The Correction – One Way To Trade It

It’s simple.

The hot money out of Japan has been responsible for “a pile” of the recent run up in U.S equities, as Ben and his buddies have been busy enough in the bond market – with little success. TLT is currently priced at 102.65!

I’m pulling up this ol chart from back “I don’t know when” I first suggested what was to come for U.S bonds, the U.S dollar – and inevitably U.S stocks.

Quote: “Not much else to add here as the intermarket analysis above pretty much outlines the direction for the U.S Dollar. I feel we will likely see a time very soon, when U.S bonds, U.S stocks as well as the U.S Dollar all fall together.”

TLT in Weekly Downtrend

I really don’t think people grasp how screwed the Fed is, and unfortunately how this translates to the “middle class” of America – who will be stuck paying for it.

With 85 billion per month in effort, you can see by only a couple of “down days in the market” the Fed is absolutely powerless when the “market decides” what’s what.

You’d seriously have to ask your self what on Earth would need to occur to “reinstill confidence” in the purchase of U.S bonds/debt? Not to mention the “global move” away from USD. Tapering is impossible. QE will be doubled no question, then likely tripled.

Did I mention that recent data has just had the “Yuan” replace the Euro as the second most widely traded currency on the planet?

This may not be the “last of it” as the large majority of retail investors will view this “next dip” as an excellent place to buy….and they will be right – for a couple weeks.

You want to play the correction?

Get short Japan.

The Yen Carry Trade Unwind: What’s Coming Next

USD/JPY: The Mother of All Reversals

Look, when I’m talking about getting short Japan, I’m not talking about some casual swing trade here. The USD/JPY pair has been the backbone of this entire charade, and it’s about to get ugly fast. We’ve seen this monster climb from 80 to over 100, fueling massive carry trades that have pumped liquidity into everything from emerging market bonds to Silicon Valley tech stocks. But here’s the kicker – the Bank of Japan’s infinity QE program is starting to show cracks, and when this thing reverses, it’s going to make 2008 look like a warm-up act.

The fundamentals are screaming reversal. Japan’s current account surplus is shrinking faster than Ben Bernanke’s credibility, and their energy imports are killing them. Meanwhile, every hedge fund and their grandmother is loaded to the gills with yen shorts. When the covering starts – and it will – USD/JPY is going to crater so hard it’ll leave skid marks on the charts. We’re talking about a potential 15-20% move in a matter of weeks, not months.

The Real Driver: Cross-Currency Volatility

Here’s what the mainstream financial media isn’t telling you – it’s not just about USD/JPY. The real carnage is happening in the crosses, particularly EUR/JPY and GBP/JPY. These pairs have been absolute rocket ships, but they’re built on the shakiest foundation imaginable. European banks have been borrowing yen at practically zero percent and buying everything from Spanish bonds to German equities. When this unwinds, the European Central Bank is going to be caught with their pants down.

AUD/JPY is another disaster waiting to happen. Australia’s commodity boom is over, China’s slowing down, and the Aussie dollar has been living on borrowed time. The only thing keeping it afloat has been Japanese investors chasing yield in Australian government bonds. When the yen strengthens and Japanese money heads home, the Aussie is going to get slaughtered. We could see AUD/JPY drop from current levels around 95 back to 75 or lower.

Yuan Ascendancy: The Real Game Changer

That Yuan statistic I mentioned isn’t just some footnote in a central bank report – it’s the death knell for dollar hegemony. China’s been playing chess while everyone else is playing checkers. They’ve systematically built bilateral trade agreements that bypass the dollar entirely, and now they’re reaping the rewards. The PBOC doesn’t need to announce some dramatic policy shift; they’re just quietly allowing market forces to do their work.

USD/CNY has been remarkably stable, but that’s about to change. China’s ready to let their currency strengthen significantly, and when they do, it’s going to create a vacuum that sucks capital out of every other market. Think about it – why would you hold dollars earning nothing when you can get yuan exposure with a currency that’s appreciating against everything else? The smart money is already positioning for this shift. By the time it hits CNBC, it’ll be too late.

The Fed’s Impossible Position

Bernanke and company have painted themselves into a corner that would make Houdini nervous. They can’t taper because the economy is still a zombie, but they can’t keep printing because it’s destroying the currency and creating bubbles everywhere. The bond market is essentially giving them the finger, with the 10-year yield climbing despite $85 billion in monthly purchases. That’s not a market – that’s a rebellion.

When TLT breaks below 100 – and it will – that’s your signal that the game has fundamentally changed. We’re not talking about some minor correction in the bond market; we’re talking about a complete loss of confidence in U.S. fiscal policy. Foreign central banks are already reducing their Treasury purchases, and when the private sector follows suit, yields are going to spike so fast it’ll make your head spin.

The endgame here is simple: massive QE expansion that destroys the dollar’s purchasing power, or QE cessation that crashes the equity markets. Either way, the middle class gets crushed, and anyone holding dollars is going to learn a very expensive lesson about monetary debasement. Position accordingly.