In Japan, a Robust Yen Undermines the Markets

In Japan, a Robust Yen Undermines the Markets

TOKYO — Tumbling stock markets and falling currencies are causing global concern, but the Japanese yen is generating high anxiety for rising too much. The yen surged as much as 10 percent against the dollar last week. In the last month, it has gained an astounding 34 percent against the euro.

One reason the yen is rising is investors’ flight to quality. Another reason, many economists say, is the sudden end of one of the world’s biggest easy-money schemes, the so-called yen-carry trade.

The yen’s rise helped hammer Tokyo’s beleaguered stock market Monday. Share prices hit a 26-year low and are down 50 percent this year. A strong yen makes Japanese products more expensive during a recession in Europe and North America, hurting the profits of Japanese exporters.

Finance ministers from the world’s seven wealthiest nations issued a joint statement as the Tokyo market sank, saying they were “concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.” But the yen remained strong as investors signaled their doubt that governments would intervene to stop the yen’s gains.

Christine Lagarde, the French finance minister, confirmed as much in an interview with Bloomberg News.
The yen’s rise is owed, in part, to its status as a safe haven — in turbulent times, investors move money into the currency because Japan is the world’s largest economy after the United States’, and its banking system has limited exposure to the subprime crisis, even though it faces recession.

But currency analysts say most of the yen’s recent gains are because of the abrupt end of the yen-carry trade.
For much of this decade, Japanese and foreigners alike borrowed money in Japan, where interest rates were very low and money was therefore cheap. They invested that money in higher yielding assets across the world, from home loans in Budapest and Seoul to equities in Mumbai.

This turned Japan, with its $15 trillion in personal savings built up by the nation’s chronic trade surpluses, into a provider of low-cost capital for the rest of the world.

No one knows for sure how large this outflow of yen was.

Much of the yen-carry trade took place beyond public scrutiny, in the form of currency options or other types of derivatives trading. Most analysts agree its size was in the hundreds of billions of dollars, with some estimating it reached well more than half a trillion dollars. As the yen-carry trade grew, currency analysts warned it was a bubble of cheap credit, which one day would burst.

Now that day has come, say currency analysts and economists. Investors have been unwinding their yen-based loans as part of a panicked flight from risky assets — like Budapest home loans and Mumbai equities — and into safer havens like the yen and the American dollar, which is also rising against the euro and British pound.

The prospect of global recession has also led central banks in many countries to cut interest rates, reducing the appeal of borrowing in Japan: South Korea cut interest rates by three-quarters of a point Monday, its biggest one-day move ever.

The result has been a huge reversal in the flow of money, back into Japan and its currency. “This is the end of the yen-carry trade, and the yen bubble,” said Tohru Sasaki, chief exchange strategist in the Tokyo office of JPMorgan Chase Bank. “The yen is coming back home.”

As this money flows back into Japan, currency analysts expect the yen to keep gaining. Mr. Sasaki says his company’s forecast is 87 yen to the dollar, but it could go as high as 80 yen.

Mr. Sasaki said the size of the yen’s rise in recent weeks suggested that at least several trillion yen, or tens of billion of dollars, had flowed back to Japan. He said the last time he had tried to calculate the size of the entire yen-carry trade was three years ago, when he estimated that it totaled 40 trillion yen, or $425 billion. He said it could have easily grown much larger than that in recent years.

All this money from Japan added to an excessive abundance of cheap capital that many economists now blame for causing the current financial crisis. Some of the biggest players in the carry trade were American and European hedge funds and banks. But Japanese individuals also fed the outflow of yen by pouring their savings into overseas investments, like emerging markets funds, in search of higher returns.

Japan’s normally conservative homemakers even got into the act by trading foreign currencies online, becoming a force in global foreign exchange markets, known collectively as the Mrs. Watanabes.

One indicator of the recent return of money to Japan has been a surge of individuals here cashing out of mutual funds that invest overseas. A survey of Japan’s 40 largest such funds showed individuals had withdrawn more than $3.5 billion since Sept. 12, Mr. Sasaki of JPMorgan said.

The end of the yen-carry trade could have serious consequences, economists say.

In Japan, the higher yen has worsened the already darkening outlook for the nation’s export-driven economy, hurting companies like Toyota and Sony. The yen, and the prospect of a recession in crucial overseas markets like the United States, have helped drive the benchmark Nikkei 225 index down some 50 percent so far this year.

