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US Housing Market Imploding! Japanese Yen Exploding!

Stock-Markets / Yen Carry Trade Dec 09, 2007 - 01:16 AM GMT

By: Money_and_Markets

Stock-Markets

Jack Crooks writes: While the mainstream media is cheering Washington's new bailout plan for homeowners, bad news keeps pouring out of the U.S. housing markets like the floodwaters of the Chehalis River:

The percentage of home loans in any stage of foreclosure surged 70% — from 1.05% a year earlier to 1.69% in the third quarter, the worst on record.


The overall mortgage delinquency rate has jumped to the worst level since 1986.

Even the delinquencies on FHA loans, supposedly safe and secure, have jumped.

The total damage: Goldman Sachs recently released a report estimating a whopping $450 billion before the carnage is over. And the Treasury's latest bail-out plan only adds to investor losses, wiping away, with one stroke of the pen, billions in promised interest income.

Inevitable result: Big trouble for the U.S economy and massive opportunities in the currency markets.

It all starts with ...

The Fed Moving in Aggressively To Avoid a U.S. Recession

The Fed meeting on Tuesday of next week could be a watershed event.

Analysts — the very same ones who repeatedly claimed "the worst is over" — are second-guessing themselves left and right. Will all this credit market turmoil lead to a full-blown recession here in the U.S.?

My answer: Probably. And if the Federal Reserve is serious about trying to avoid it, it's going to embark on one of the most massive rate-cutting, money-pumping efforts we've ever seen, and next week could mark a new launching pad in that herculean effort.

The Fed knows what's happening. They see the huge losses on Wall Street. They see how panicked mortgage investors are, and how pinched consumers are becoming.

They also know that U.S. growth depends on investor faith and consumer confidence. So they're going to do anything and everything in their power to try and keep both in the game — investors investing and consumers happily shopping away until at least year-end.

Unfortunately, more money and rate cuts are not going to solve the problem ...

You saw what happened when the dot-com bubble burst. The Fed responded by cutting rates to the bone. Did that stop the U.S. from falling into a recession? No.

And this time, things are far worse. This time, it's not just one sector. It's hundreds of millions of homes, $13 trillion in mortgages and a massive financial sector that are taking it on the chin.

If banks are more reluctant to loan out money, business activity grinds to a halt. If businesses grind to a halt, you can bet they won't need as many hands on deck. That, in turn, spells disaster for consumer spending.

The risks to the U.S. economy: Huge.

The chance of a recession: Very high.

The irrational exuberance of the Fed in heading it off: Unprecedented!

But that won't come as a giant surprise to investors.

Here's What Will Really Shock the Markets: A Massive Flow of Money Back to the Japanese Yen

Tremendous pressure is building in the yen-carry trade .

Investors borrowed an estimated $1 trillion from Japan to invest in riskier assets. Now, as these investors recoil from the rising risk of losses, they're rushing back.

But so far, only a small fraction of that money has returned to Japan, and already the yen has rallied sharply.

Using the continuous futures contract as a benchmark, the value of each yen has surged from less than .82 cents in July to nearly .94 cents last month.

Now, it's come back down a bit, to about .90 cents.

But as you can see from this chart, it's holding solidly to a firm and steep upward trend (red lines).

To me, that's a set-up for smart investors:

You have a clearly established trend.

You have a convenient entry window.

And you have some of the most powerful forces in history behind you!

The Fed meets Tuesday. So I'm shooting off my next recommendations this coming Monday. If you want to join me, I'll need to hear from you by tomorrow (Sunday) midnight at the latest. Otherwise it will be too late to get you the recommendations.

Martin provides the details in his latest update posted to the Web last night .

Best wishes,

Jack

 

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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