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A simple way to tell we are not in a bull market bubble



October 19, 2009 – Comments (5) | RELATED TICKERS: BRZU

Check out the recent performance of the Yen. My YCL short hasn't helped me much and has pretty much exactly followed the SPY. Why is this important?

Because during the last bubble in 2007, the Yen performed terribly. People were shorting the Yen in favour of high yielding currencies and stocks. It was all part of the super leveraged bull market that crashed because of credit crisis, deleveraging and illiquidity. Now the Yen is one of the strongest perfoming currencies despite the stock market strength. The market coming this far up from its highs is just is due to the USD crash and natural rebound from the bear market bubble, NOT due to some world wide bull market bubble phenomena forming like in 2007. If the "big boys" were really propping up asset prices like some conspiracy theorists claim they are doing, we would have seen significant moves in the currency markets. The currency market is literally hundreds of times larger than any stock market and if the big boys are going to prop up asset prices they will use it to do it.

With the recent Aussie rate hike, you would have expected their markets to decline. But no, on that same day they actually went up. This leads me to believe the activity we saw leading up to the bubble is JUST STARTING. People are starting to drop the low yielding currencies for the higher yielding ones then investing in those countries. It also doesn't hurt that Australia's economy and stock market are commodity-intensive.

Before we see a bull market bubble burst we have to see the Yen deline, at least against the key world currencies if the USD is headed on the fast track to 0. Remember during the last bull bubble, EUR/JPY was in the 160's. Now its 135. GBP/JPY was 220+ and its now under 150. During the summer I was making blogs about how the GBP/JPY was the strongest indicator of a market increase and now that relationship seems to be broken but the stock market continues further. Even AUD/JPY is in the 83's vs its peak of 106 and we hear stories about the AUD being strong. Well its got room to be much stronger.

Think its only an anomaly with the Yen? Well at the peak of the market the EUR/CHF was 1.6, at its low coinciding with the March lows on the SPY was 1.48 and now its under 1.52. The EUR/TRY (Turkish Lira) is 2.17. Its hit its highs in March at over 2.30 for a brief moment (coiniciding with you know what) and was at its lows just before the market crashed in 2008 under 1.80. The Turkish Lira is an effective measure to determine the carry trade effect because it is consistently the highest yielding currency that is backed by a country with some sort of political and economic stability. At its peak it was yielding over 20% and even now its yielding 8%. 

These numbers showing how far off the Yen and other bearish currency pairs are from their lows and how far off we're from a leveraged bull market bubble means bears will have to hold their breathe a lot longer. The market's not in a bubble ready to burst until an erosion in the bearish currencies take place.

5 Comments – Post Your Own

#1) On October 19, 2009 at 9:11 AM, russiangambit (28.88) wrote:

> Because during the last bubble in 2007, the Yen performed terribly. People were shorting the Yen in favour of high yielding currencies and stocks. It was all part of the super leveraged bull market that crashed because of credit crisis, deleveraging and illiquidity.

Now people are doing the same with dollar.

Are you saying weak yen is a requirement for a bull market or a bubble? Why not dollar? I am not following your logic.

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#2) On October 19, 2009 at 11:40 AM, syljtffreedom (< 20) wrote:

i agree with russiangambit. that could be the reason why the asian side of the world's stock prices have increased dramatically. does this mean we should short the asian markets instead? 


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#3) On October 19, 2009 at 12:03 PM, EV38 (30.43) wrote:

Let me clarify the carry trade.

Say you're an investor who wants to borrow $1M and invest into the capital markets of Country X (it doesn't matter whether you're a citizen or not of this country). Now Country X's interest rate is 5%. That's 50K a year of interest you'd have to pay. But instead if you shorted (or borrowed) the Country X equivalent of $1M in Country Y's currency then converted that to Country X currency, and Country Y had only a 1% interest rate, or in the Yen's case for many many years, basically 0% interest rate, you are saving $40-50K a year in interest. Now of course international economic theories state that the difference in interest rate would be offset by a move in the exchange rate favourable for the low interest currency to offset the interest rate arbitrage, but of course we all know that's a load of garbage that's used to price futures contracts and nothing more.

As in other words, the short of the Yen during a stock market bull bubble doesn't have anything to do with being bearish on their economy, but its just effective to short the Yen on the currency markets because that is traditionally a low interest rate currency. The weakness in the Yen is an indication of people's appetite for borrowing to invest in higher risk higher reward assets. And right now that appetite for risk is still pretty low, meaning we are not in a bubble situation yet, but rather the activity suggests its just starting - recent AUD strength vs low yield currencies coinciding with an interest rate increase and an aggressive move upwards in their stock market.  

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#4) On October 19, 2009 at 12:44 PM, russiangambit (28.88) wrote:

But who says that carry trade MUST be yen-based? It is moving to being dollar-based. Dollar is more liquid and the interest rate is also at 0%. Plus, there are seasonal factors that are contributing towards the yen strenght right now.

I still don't see how strong yen means we are not in a bubble. We are in USD-based bubble.

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#5) On October 19, 2009 at 1:09 PM, EV38 (30.43) wrote:

There is certainly the USD factor. Whether the USD has overtaken the Yen as the short currency indicator I don't know. I would argue not for the simple fact that the US market is going up. During the last bubble shorting the Yen to buy USDs to invest in the US capital markets made a lot of sense, especially since the Nikkei generally stagnated so there's no reason to keep Yen to buy into the Japanese markets. But now you can't short USD to buy USD to put into the capital markets. The USD decline is because people think it sucks not because of the carry trade effect.

Now whether the demand to short Yen is tempered because people aren't shorting it to get into the US market but rather just paying essentially no interest by using USDs instead is a plausible argument. Your guess is as good as mine. Time will tell if/when the market gets into a bubble by judging the performance of the Yen and other traditionally bearish currencies at that time.

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