Globally, the carry trade’s demise could contribute to an overall increase in borrowing costs, especially for developing countries and lesser-known companies in developed nations, by cutting off a major source of low-cost capital, economists say.

“The unwinding of the yen-carry trade is just one more way of taking excess credit out of the system,” said John Richards, head of Asia research at the Royal Bank of Scotland’s Tokyo office. “Higher borrowing costs will go up disproportionately for riskier investments.”

A major reason for the end of the yen-carry trade has been a narrowing in the gap in interest rates between Japan and other developed countries. For years, Japan’s low interest rates — the benchmark overnight rate is 0.5 percent — were attractive enough to entice investors to borrow money here and invest it in countries with higher rates of return, despite the foreign exchange rate risks.

Now, investors are unwinding those loans as interest rate differences between Japan and the rest of the world shrink, making yen borrowing less lucrative. When its board meets later this week, the United States Federal Reserve is widely expected to cut its overnight rate again, from its current rate of 1.5 percent. That is already way down from 5.25 percent when the subprime problems first hit financial markets in July 2007.

Since that time, the yen has risen 24 percent against the dollar as investors have repaid their yen borrowings. Indeed, some currency analysts said this dissolution of the yen-carry trade may already be reaching its climax.
Koji Fukaya, senior currency strategist in the Tokyo office of Deutsche Bank, said he expected the yen’s gains to continue into November, before settling down at a value of about 90 yen a dollar.

“The unwinding and liquidation will continue for a few more weeks,” he said. “Most of the yen-carry trades have already been unwound.”

Spending Stalls and Businesses Slash U.S. Jobs

Spending Stalls and Businesses Slash U.S. Jobs

 

As the financial crisis crimps demand for American goods and services, the workers who produce them are losing their jobs by the tens of thousands.

Layoffs have arrived in force, like a wrenching second act in the unfolding crisis. In just the last two weeks, the list of companies announcing their intention to cut workers has read like a Who’s Who of corporate America: Merck, Yahoo, General Electric, Xerox, Pratt & Whitney, Goldman Sachs, Whirlpool, Bank of America, Alcoa, Coca-Cola, the Detroit automakers and nearly all the airlines.

When October’s job losses are announced on Nov. 7, three days after the presidential election, many economists expect the number to exceed 200,000. The current unemployment rate of 6.1 percent is likely to rise, perhaps significantly.

“My view is that it will be near 8 or 8.5 percent by the end of next year,” said Nigel Gault, chief domestic economist at Global Insight, offering a forecast others share. That would be the highest unemployment rate since the deep recession of the early 1980s.

Companies are laying off workers to cut production as consumers, struggling with their own finances, scale back spending. Employers had tried for months to cut expenses through hiring freezes and by cutting back hours. That has turned out not to be enough, and with earnings down sharply in the third quarter, corporate America has turned to layoffs.

“People have grown very nervous,” said Harry Holzer, a labor economist at Georgetown University and the Urban Institute, tracing cause and effect. “They have seen a lot of their wealth wiped out and as they cut back their spending, companies are responding with layoffs, which hurts consumption even more.”
The unemployment is widespread, with Rhode Island the hardest hit.

For Dwight and Rochelle Stokes of Phenix City, Ala., the layoffs are a family event. He lost his job two weeks ago as an aviation mechanic at the Pratt & Whitney jet engine facility near his home — a few days after his wife lost hers as a cosmetologist at Great Clips, a family-owned barbershop and beauty salon.
“It got really slow in July and August,” Ms. Stokes said. “I would sit there for two hours, and some days we had only 10 clients, four of us for 10 clients.”

The broadening layoffs are most pronounced on Wall Street, in the auto industry, in construction, in the airlines and in retailing. The steel mills, big suppliers to many sectors of the economy, are shutting 17 of the nation’s 29 blast furnaces — a startling indicator of how quickly output is declining as corporate America struggles to adjust to the spreading crisis.

“We have seen a softening order book in the most dramatic ways in the last week,” said Tom Conway, a vice president of the United Steelworkers of America, adding that layoffs in the industry “are just starting now.”
In September alone, 2,269 employers each laid off 50 people or more, the Bureau of Labor Statistics reported, up sharply from the spring and summer months, and the highest number since September 2001, when the aftermath of the 9/11 attacks coincided with a recession to spook employers. A spike in 2005 was related to Hurricane Katrina.

The financial services industry has been cutting jobs since last summer, when the credit crisis took hold. By some estimates, 300,000 jobs will disappear from banks, mutual fund groups, hedge funds and other financial services companies before the crisis subsides — 35,000 of them in New York.

