Ref: 2011-02-PO of March 15, 2011

Quake in Japan, Tremors in America

Nature is Supreme:

Nature is the most powerful force dawned upon the universe by almighty God. If
humans were to control everything, no one would have ever believed in God. When
something wrong is perpetrated over the years, it ultimately gets corrected by the
almighty force of nature with glaring violence with a warning and stern reminder “Do
not fiddle with me, did you get that?”

In the wake of severe quake followed by Tsunami in Japan, the humanity was served
with this violent reminder again. The illiterate people learn the message quickly, but
the educated class - so called Investors, speculators, hedge fund managers, pension
fund controllers, derivative players - does not learn easily and quickly. The nature has
therefore reserved the massive shock - CRASH - in whatever the educated class practice
day by day, year by year, decades by decades and centuries by centuries.

Have you heard the word “Crash” from the illiterate class - ever? No. But ask the
educated illiterates or Elite Class - they will recall every crash of 1929, 1987, oil
shocks of 1980s, crash of commodities, oil prices crash to $ 9 per barrels, crash of 2003
and crash of 2008 - all in financial markets with the paper and electronic money
created by humans to utter defiance of the disciplinary money of God - Gold.
Anil Selarka Quake in Japan, Tremors in America 2|P a ge

When Japan was not listening to the nature that low interest rates and weaker yen was
harmful to its economy for almost 16 years, the Supreme Power assumed the command.
It engineered the massive crash in the form of major earthquake of 8.9 scale followed
by huge Tsunami that wiped out almost entire north east coastal cities of Japan in less
than few minutes. What was built over 66 years since World War II was destroyed in
less than 6 minutes. That's the nature - the Supreme Lord.

Japan - Making money in hard goods, loose in Paper trading

When the Japan was creating fabulous products, everyone admired, including God. HE
must be carrying Giant LCD or HD TV to micro TV, gadgets, mobile phones! Just kidding.
But when HE saw that the Japanese were blindfolded by its love for dollar, not God, HE
was perturbed. HE tried to teach the Japanese with subtle warnings by causing its
NIKKEI crash from 37000 to currently 11,000 (before Tsunami), and not allowing its
economy to prosper for 16 years. However, the Japanese did not understand nor did
they heed the warnings.

Japan was exporting huge physical inventories to United States, UK, Europe and rest of
the world in fierce competition, not in terms of price, but in terms of extra ordinary
quality. However, what it earned was kept in Dollar reserve with the United States by
deliberately keeping its currency artificially low. Japanese governments in almost every
succession went on printing more and more Yen to buy dollar to keep its own currency
weak. United States mused. It never objected to Japanese keeping its currency low but
went on lecturing China to allow its currency strengthen when both countries were
following almost identical policies.

Violent Correction
The nature could not prolong the obvious wrong. It finally struck, caused severest
quake on record in Japanese history, and sank almost every asset that was used to build
the massive reserve in dollars. When the humans do not heed the warnings, the nature
acts, and IT DOES ACT with severest punishment. But even then, the humans do not
learn.

When the disaster struck, the natural course for Japanese was to withdraw the dollar
and convert into yen. After all, its reserve - a kind of savings - has to be used one day for
eventual use in calamity. But the Japanese did not use. They pumped into money
market 15 trillion yen created out of thin air (not by selling dollars) which is equal to
US$ 183 billion. And what happened - the NIKKEI dropped further by 14% in single day!
On following day, it pumped in another 8 trillion yen (almost $93 billions) again out of
thin air into the financial markets, that is, the paper market.

Almost 23 trillion Yen went up in smoke in just two days.

When the need of the hour for the Japanese government was to rush massive physical
aid to affected people and area under destruction, it went on engaging itself into
Anil Selarka Quake in Japan, Tremors in America 3|P a ge

unprecedented money market operation or in paper and intangible markets with

massive force without any conviction.

