Beware folks.

The Yen is propelling this rally; the correlation has been ridiculous all year.  

The problem now is that Japan's government is going to run into some real trouble with rolling shortly, and there are sharks smelling blood in the water.

While the absolute interest rate move is not large, when you have as much debt outstanding as Japan does it doesn't take much of a move for a self-reinforcing move to get going.

And get going it will.

Exactly where we see the cascade of people saying "uh, value is no longer connected to price, and by the way price is too high" is not possible to know in advance.

That it's coming, and right when people are getting complacent, is a certainty.

Ole 'Abe may get more than he bargained for....

The Yen/Dollar cross went "smartly" through 100 yesterday, and this morning stands at 101.73.  

It was at 77 in October.

That's a 32% move in about seven months.

In response the Nikkei has gone screaming higher, but this index is of course "marked in Yen", which means it's not quite what it looks like.

But this sort of game -- intentionally and massively diluting the currency of a nation with the intent of "generating inflation" -- is not "free."  The "bad news" side came in the bond market which went lock-limit on yields (and down on price.)  

This of course means that anyone who actually was dumb enough to buy JGBs now has a capital loss.  An unrealized one, but a loss nonetheless.  Unlike the United States nearly all of those bonds are held by Japanese firms and citizens; the nation is utterly dependent on the ability and willingness of those domestic holders to roll over that debt.

The problem is that if Abe's gambit works then interest rates go up and stay up.  Since the government is massively in debt it will be unable on a cash basis to pay their bills, as they will not be able to roll the existing debt when it matures and pay the (new) coupon.  If they try then they are forced to continue to print even more Yen to fund the interest payments which in turn causes the value of the bonds emitted to go down further -- a monetary equivalent of a flat spin -- and is unrecoverable.

If it fails then the people are unable to pay their bills; the price of everything imported has already gone up a massive 30% in Japan.  Need I remind everyone that Japan has zero oil and must import all of it, along with most of their other industrial requirements -- and their nuclear power plants remain shut down?

So many people think this is some sort of "validation" of what Bernanke and now Abe have undertaken. It is not.  It is a coffin corner of these folks own design and while Abe is stuck here with the consequences first they're going to come to Bernanke's Fed too, although the worst of it will probably wait until after Ben's time has expired.

Unless, of course, the clock reaches zero in Japan first.

It is one thing to honestly put forward a question for scholarly debate.

It's another to intentionally mislead with a slanted agenda.

The latter is what's going on here.

What if there was a program that would cost nothing, improve the lives of millions of people from poorer nations, and double world GDP? At least one economist says that increased mobility of people is by far the biggest missed opportunity in development. And an informally aligned group of advocates is doing its best to make the world aware of the "open borders" movement, which suggests that individuals should be able to move between countries at will.

Double the world's GDP?

In a word: How?

The presumption is that the reason that people live in poverty and that nations are mired is not due to their society -- that is, the people themselves.  It's due to some externality -- usually blamed on their leaders who are "jackbooted bastards."

Well then, how do you explain the fact that even when our legislators do exactly the opposite of what the people demand two weeks before an election we still send 95%+ of them back to their offices instead of sending them home?

That destroys the argument instantly, but nobody mentions it.  Even though the best example of it is right here in the United States following the TARP vote.  You need more examples?  I give you two words in response: The EU.

The theory they espouse is that border restrictions of almost any kind are wrong, that they are antithetical to the fundamental human right of self-determination. To see their point, imagine an American in rural Mississippi being told she cannot move to New York City to seek a better career. That is exactly what the U.S. and other developed nations are telling the millions of foreigners who are denied access to their rich labor markets.

Oh nonsense.

America's "rich labor market" is paid for by the wages of Americans.  That is, we have skin in the game in that we provide these "rich markets" -- along with the rich social benefits that come with it.

I could be convinced to support an "open border" policy with a requirement for stringent and verifiable, public checks against blacklists for people involved in terrorism (among a few other choice activities such as child porn creation and distribution) if and only if the entire welfare state apparatus was disassembled first.

Not "restricted" from those who come here, disassembled.

That includes, by the way, the "free public education" schemes and the tax environment to support it.

Why?  Because those who come here for purely economic reasons need to have a full dose of incentive to succeed and the penalty of failure, including literal starvation.  If not then you are doing nothing more than leaving a full bowl of food out on the back porch and then being surprised when every feral cat and stray dog within 100 miles calls your rear stoop home.

That might not be so bad (after all, cats and dogs are cute) except that the dogs will crap all over your yard.  Then both cats and dogs will start breeding like crazy and instead of a few of each you'll have dozens, some of which turn out to be aggressive and menace your children.  Never mind that the very pretty birdhouse you erected in the back yard will become a food source and play toy for said cats, and you will no longer have any birds to go along with a yard full of dog-poo "landmines."

Eventually you will consider depredation on the very animals you attracted with your "open border" policy, and with good reason -- they will have destroyed your quality of life.

Every farmer and rancher understands this.  He allows the barnyard cats because they eat the mice, but he doesn't feed them -- the mouse and cat population balance one another naturally. If the cats screw too often and produce too many kittens some will have to run off to other places or die.  That's the balance of life.  If a bunch of coons show up and start trashing things he shoots them, because they are net consumers and offer nothing in return.

