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April 11, 2016
Yen Volatility Increases Probability of a Crash Happening Sooner
By Michael Markowski, Director of Research
The volatility of the yen versus all of the world’s currencies is signaling that a crash of the world’s markets could happen sooner rather than later. The yen has appreciated significantly against all of the world’s currencies including the euro, U.S. dollar, Swiss franc, and the British pound since April 5, and most notably on April 7, when the yen appreciated by almost two percent versus all of the world’s reserve currencies, including the U.S. dollar, euro, British pound and the Swiss franc. The yen, on April 7, reached 18-month highs versus all of the world’s major currencies. For the week ended April 8, it gained at least 2.2% against all 16 of its world-currency peers. Last week, the volume of contracts by speculators for yen to appreciate hit their highest level since 2008.
The strongest indication that the yen will soon cause a crash of the world’s markets was the yen’s resilience versus all currencies on Friday April 8, 2016. The U.S. dollar/yen chart below is a prime example. After the yen had increased by 3% versus the dollar in April, and culminated with the yen going to an 18-month high on April 7, one would have expected some profit taking on Friday, April 8. Indeed, the dollar climbed by almost a point to 109.05. The dollar then proceeded to give up all of its gains, and closed down versus the yen for the seventh consecutive day. Deterioration of the dollar, of the S&P 500, and of the Dow 30 indices in the final hours of trading on Friday April 8 indicates that the yen will rise, and apply more pressure on the global stock indices during the week beginning Monday April 11.
Since the yen has been appreciating significantly versus all of the world’s currencies, the yen’s appreciation bears no relationship to the U.S. Federal Reserve’s existing or future interest rate policies. The yen is appreciating against all of the world’s currencies because it is the world’s default safe-haven currency.
Motivation for my April 1, 2016 article entitled, “No April Fool’s Joke: NIRP Crash Indicator Elevated to Pre-Crash Warning” was the increased yen volatility on April Fool’s Day. The fact that the S&P 500 and Dow 30 indices had closed at their highs for 2016 on Friday April 1, 2016, was completely irrelevant. For the week ending April 8, the U.S markets were the most volatile since February of 2016, and all of the U.S. indices — including the S&P 500, Dow 30, and the Nasdaq — closed down by more than 1%. On April Fool’s day my NIRP Crash Indicator had gone from its Yellow cautionary signal for the entire month of March to a pre-crash Orange level where it has since remained. Orange is the final pre-crash signal before the indicator turns red, which would indicate a significant crash is underway. (The signal for the NIRP Crash Indicator is freely available and is posted at www.dynastywealth.com daily after the close of the markets.)
Based on research that I have conducted on prior crashes, including the Crash of 2008, my conclusion is that when volatility increases significantly for the yen it becomes a leading crash indicator. The Japanese yen and the U.S. dollar are the world’s two largest single country reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar — by far the world’s most liquid and largest safe-haven currency — is susceptible to dramatic declines until the storm has passed.
Savvy investors know that the U.S. is, unquestionably, considered the world’s leading economy and markets. They know that upon a crash of the U.S. stock market the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar versus the world’s second leading single-nation currency. The yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world’s top reserve currency, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union’s member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because each of the underlying countries has economies much smaller than Japan’s.
The U.S. indices, including the Dow 30 Industrials and the S&P 500, have not yet discounted the downward volatility spikes that will likely be associated with the Yen’s April 18-month highs, versus most of the world’s currencies, including the U.S. dollar and the euro. On April 1, 2016, the U.S. indices closed at 2016 highs. I predict that the worlds’ major stock indices will soon start to decline significantly and approach their February 2016 lows. The video entitled, “Yen Volatility Causes Market Crashes”, and the charts below provide details regarding the relationship between the yen’s volatility and market crashes.
The currency chart below depicts the performance of the U.S. dollar versus the yen for the last 12 months ended April 8, 2016. The trajectory of the extended downward spikes of the U.S. dollar versus the yen in August of 2015, and from January 31, 2016 to February 11, 2016 coincide with the downward spikes that were made by the S&P 500 and Nikkei 225 over the same periods. (The S&P 500 and Nikkei 225 chart appears under the chart immediately below.)
500 vs. Nikkei 225” chart above depicts the price performance correlations between the two major world stock indices for the global stock market crashes that occurred in August of 2015 and January/February of 2016. The above chart also depicts the divergence, or anomaly that has occurred between the Nikkei 225 and the S&P 500 since the beginning of April 2016. Given the prior price crash correlations of the world’s two major stock indices, which coincide with the crashes of the U.S. dollar as compared to the yen, the probability is high that the divergence, or anomaly will prove to be temporary.
The 10-year U.S. dollar and Japanese yen chart below explains the relationship between the U.S. dollar and the yen during the crash of global markets that began in 2008 prior to Lehman’s declaring bankruptcy, and lasted into early 2009. The chart depicts the U.S. dollar’s declined by approximately 20% from 110.55 yen to 87.28 yen during the four-month period, which began in August of 2008 and ended in December of 2008. The chart depicts an approximate 10% decline in the U.S. dollar as compared to the Japanese yen from February to April of 2016. The chart also depicts that the U.S. dollar as of April 8, 2016 has not yet bottomed. Further, should the decline be equivalent to the decline of 2008 the U.S. dollar would fall below 100 yen.
