Tuesday, March 15, 2011

Japanese Nightmare

It is horrible to watch the tragedy over in Japan unfold, as the news continues to get worse and worse regarding the nuclear power plants.

Japan had a flash crash overnight bringing their market down over 16% at one point and has since settled down over 10% in just one trading session.

That is the equivalent of the DOW falling 1200 points in one day.

This is the first true panic we've seen in the global markets in many, many months as all stock exchanges are getting crushed around the world.  (The DOW is down close to 300 points before the open)

My interest is how asset classes are behaving during the panic.  In recent, calmer, sell-offs we saw a move away from the American dollar into Swiss Francs and precious metals.

In this Japanese induced panic we have seen a rush to American dollars (treasuries) and a sell off in all asset classes (including precious metals which are getting hammered in the futures market)

While I did not think the catalyst would be a Japanese earthquake, I discussed this move recently in Big Picture Outlook: Waves.  I feel that there is one more deflationary shock ahead of us with a rush back into dollars, and the response will be a massive monetary stimulus from central banks. (money printing)

This scenario has played out exactly as expected using the Japanese earthquake as a case study.  As their markets fall precipitously, the Bank Of Japan (their Federal Reserve) has pumped over $98 billion in printed cash into the markets just this morning.

The Japanese government has authorized them to purchase ETFs and REITs to essentially bid up the stock market. 

I expect this to be a similar action from both governments and central banks around the world when the crisis moves from being geological back to economic and financial.

Stay nimble and prepared to purchase strong assets if they go on sale. This could be the catalyst for the next major move down.

And while we focus on the market impact here because this is a financial website, it important to remember that many lives are being harmed due to this tragedy.  Our thoughts and prayers need to be with the Japanese citizens affected by this disaster.

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