Goldman Sachs alone, among the best performers on Wall Street, has announced plans to cut 10 percent of its work force, which stood at 32,594 at the end of last month.

The current unemployment rate, 6.1 percent — up more than a percentage point since April — is still relatively mild by post-World War II standards. The highest level since the Great Depression, 10.8 percent, came in November and December of 1982 as the economy was shaking off a severe recession.

The unemployment rate hit 9 percent during the mid-1970s recession, and 7.8 percent in the 1990-1991 downturn. The next peak, 6.3 percent, occurred in June 2003, during a long jobless recovery in the aftermath of the 2001 recession.

Dwight and Rochelle Stokes, both in their late 20s, have just joined the layoff rolls. So has Mr. Stokes’s father, Warren, 48, who lost a $30-an-hour job this month on the assembly line of the Chrysler truck plant in Fenton, Mo., near St. Louis., where the father had worked for 12 years. “They just cut back,” the son said.
Just a year ago, he and Rochelle, and their two very young children, moved to Phenix City from Fenton so he could take the mechanic job at the Pratt & Whitney plant in nearby Columbus, Ga. Airlines send engines there for periodic overhauls, and when Mr. Stokes arrived 400 workers were tearing down and rebuilding 15 engines a month.

But as the airlines reduced their flights — and announced 36,000 job cuts, nearly all of them taking place in the current fourth quarter — that number fell to three engines this month and “it was going to be worse for November, just one or two,” Mr. Stokes said.

“We came in on Monday morning and our supervisor told us not to touch an engine, and we knew there would be layoffs,” he said. By lunchtime, Mr. Stokes and 100 others had been escorted out of the building, with four weeks’ pay as severance, along with four weeks of health insurance and a $1,000 departure check.
As a starting mechanic, Mr. Stokes’s pay, $11.50 an hour, was just over half of what he had earned as the manager of a chain of pawn shops in Missouri. But he took the job anyway, moving with his family, because Pratt & Whitney offered full college tuition. Mr. Stokes immediately enrolled in Embry-Riddle Aeronautical University to pursue a bachelor’s degree in management and a minor in engineering sciences.

Using all his spare time, he had earned half the necessary credits when the layoff came. The severance included extended tuition, and Mr. Stokes, piling on course work, hopes to earn his degree by early summer. But he will do so by correspondence course; the family is returning to Missouri, moving in rent free with Mr. Stokes’s sister in Fenton.

“I am going to take seven or eight courses and hurry up and get my degree, and my wife will go back to cutting hair,” Mr. Stokes said, “and when I have my degree in June, I’ll apply for a management position. Even though things are bad, I hear there are openings in St. Louis requiring a bachelor’s degree.”

Thanks to Nytimes

Think Firefox 3 is fast? Try Firefox Minefield

A colleague today showed me a cool, new browser that he's been using to browse the web at blisteringly fast speeds. The browser? Minefield. The author of the code?

Mozilla.

Yes, that same Mozilla that makes the Firefox browser. Minefield is, in fact, a way to glimpse into the future of Firefox, as it's a pre-release/alpha version of the Firefox browser.

After spending some time with Minefield, one thing is clear: the future of Firefox is fast. Lightning fast.

How fast? Some claim that it has the fastest javascript engine on the planet, which means it leaves Google's Chrome browser in the dust. In my own unscientific tests, I'd say that this assertion is correct. Ars Technica pegs Minefield as 10 percent faster than Chrome.

You can download the latest nightly build for Mac OS X, Linux, or Windows, but be warned: it's alpha code. While a quick scan of the Web shows few complaints as to stability, Minefield may not be for you. It doesn't support some of my favorite Firefox extensions (like Adblock Plus), but it actually has surprisingly good support for extensions, given that it's a fast-moving project.

Feeling brave? Or simply feeling like your browser is too slow? Give Minefield a try. It's a separate install so it won't affect an existing Firefox install. You have nothing to lose but your chains.

Dollar and Yen Soar as Other Currencies Fall and Stocks Slip

Dollar and Yen Soar as Other Currencies Fall and Stocks Slip
By MARK LANDLER and VIKAS BAJAJ

WASHINGTON — Fear that the financial crisis is infecting once-healthy economies created another white-knuckle day for investors Friday, causing stocks to tumble from Tokyo to New York.

Uncertainty also roiled currency markets as investors continued to turn to the security of the United States dollar and the Japanese yen and drove down currencies of developing countries like Brazil, Ukraine and South Korea and even of developed countries like Britain.