Below is a 10-year price-comparison chart for the S&P 500 and the Nikkei 225. At July 1, 2008 the charts for the Nikkei 225 and the S&P 500, which had been descending since May of 2008, diverged. The Nikkei 225 continued downward and the S&P went upward on July 1, 2008. The Nikkei continued on a downward spike trajectory until the index reached a base of support on October 1, 2008. The S&P 500 continued on its slightly upward trajectory until August 1, 2008. The S&P 500 than began a rapid descent, or spike, that resulted in its not finding its first base of support until November 1, 2008. Based on the 2008 charts, the Nikkei led the S&P 500 by a month during the crash of 2008. The chart also depicts the most recent divergence of the S&P 500 and Nikkei 225.
Based on the one- and ten-year historical price-chart comparisons for the yen, the dollar, the Nikkei 225, and the S&P 500, probability is high that the S&P 500 will soon decline significantly. It is most probable that the extent of the initial decline will be determined from the point at which the U.S. dollar stabilizes versus the Japanese yen. My March 16, 2016 article entitled, "Ridding World of Negative Rates May Require Meltdown of Income-Producing Assets”, provides details about the potential mark down of the S&P 500 could likely be in stages. My interview “Why Negative Rates could send the S&P 500 to 925” provides the rationale regarding why the S&P 500 could decline to under 1000.
For those preferring to liquidate as soon as possible, instead of their having to monitor Dynasty Wealth’s “NIRP Crash Indicator” that is monitoring for the next market crash, my recommendation is that they employ a “black swan” investing strategy. Nassim Nicholas Taleb devised the strategy of investing 90% of one’s liquid assets in government or sovereign debt securities and the remaining amount in extremely high-risk/high-return investments including venture capital and small cap and low priced stocks. The video below entitled “Markowski Visionary Analyst 5 of 5” provides details regarding sovereign debt being the only 100% safe solution that an investor can apply to protect their liquid assets from a market crash or economic calamity.
Taleb’s book (Taleb, N.N. 2007. The Black Swan: The Impact of the Highly Improbable. Random House)spent 36 weeks on The New York Times, Best Sellers list. In his book, Taleb, who had a distinguished career as a trader, contended that banks and trading firms are especially vulnerable to hazardous “Black Swan” events that expose their very defective models. (Please see CNBC interview with Taleb.)
Taleb’s philosophy is both extremely simple and safe. Invest under the assumption that it is inevitable that there will be a “Black Swan” or one-off event(s) that will devastate a market. Should such an event occur, the result would be that the shares of the companies, even those in the S&P 500 — arguably the world’s highest quality stock index — would get clobbered. Thus, it is ludicrous for an investor to believe that they have little risk because they are fully diversified. Diversification does not protect an investor during periods of extreme volatility or against unforeseen mega-events. Taleb made huge profits from the crash of 1987, the bursting of the NASDAQ dot-com bubble in 2000, and from the crash of 2008.
The research philosophy of the Dynasty Wealth LLC, the “boutique” research firm that I founded perfectly positions an investor with the high-risk and high-return investment opportunities required to effectuate a “Black Swan” investing strategy. Dynasty Wealth evolved from research that I had conducted on the ongoing transformation from the industrial economy to the digital economy. My research findings enabled me to conclude that the period from 2015 through 2020 would be the best ever for investors to generate dynasty wealth returns of 10- to 100-times from utilizing a truly diversified portfolio. The video entitled, “Digital disruptor companies have the potential to get $10 billion valuations quickly”, below provides details about how investing into a portfolio of digital disruptors enable investors to create dynasty wealth. It discusses digital disruptor UBER. A $10,000 investment into UBER in 2010 was valued for $105 million in 2015.
My April 1, 2016 article entitled, “No April Fool’s Joke: NIRP Crash Indicator Elevated to Pre-Crash Warning” provides access to all of my March 2016 research reports and three video interviews covering negative interest rates:
- Video: Negative Rate Risks Parallel to 2008’s
- Video: Negative Rates Pose Risks to U.S. and all Global banks
- Video: Michael Markowski, Founder, Dynasty Wealth sits down with SCN's Jane King
Additional videos are available explaining digital disruptor and first mover companies, whereby selectively investing in these market niches enables an investor to create dynasty wealth relatively quickly. (Please see http://www.dynastywealth.com/video.php.) In-depth information regarding my past and current predictions is available at www.michaelmarkowski.net.
My predictions are frequently ahead of the curve. The September 2007 predictions that appeared in my EquitiesMagazine.com column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While accurate, they proved to be premature. For this reason I had to advise readers to get out a second time in my January 2008 column entitled “Brokerages and the Sub-Prime Crash”. My third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. For my article “The Carnage for Financials Isn’t Over” I reiterated that share prices for the two remaining public companies continued to be too high. By the end of November 2008 share prices of both Goldman and Morgan Stanley had fallen by an additional 60% and 70%, respectively — new all-time lows.