According to CIA latest figures, Japan today has massive public debt of 197% to its GDP.
In the aftermath of quake, its GDP is likely to go down by 30% and its public debt (with
25 trillion yen printed by budget deficits) will rise by 25% that will worsen its Public
Debt to GDP ratio to over 353% - in less than 9 months. (Existing Public Debt + 25% of
new PD divided by new GDP (Current GDP - 30% deceleration) %.

With massive 25 trillion injected into the system, the specter of inflation will rise very
fast. The inflation in Japan will be almost uncontrollable. With huge short supply in
daily essentials such as water, electricity and food accompanied by umpteen supplies of
additional Yen created out of thin air, Japanese government has played a gamble of
lifetime in casino type of operation. In all probability, this gamble is not going to work.
With massive political instability, uncertain economy and now the humongous debt
with destruction, we do not know how many years the Japan will be thrown back. It
will recede into 5th or 6th largest economy after the effects of the dire game is played
out in full.

True that Japanese are the most industrious people in the world. But what can they
possibly do when their policy makers are running with the speed of Boeing 787 in
wrong directions?

The Supreme Nature will reassert itself. It is possible that -

1. Japan will have to sell massive amount of US Dollar reserve in favor of its own
currency - Yen. It needs more yen at home than dollar overseas. What is the use
of savings if it cannot be used even during the days of extreme necessities?
1. As result, it is possible that Yen will eventually rise with outflux of dollar
and influx of yen into the monetary system in Japan
2. Unless the Japanese Monetary Authority and Bank of Japan adopt another
imprudent step to pump in trillions of yen into the money market without
selling its dollar reserve.
Anil Selarka Quake in Japan, Tremors in America 4|P a ge

3. Whether BOJ pumps in more money or not, it is inevitable that the

Japanese Yen will rise from current 82Y/$ to almost 60Y/$ in less than 18
months at the most. There is a strong urge for money to revisit home from
overseas, and this will be done very fast whether to the liking of Japanese
politicians and businesses or not. Home-coming of Yen will be the
biggest development in FOREX market in more than 60 years.
4. The journey from 82Y to 60Y will not be easy one to start with. Initially,
with growth figures of Japan revised down followed by rating downgrade
by S&P, Moody and Fitch credit rating agencies, some hedge funds will
short the Yen knowing fully well that Japanese government will love their
actions. The Yen might show some initial weakness right up to 86.8 levels
at the most, after which it may résumé its upward journey stopping at 81,
78, 75 and 71. Once it surpasses the 69Y threshold, it may move to 65,
63.50 and eventually 61 level. There could be concerted actions from G7
nations at the instance of Japan's request, but such actions cannot stop the
rise for long time.
5. Those who short the Yen presuming lower GDP growth or excessive
printing of yen by BOJ will be simply butchered later on.
6. Those overseas workers working in Japan and getting their salary or other
income in Yen should preserve their savings before remitting the amount
to their own country in panic. In this authors' personal opinion, any
weakness in Japanese Yen to 86Y or about will be entry point for taking
position in Yen. Those who sell Yen in panic may feel hurt later for loss of
profits.
7. Japanese insurers will have no alternative but to sell its overseas assets like
stocks, bonds, and treasuries and bring the money back home to meet the
insurance claims. These insurers do not have luxury to print the Yen on
their back yard. They are private corporations, not government entities
who can print the Yen at random out of thin air.
2. Japanese growth will be knocked off in big punch. It will be a sufficient cause for
foreign investors to shun the NIKKEI and invest less in Japan for at least 2 years.
3. Interest rates may rise in Japan which has been kept at artificially low level for a
long time. There will be a dearth of capital, so new capital will come at a cost, not
free as before.
4. Japan will be absent at all future treasury auctions in United States. Or its
scale of activity will be substantially cut down. When one major creditor
Japan stays away from the participation, there will be rise in effective interest
rates in United States. Watch out the LIBOR - it may give first indication of
movement in interest rates in United States.
5. If Japan and its businesses/insurers/banks are obliged to sell the dollars, and buy
Yen for use in resurrecting manufacturing plants in Japan, US dollar index (paper
trading) and physical dollar itself will come under severe and continuous selling
Anil Selarka Quake in Japan, Tremors in America 5|P a ge

