http://seekingalpha.com/article/259230-b....

March 21, 2011

The message of the talking heads of finance trying to explain the sudden and significant drop in Treasury yields has been the stale "flight to safety" dribble. The real reason for this Treasury rally is that the Bank of Japan has embarked on a massive money printing campaign equivalent to $420 billion USD over four days.

Both the BoJ and U.S. Fed have been printing about $100 billion per month. Given that there are few places or large liquid markets -- or for that matter, productive investments -- in which to quickly park such funds, a good bit has flowed momentarily into the two biggest Ponzi schemes on the planet -- JGBs and U.S. Treasuries.

I believe this parking place is temporary. Events are moving lightening fast, but for the moment there is the perception that a repatriation trade back to Japan is underway. In reality this is really a fear driven yen carrytrade unwinding. The carried assets are sold and yen is bought back or covered. The BoJ "defends" against this yen appreciation by printing more money. I wouldn't be half surprised if some of the big trading desks are behind this in an attempt to manipulate the Bank of Japan into this behavior.

However, in our central bank infected and moral hazard diseased global economy, you can have an earthquake and nuclear fiasco and about the only people who respond with fear or risk aversion are those living nearby. That would basically be limited to Tokyo and environs. Those players cover their trades and try to get squared up.

Those unaffected elsewhere remain on never-met-a-risk-they-didn't-like hallucinogenics and prepare to utilize the fresh crack being provided by the BoJ. Actually, given that many of these yen carrytrades flowed into the commodity bubble, it's amazing that by and large those trades have held up. One might expect much more weakness. That's because the global risklove community who play in the sandboxes are licking their chops over all the new funny distortion money entering the game. The odds are good that these players just absorb the positions of the yen carrytraders and press ahead.

In terms of the real economy (which I still insist on focusing on), this newly printed money will further accelerate the global inflation that is already running amok. This will in turn continue to destabilize more countries and lead to more instability. The fact that Bahrain is now in trouble strongly suggests the sandbox Boyz will make another speculative push on oil. On the surface, speculating on oil might make sense. I pass because I see it as one more Day of Reckoning trade that sows the seeds of its own destruction. The mindless feedback loop looks like this: higher energy and commodities = squeezes on real people = weak economic conditions = bad underlying economic fundamentals for almost all goods and services = print more money = wash, rinse, repeat into an economic collapse.

The Fed and Wall Street have a crackpot theory that consumers, who they see as monolithic despite the U.S.'s huge income disparity, won't accept higher prices. This is true only for some consumers, who simply drop off and sink into poverty, leaving a diminished marketplace for those who can still afford it.

The question of when this will emerge is important. For my purposes, I'll wait for the passage of the super extreme moon period -- when the full moon is its closest to the Earth in 18 years. There is a chance of a second smaller quake in Japan anyway, and this event bears watching for its potential impacts. The high-risk dates for this are March 16 to 22. This allows the drama around the nuclear situation to fully play out, during which we can watch the BoJ print even more money to set the stage. In the interim, if there is a big quake or other disaster somewhere, then the process will be prolonged and even intensified.

The first order trade for me would be shorting U.S. Treasuries, particularly 2 and 5-year Treasury futures, and also Eurodollars. The Boyz and Playas won't rest their money in 2 and 5-year Treasuries yielding half a percent and 1.8 percent respectively against approaching double-digit inflation for long. They will mobilize it and move it.

My personal proxy for gauging inflation is the MIT Billion Price Index, which I trust far more than the laughable Ministry of Truth government data. I am using two data figures: the six-month annualized at 4.8 percent and the three-month annualized at 7 percent. The stronger second data point indicates further strong acceleration in U.S. retail inflation. I have no issue shorting Treasuries when 7 percent inflation and climbing is in play.

The Fed's game of pretending that there is no inflation has made them a laughing stock. Given the piece of work this week by the BoJ, anger about inflation will spread in both the U.S. and Japan. Once interest rates at the shorter end increase a couple percent, I would look for a U.S. and Japanese debt trap to develop.

Once the dust starts to settle in Japan, all the fresh money and ongoing QE2 monies will go to various and perverse hot trades, further wrecking the global economy. The inflation will make any rebuilding of Japan far more difficult and hard to execute. This will be sold as "growth," but the signals already indicate anything but and this only worsens it.

Therefore, the other trade is to short any group hurt by serious inflation: banks, consumer and retail outfits, transports, and anything that produces actual goods. Add emerging markets to that list because people in those countries are being ravaged. Once the commodity bubble bursts, I'd be short the Boyz and too-big-to-fail banksters on Wall Street, as all the governments involved will be too busted to help them this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Middle of the curve is looking weak even with Fed playing ball. Looks like the Japs may have been sellers in the 7 year time frame which means they were probably selling fresh 10 year debt issued around the time of the Lehman collapse.

Good point Bontly - but just a few years ago it was over 120 yen to the buck - so Japan hasn't yet killed its currency - but it is becoming more competitive with its Asian neighbors. The carry trade is epic. Go to Japan, borrow a billion or two yen, buy damned near anything denominated in dollars, sit back, watch the yen scream down - and make a ton of money.

Disclaimer - I ain't qualified to make investment advice - but seriously - this seems like a no-brainer.

Japan is far from killing it's currency contrary to Kyle Bass. I'll be amused as to what Mr Bass has to say when the Nikkei is over 15,000. His 15 minutes of fame has come and gone IMO.

How far from killing it Dbongo?

Heavily debasing but it's not dead Passivesf. Those in Japan need to be in the Nikkei if they want to stay ahead of the game. No different than here. Stocks are the best place to be right now.

Dbongo, have you ever been involved in the tulip business?

Tulip Business? No, not sure were you're going with that one. Wish I had got into the Sushi biz about 6 months ago though. ; )

Great question Antone...

sushi ? wont be long before canadian salmon and domestic catfish are the only SAFE seafood.

my local sushi guy gave me white tuna, which i corrected him as being albacore. Be ready for ass discharge.

Antone,you gotta think SUSHI BRO! It's quite tasty these days.

Nikkei looks like it could possibly top the Dow tonight. Now that's a bubble folks!

UPDATE EDIT::::Passed the Dow 2 minutes ago

correction: not albacore, I meant escolar.

http://motherboard.vice.com/blog/that-fi....

Quote:

Tuna wasn’t quite as bad, but was still pretty bad. Fully 59 percent of fish labeled tuna—whether in a can, in a sushi restaurant, or at a fish market—wasn’t tuna. The most common substitution was an oily fish called escolar, aka, “butterfish,” “oilfish,” or “king tuna.” In fact, 84 percent of all fish sold as “white tuna” were escolar—which, as the full report notes, can result in serious digestive problems whenever someone eats more than a few ounces.

My chef knew the name too. he didn't know that it makes you **** like a river, when consumed beyond a certain # of ounces. 6 or so I believe.