Tuesday, March 22, 2011

G7 Fails to Stem Yen’s Rise, The Futility of Market Intervention, Portuguese Government Next to Collapse

3/22/2011 Portland, Oregon – Pop in your mints…
We left off Friday with the G7 Central Bankers reaching deep into their pockets and dumping all of the Yen they had, and then some that they didn't have, in an effort to stem the rise of the Japanese currency.  At first, it appeared to work.  On the surface they were able to avoid a catastrophe in the JGB (Japanese Bond), Nikkei, and US Dollar markets.  But what do you know?  On Monday, the Yen continued to rise as if nothing had happened before finding a trading range near the levels at which the G7 had intervened.
Is this seemingly unrelated crisis in Japan the Waterloo for the US Dollar in the currency wars?  That is our current speculation here at The Mint.
In a world not riddled with government debt and baseless currencies with which to pay them, a disaster of this magnitude in Japan would cause the value of currency on the Isle of Japan to rise and the value of debt obligations to fall.  This is simple logic.  When a disaster strikes, you need things now, not promises of things 3 months to 30 years in the future.  The word currency cleverly captures this idea of having something "currently" and not later.  It is no mystery that it should become dearer as anxiety increases.
In a world that is awash in debt and baseless currency, as our world is, anything can happen.  Anything, as long as it is limited to setting the current price of government debt holdings and competing baseless currencies against one another.  The current flavor of "anything happening" is that, defying all logic, the Japanese Yen seems to have gradually fallen from the speculative buying that bid it to record levels in the aftermath of the threefold disasters which befell northeastern Japan.
Upon further review, "gradually fallen" may not be an accurate description of the price action in the Yen:
Japanese and G7 Central Bankers try to Push the Yen off a Cliff!
As you can see in the above chart, it looks more and more like the Japanese and G7 Central Bankers threw the Yen off of a cliff.  Unfortunately for them, it appears that the Yen has wings and that even the combined efforts of the mightiest Central Banks on the planet cannot stop this rally.
Bad news for the dollar.
Market intervention is, in the long run, futile.  In the short term, however, it can be very profitable.  Just ask Goldman Sachs!
Here is a tip, if you see a market that is being massively intervened in, bet against the intervention.  Following this logic, one could now buy the Yen (but not JGBs, mind you!) without fear.  Free people and the free markets which represent them will always overcome any attempt by a minority of governments and Central Bankers to work against them.  Supply and Demand always prevail in economics.  The only thing that intervention does is to slow the process.
If you understand the supply and demand dynamics of a market and see that demand is overwhelming supply, go for it.  Look at the interventionists as your allies as they continue to hit the pause button so that you can increase your positions.  All they (the interventionists) do is send false signals which end up further restricting supply, which simply makes the reasons for going long all that more compelling.  Just don't go into debt to do it!  Market intervention is futile, and it is a shame that so much of it is taxpayer sponsored.
Before we sign off we cast our weary eyes across the pond and see that the Portuguese are offering the world another example of fiscal democracy at work.  In a scene being played out in democratically elected chambers all over the world, the majority is refusing to give up the government subsidies, entitlements, and boondoggles that they have slowly voted into existence over the years, even in the face of national bankruptcy. 
Voting things into existence and actually working for them are two very different things.  Voting is easy, working is not.  This is the great tragedy of democracy in fiscal matters.
There is an escape hatch from all of this madness, and, in the US, it is surprisingly easy to find and  open.  Hold wealth in silver or gold (click here and Register at APMEX.com Today!), pop some popcorn, and sit back and watch the political theater unfold.  Knowing that your wealth is safe, you may even get a chuckle or two as the wheels come off the bus of fiscal and monetary policy as we know it!
Stay Fresh!
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Key Indicators for Tuesday, March 22nd, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.