Interest Rate Roundup

Friday, March 02, 2007

There goes the yen again ...

In early trading, stock futures are falling sharply. Why? Look at dollar-yen. The yen is rising yet again, recently up to 116.88 yen against the dollar in the spot forex market.
I think this is a major force driving the price of all kinds of assets -- bonds, stocks, you name it. Cheap money the world over has helped inflate asset values, and if cheap money starts to drain out of the system courtesy of higher Japanese interest rates and a rising yen, it could have a significant market impact. See this piece if you're interested in more commentary on the matter.
When or where this process will end is anyone's guess. But it's worth pointing out that in a worst-case scenario -- the 1998 debacle that caused Long-Term Capital Management to blow up:

* U.S. Long Bond futures soared from an intraday low of 121 24/32 on July 30, 1998 to a high of 135 8/32 on October 5, 1998. Ten-year T-note yields plunged from 5.5% to 4.16%

* The yen surged from 143.90 to 111.85.

* The Dow Jones Industrial Average peaked on July 20,1998 at 9367.84. It then dropped as low as 7400.30 on September 1, 1998 before making a slightly higher low in early October. From high to low, the decline measured out to about 21%.

I am NOT saying this is LTCM all over again. Maybe everything will work out fine and things will stabilize here. But it can't help to review a little history given some of the similarities between conditions then and now. As philosopher George Santayana said, "Those who cannot remember the past are condemned to repeat it."


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