In the United States, where the crisis began, investors were less alarmed than elsewhere. A rout in Asian and European stock markets sent the Dow Jones industrial average swooning by more than 500 points in early trading in New York, but trading recovered enough ground through the day to leave the Dow down 312.30 points, or 3.6 percent.

Just a year ago, a drop of that size would have been considered a black day in the markets, but in these days of routine triple-digit declines, it offered a modicum of relief to traumatized investors.

Still, there were chilling new developments that attested to the wide scope of the crisis, despite efforts by heads of state, central bankers and corporate leaders to stop the bleeding. Cash flowed into the dollar and the Japanese yen, the two most sought-after safe havens in a storm-tossed world, as it fled from emerging markets.

Hedge funds and other investors are pulling money out of these countries on an immense scale, analysts said, and putting it into dollars and yen. There were few safe harbors, as commodities also tumbled. Fears of a spreading global recession caused oil prices to fall 5 percent, to $64.15, even after OPEC, the oil cartel, announced it was cutting output. Government-backed mortgage bonds and debt issued by top-rated corporations were also dragged down in the undertow.

“This is a panic in the way of the fine 19th-century panics, where we all run around like headless chickens,” said R. Jeremy Grantham, chairman of the Boston-based investment firm GMO, who had predicted stocks would tumble. “I have been in the business for 40 years, and I have never seen anything like this.”

So great are the concerns among policy makers about the turmoil in currency markets that it has prompted talk of a coordinated intervention by the leading industrial countries in coming days, to quell the soaring dollar and put a floor under emerging-market currencies.

Such a move — in which the Federal Reserve and other central banks would sell dollars and yen and buy other currencies — has been used extremely sparingly by the United States in recent years.

“The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic,” said Kenneth S. Rogoff, an economist at Harvard.

When a developing country’s currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults — a feature of previous financial crises in Asia and Latin America.

In the United States, the rescue effort may also grow. The Treasury Department, officials said, is weighing whether to expand its program of capital injections to encompass insurance companies, many of which own savings and loans, and is under pressure to include the financing arms of the auto companies. The government injections are currently reserved for banks.

The Treasury secretary, Henry M. Paulson Jr., appears to be drawing the line at investing in hedge funds, which, officials note, do not supply credit to the economy and are in the business of taking on large risks.

Indeed, hedge funds accounted for some of the turmoil on Friday. They are being forced to sell their stocks, bonds and other instruments to pay off their investors and lenders. Beyond that, investors are increasingly convinced that the global economy is headed for a long, painful recession.

“There has been tremendous activity in the currency markets, the commodity market and the stock market that reveal the fingerprints of forced selling,” said Marc D. Stern, chief investment officer of Bessemer Trust, an investment firm based in New York.

The flight to safety is hurting once-mighty currencies like Britain’s pound. On Friday, worries about how the financial crisis would affect Britain’s economy caused the pound to lose 8 cents against the dollar, falling to $1.53.

While a strong dollar might be a boon for American tourists abroad, it creates a host of problems for economies.

And the downdraft of the pound and the euro — which fell to $1.26 against the dollar on Friday, its lowest level in two years — is less serious for the economic well-being of Britain and Europe than the deterioration of currencies like the Mexican peso or the Russian ruble.

Even if the Federal Reserve, the Bank of Japan and other central banks intervened in the foreign-exchange markets, it was not clear that it would reverse the pressure on these currencies.

“I don’t see this as a crisis breaker,” said Simon Johnson, a former chief economist at the International Monetary Fund. “But it would help emerging-market companies, and give everyone a chance to catch their breath.”

The last time the Federal Reserve intervened in currency markets was in September 2000, when it teamed up with the European Central Bank and the Bank of Japan to shore up the faltering euro. Before that, the United States and Japan teamed up to buy yen during the Asian crisis in June 1998.

With President Bush convening a meeting of the Group of 20 nations in Washington on Nov. 15, analysts said there would be pressure on the United States and other Western countries to show they were trying to cushion the blow of the crisis on developing countries.

The International Monetary Fund is trying to arrange a large credit line to help developing countries desperate for dollars. On Friday, Iceland announced it had reached a tentative deal for a $2 billion emergency loan from the fund — making it the first country to seek aid from the fund during this crisis, and the first Western country to do so since 1976.

The bad news started early Friday in Tokyo and Seoul, where big companies like Toyota, Sony and Samsung disappointed investors with their earnings. It continued as trading opened in Europe, with Britain reporting that its economy shrank in the third quarter.

