Japan’s NUCLEAR Experiment

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Market Psychology has had a VERY BIG swing from bearish to bullish since the Key Turn Date in mid-November 2012 as it became clear that Abe was going to win the Japanese elections and begin implementing VERY aggressive reflationary measures to end two decades of deflation in Japan. The inter-connectedness of global financial markets insured that the BIG changes in Japan would contribute to BIG changes in markets around the world.

Since mid-November 2012:

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1) the Yen has fallen ~15% Vs. the US$…now down 10 weeks in a row to a 2 ½ year low,

2) The Yen has fallen ~20% Vs. the Euro,

3) Gold has risen to All Time Highs Vs. the Yen,

4) Global stock markets have risen with the major US Indices at 5 year highs (VIX at 5 year lows,)

5) The Nikkei stock index has risen ~26%,

6) European peripheral bond yields have fallen sharply,

7) It has been “Risk-On” in global financial markets in a BIG way!

Abe believes that the Yen has become “far too strong” over the past several years and needs to be weakened… that the Japanese people have become “far too used to” deflation…and that has to end…so his reflationary plans are to force the Bank of Japan to target 2% inflation and to take the necessary steps to achieve that…i.e., print Yen in unlimited quantities…and to massively increase government spending.

The BOJ and the Government will issue a Joint Statement this week detailing further “aggressive action” to end deflation in Japan. This joint statement, and the barrage of media comments directed at the BOJ by the Abe government, is compromising whatever remains of BOJ “independence”…it is part of a global trend to co-opt central banks to political ideology.

The Japanese actions have “upped the ante” in the global currency war and will be viewed as “beggar thy neighbor policies” by the exporting countries that will lose market share to the Japanese….there is already pressure within those countries to retaliate.

Japan is taking a HUGE gamble…their new leaders believe that they have no choice…they have been stuck in deflation since 1990. Their demographics, especially with a no-immigration policy, are of a rapidly aging and shrinking population. Their debt to GDP ratio is off-the-charts. They have been trying to revive their economy for two decades…without results…so now they are going NUCLEAR…and if that doesn’t work…then what?

Many analysts have argued that what has happened to Japan over the last two decades is foreshadowing what will happen to us as we struggle to revive our economies, pay off our debts, keep our promises…all in the face of aging populations.

For my longer-term savings:

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I have maintained that we are living in an Age of Deflation (thank you Gary Schilling) and that the reflationary efforts of the Authorities since the BIG CRASH in 2008 have only been a rear-guard action in the face of massive private sector deleveraging…however…the one thing that could get me off the sidelines…get me to become more aggressive with my “retirement money” would be if/when the Authorities REALLY ramped up their reflationary efforts…as they have in Japan…when that happens cash truly becomes trash.

For my short-term trading accounts:

I’m “anticipating” that the bullish surge in Market Psychology on the back of the Japanese reflationary activities is overdone and that we will see a BIG turn in prices…however…I’m waiting for a “confirmation” of the turn before I put any serious money into that trading idea!

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avatarVictor Adair - Victor Adair posted Monday, January 21st, 2013.

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