), and invested in short-term U.S. Treasuries at a positive income carry of 4.75 percent and the prospect of repayment in cheaper yen, offering a capital gain. Not a bad deal, right?

It became known as the yen carry trade.

The almost reckless greed that appears to permeate most of today’s markets meant that this cheap money was poured into increasingly speculative prices for bonds, stocks, and commodities. Worse still, it encouraged speculators to borrow more and leverage their investments to positions that would be normally be considered alarming. However, as prices appeared to rise continuously and institutions, especially banks, were awash with cash, more money was lent.

If you are concerned that the market is reaching highs that are not sustainable and would like to know how to make your money safer, email or call our office.

Robert Matheson
Matheson Financial Services
239-403-8727

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Robert Matheson, Registered Investment Advisor, CPA*, CFP®, CEPP
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The information and data contained herein has been obtained from sources believed reliable, but is in no way guaranteed by Robert Matheson or Matheson Financial Services as to its accuracy.  Furthermore, this report is provided as a complimentary service by Robert Matheson and is not a solicitation, or an offer to buy or sell any security, mutual fund, commodity or any other product mentioned in this or any other report.  Past performance does not guarantee future results.