Yen Long Term

In 1980 it was 306 Yen to the Dollar.   In 2000 it was just 99.  If you held Yen for these 20 years you made a factor of 3 relative to the dollar just on the change in currency value.  This meant that you could earn low interest on Yen and still be willing to hold Yen.  However, if now the value of the Yen starts dropping fast people will not be so willing to hold Yen at low interest rates.

Foreign Holdings of US Treasuries Reported Down

The foreign holdings of US Treasuries seems to be down $70 billion in the latest reporting period.  This is only 1.2% but foreign holdings usually seems to go up every month.   There is a chance this is just some artifact of a change in the way they report the numbers as the previous reporting periods all have a footnote next to their date.   But it might be the start of an important new trend where foreigners don't want to hold US Treasuries or dollars.   If that is the case there is a risk that this starts the bond panic that results in the main hyperinflation feedback loop.

Interest Rates Up Implies Stocks Down

The earnings and dividend yields on stocks sort of compete with the interest yield on bonds for investors.   The inverse of the P/E ratio, or E/P ratio, can be compared to the interest rate on bonds.  The idea is often called the Fed Model and makes sense as a starting point for stock valuations.  This is really why when the Fed forces interest rates down they can expect the stock market to go up.   But this implies that if interest rates double you should expect the stock market to go to half what it was.  I expect that algorithmic trading must take this into account.    At the moment the interest rates are up far more than stocks have gone down so far.  I think there is a good chance that interest rates keep going up.  The more bond values drop the less people want to hold them.  The more sellers there are, the more the value drops.   I think there is a high risk that the stock market goes down much more.

Here is E/P compared to interest rate on 10 year government bonds:

Here is E/P compared to interest rate on corporate bonds:

The graph below gives some idea of what is going on in corporate interest rates currently.  Just eyeballing, it looks like about 5% to about 7%, or about a 40% increase.  It could easily go up much much more.

 As corporate bond yields go up it really makes sense for stocks to go down.  Another way to think about this is that when companies can borrow money really cheaply an easy way to boost earning per share, and possible get executive bonuses, is to just borrow money and buy back some shares.  But when interest rates go up they won't do this so much.  So a major thing propping up the stock market will go away.

Yen Daily Volatility vs 5 Year Earnings

In the past week the yen has gone up about 4%, then down about 4%, then up about 4%. This is very high volatility.  Japanese bonds are paying 0.33% per year for 5 years, for a grand total, with compounding, of 1.66% after 5 years.  There were several days when the value of the Yen changed by that much in 1 day this past week.   When the daily volatility is about as much as the 5 year earnings, people should be rushing for the exits.   As people realize this and get out the central bank will make many more Yen to buy up existing bonds and new ones from the government.  The value of the Yen will drop faster.  More will exit bonds.   The central bank will print even faster. 

I have had hyperinflation as a hobby for several years now.  But it has been sort of theoretical and abstract.  It is amazing to watch things unfold in Japan as a real world example of how it works.  It is like we have a ringside seat at a slow motion train wreck.  Very strange and fascinating at the same time.  We live in interesting times.

Update on June 20th, 4 am:
     The Yen is down over 3% in the last 24 hours.   The 5 year bonds are paying 0.35% per year.  With 5 years of compounding this comes to a grand total of 1.76%.   The currency dropped about twice this in one day.  Only an idiot would hold JGBs.   Japan will soon have a shortage of idiots.