By the time investors awoke in New York, stock futures had fallen so far that trading in them had been halted. Investors were on notice that the market could fall at least 6 percent, perhaps much more.

As trading started, the Dow dropped 450 points, or about 5 percent, and the floor appeared calm. Some traders said they took solace in the fact that the decline had not been greater — and far from the 1,100-point drop that would force a trading halt on the Big Board.

“It was frightening, absolutely frightening,” Warren Meyers, a floor trader for Walter J. Dowd Inc., said early on Friday. “Every day we are walking on shaking ground.”

Stocks seesawed for much of the rest of the day. A report that existing home sales jumped 5.5 percent in September as banks unloaded foreclosed homes did little to help the market.

But at about 2 p.m., stocks started rallying, and by 3 p.m., the Dow was down by just 100 points for the day. It was unclear what was fueling the rally, though investors seemed cheered by reports that the Treasury was weighing investments in insurance companies.

The Dow, however, was not able to build on those gains and fell sharply at the end of trading, dropping 183 points in 10 minutes.

The Treasury’s benchmark 10-year note fell 3/32, to 102 18/32, and the yield, which moves in the opposite direction from the price, was at 3.69 percent, up from 3.67 percent late Thursday.

As is often the case when stocks fall steeply, the market is starting to entice some investors, many of whom say they have never seen prices so low, to buy. Among them is Mr. Grantham, the GMO chairman.

After years of warning that stocks were unreasonably overpriced, he said he now believed they were below their fair value and had been slowly acquiring holdings in blue-chip companies.

“It’s a very nerve-racking time to be a value investor,” Mr. Grantham said. “You put a little bit into the market, and the next day you think, ‘What an idiot, what an idiot.’ ”

Thanks to Newyark times

MONKEY WIN OVER WITH TWO TIGERS

MONKEY WIN OVER WITH TWO TIGERS

Size is bigger !

Size is bigger

Who's to Blame for the Mortgage Crisis?

While the mortgage crisis undermines the entire economy, nobody is taking responsibility or accepting accountability.  But plenty of people are playing the mortgage meltdown blame game. Lots of fingers point to rating agencies that gave high marks to grossly underperforming assets.

In the run-up to the mortgage crisis, companies in the business of buying securitized mortgage products leveraged themselves to the hilt, routinely buying as much as 30 times the value of their pledged collateral. Is it any wonder that we're in the mess we're in?  By itself, that practice is a recipe for a credit catastrophe. But now we know that the so-called collateral was also hyped, leveraged, and not worth nearly as much as its stated value. Trusted credit rating agencies may be to blame.

Mortgage meltdown

In the absence of official government regulation, and the transparency of bookkeeping that goes hand in hand with prudent oversight, investors rely on private rating agencies to appraise assets. Had the agencies been vigilant, they would have noticed that the assets based on mortgages were losing value in a dangerously precipitous fashion. They might have surmised that housing prices don't continue to rise forever, and that, as the real estate bubble expanded, the underlying potential for further asset appreciation shrank. The catastrophic impact of the mortgage crisis could have been drastically lessened if the credit of many ailing financial institutions had been appropriately lowered by credit rating agencies.

But there's an apparent conflict of interest for the rating agencies, because the companies getting rated are the same ones that pay the rating agencies in the first place. It's like paying an appraiser to tell you how much your home is worth-which is why mortgage companies don't accept appraisals ordered by homeowners, but insist upon hiring their own appraisers. Government officials started cracking down on rating agencies this year, but it was too late to avert the mortgage crisis.

Conflicts of interest

A few months ago, three of the most influential agencies-Standard & Poor's, Moody's, and Fitch-reached a deal with the New York state attorney general's office to change how they do business. The agreement seeks to end the practice by having the issuers pay the credit-rating agencies in four installments during the rating process, not just at the end when the rating is awarded. Agencies also agreed to change how they rate mortgage lenders and their mortgage-underwriting processes, and to post ratings online for consumers to view before taking out a mortgage.

"The mortgage crisis currently facing this nation was caused, in part, by misrepresentations and misunderstanding of the true value of mortgage securities," New York Attorney General Andrew Cuomo said in an article in the Washington Post. But critics argue that changing the pay structure doesn't address the more fundamental problem of a conflict of interest between agencies and the companies they rate. They also complain that, even when agencies downgrade companies, they do it too late-by then, the problem has already exacerbated the mortgage crisis.

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