The premise that we have some "moral" argument for helping others presumes that they want said help and didn't bring their condition upon themselves.  This argument lacks evidence; indeed, the available evidence runs the other way.  Poor nations tend to be poor due to corruption, grift, fraud and similar.  Haiti was once a fairly prosperous land until they cut all their trees down and started using dynamite to fish, destroying their reefs.  That destroyed their fishing industry and left the countryside prone to massive mudslides when the inevitable tropical storm came through which happens a couple of times a year.

Who did that?  

Haitians did that.  You want to import that sort of short-term thinking en-masse, without limits, here, and then on top of that you wish to entice them with free school, free housing, free food and even better the more they reproduce the more of each of the above they get?

You're kidding, right?

Unfortunately the people advocating this crap, including Libertarians, are not kidding.

You need only look to places like California, that have both an extremely high illegal immigrant population and a trashed budget to see what happens  "Open borders" are de-facto policy in most of California and the outcome has been catastrophically bad.

The fact of the matter is that there are somewhere between 12 - 30 million illegal immigrants in the country today.  They are grossly over-represented in our prisons and jails, grossly over-represented in gang membership, grossly over-represented in terms of net welfare and other social spending receipt and grossly under-represented in terms of middle-class and above mobility.  

The problem isn't their country of origin -- it's them.  They come here because they think they have a shot at a better way of life but they don't, to a large degree, become Americans because they don't have to.  They don't have to go get a job because we'll give them welfare.  They don't have to pay for their own hospital care because we'll treat them under EMTALA if something bad happens.  They don't have to worry about how many kids they have because every one they poop out is an instant citizen and paycheck for the next 18 years, so they do exactly that and then collect WIC, Food Stamps, Section 8 housing and Medicaid, while doing the same destructive things they did back home including running guns and drugs while robbing, raping and killing anyone who*****es them off.

Ultimately the problem is one of property rights.  We as American Citizens have skin in this game.  This is our land and common wealth -- we built it, we pay for it with our taxes and we are responsible for maintaining it.  Our social safety net is too damn big but at least we paid for it with our own money, or the promise to deliver it in the future (via debt.)  

The immigrants who want to come here want access to not only that "safety net" as their primary means of getting by but also want the stability that it has brought to Americans.  But they didn't earn any of it and can't be charged for it ex-post-facto.  They are like locusts that descend on the farmer's field to eat the corn -- they put in zero effort to sow the corn, to till the field, to fertilize the crop or to water the ground.  

They just want to eat the damn corn, and they will do so until the corn is all gone, then they move on.

There's no problem with mobility of human capital provided you don't leave the food dish out and allow those who are mobile to steal the food that they did not have any part of creating.  If said immigrants get nothing they didn't help create themselves then and only then will they come here for reasons of putting in hard work and upward mobility rather than the parasitic behavior they display now.

What you can't do is support both a state "safety net" that is present (or larger) in one place while it is absent (or smaller) in another and at the same time have open borders.

If you do this, and we have been doing this, you don't get migration for economic opportunity, you get locusts who strip the land raw -- people who come to your nation as thieves, not participants.

Oh, but everyone believed that if Cyprus "came up with" $7 billion (by stealing deposits) and shutting down the banks, along with capital controls, the $10 billion was "enough."

Oops -- it's not.  As I noted at the time the destruction of jobs that came from pilfering small and medium sized business bank accounts was going to lead to monstrous layoffs -- and thus fewer tax receipts.

Now the number has gone up to $23 billion -- six billion more -- which incidentally is twice what the government was first told they had to find on their own.

Yet another abject fraud perpetrated on the people.

Are you learning yet America?  

Probably not.

Your Representatives aren't telling you the truth.  Neither Democrats or Republicans are doing so.  The Fed isn't doing so.  And you're not paying attention because "happy days are here again, the market is going up!"

Uh huh.  It did in 1999 too.

It did in 2006 and 2007 too.

There were "rational" and "reasonable" views of why everything was going to be ok then too.

But the number didn't add up then just like they don't now.

Don't say you weren't warned, because you were.

Repeatedly.

Yeah, I know, I know, the central bankers are "under control."

Uh huh.

This is why the 10 year JGB, Japanese 10 year bond rates, traded in a range that was, well, ridiculous.

But here's the real problem:

The BOJ said it will double the monetary base by the end of 2014 through purchases of government bonds, in Japan’s biggest-ever round of asset purchases. Ten-year Japanese government bond yields fell to a record low of 0.315 percent, the yen plunged by the most in 1 1/2 years against the dollar and stocks rallied to a 4 1/2-year high, as investors expect Kuroda to revive an economy beset by prices stuck at 1992 levels.

So if the BOJ thinks it can make inflation go to 2%, what is the embedded loss in that 10y bond?

That's fairly easy; it's 1.685% -- annually.  In other words if you buy said bonds at that yield you are forfeiting about 20% of your purchasing power, assuming that the BOJ manages to hit its target.

Do you really think that anyone is intentionally burning 20% of their funds?  No -- they're wagering the other way -- that the BOJ's actions will fail and the economy will effectively collapse as a consequence.

Now maybe they're right and maybe they're wrong, but with 2% inflation the 10y yield must exceed that in order to provide any sort of actual return, and the magnitude of the moves down at the current level tell you what sort of catfight is being had in terms of beliefs.

The dumb money piled into Japanese equities, just as it has in US equities and almost-certainly under the same rubric -- "there's nowhere else to go."

Uh huh.  That's what the cattle say as they are forced into the chute -- it'll all be ok, there's nowhere else to go.

What's waiting at the other end of that chute?