pressure. Gold and silver may gain steadily with faster pace than ever before
(barring short term downward prices caused in wrong conception).
6. The countries exporting food items such as Australia, Canada, USA, China
and other nations will gain from their exports if they are not facing
foodstuff related inflation and did not ban exports.
7. There is a wrong conception that the Japanese manufacturers will lose their
production advantage. They will make it up by producing more in cheaper
overseas plants. Therefore, the countries housing Japanese manufacturers will
witness substantial increase in exports from their countries. China, Malaysia and
Indonesia will be the biggest gainers in exports. Their respective currency may
gain too as result.
8. With Yen rising, the profitability of Japanese conglomerates will decline in Yen
terms but in dollar terms they may not lose advantage due to rise in Yen value. It
is possible that some Japanese companies will start preparing their final accounts
in US dollar terms rather than their own currency to window dress it better.
9. Those who contracted debt or contracted “Yen Carry trades” by borrowing in Yen
or swapping into their ultimate currency to fund their own requirements will
suffer huge losses because their debt in real terms will rise anywhere between
10% and 25% depending on the level of Japanese Yen appreciation versus
currency of destination. For instance, a bank like ICICI in India, who contracted
Japanese Yen debt equivalent to $ 1 billion of loans or Commercial Borrowings in
recent past, will find its profitability shrinking to the extent of Yen appreciation
versus Indian Rupees.
10. The derivative markets which was mainly involved in "Carry Trades against Yen"
and in non deliverable forwards, will find themselves losing humongous amount.
There could be total collapse of derivative market when the Yen starts
strengthening and interest rates in Japan ticking higher from near zero level.
Those Yen borrowers for swap transactions will suffer from higher Yan and
higher effective interest rates on Yen.

Tremors in America
There will be more consequences. Most worried persons will be Bernanke and Geithner
(and Obama himself) because none of their high profile visit is going to work in their
favor this time. They can’t bring even moral pressure on Japan not to sell the treasury
or buy more of them in future auctions. Their day of inevitable will be nearer than
before. When Japan starts selling treasury, Chinese are not going to sit behind and
watch their value shrinking right before their eyes – they have even greater stake after
all. Based on the cardinal investment rule “ If you can’t fight them, better join them”
the Chinese will be forced to join the Japanese in selling treasury dollar game. US dollar
is going to be vulnerable in future. Give or take 4 to 6 months, and you will have heavily
losing US dollar in the Forex game.
Anil Selarka Quake in Japan, Tremors in America 6|P a ge

All in all, the currency market is going to witness the massive upheavals. The major
beneficiaries will be Aussie dollar and Canadian dollars. Minor beneficiaries will
be Brazil Real and South African Rand. Controlled currencies of China and India
may not rise much in spite of higher exports for obvious reasons. They have
surplus food stuff to export to Japan; secondly, they are least affected by inflation due
to stronger currency and economy, and finally they are benefitted by higher hard and
soft commodities. Aussie dollar might rise to 1.20 and Loony (Canadian Dollar) may
rise to 0.88 to 0.92

It is amazing that the Japanese leadership is engaged into paper trading exercise when
it should focus on real tangible asset exchange and development.

They have still not understood that it has been adopting deliberate "weak yen' policy
right from 142Y to current 82Y in last 16 years with disastrous result. If it has amassed
US dollar reserve of about $900 billion, it has in real sense lost nearly $300 billion in
Forex losses, if you take average rate of 120Y. That is, they shorted or sold Yen at
average price of 120 and now can get back only 82 or 2/3rd of what they sold. That is,
they lost 1/3rd of $900 billion or cool $ 300 billion in Forex losses.

Japanese Government will learn it hard way that "Selling Yen and Buying US Dollar is
injurious to Japanese Wealth" and by the time it realizes the truth, it will be too late.

Anil Selarka (also known as Kalidas)

Hong Kong Camp: USA
March 15, 2011 – Ref: 2011-02-PO

©2011 by Anil Selarka (Kalidas) All Rights reserved by the Author