While there is probability that the US markets may see a major low in the markets in Sept or Oct. Many money managers and retail traders are only focused on domestic issues or the Fed raising or lowering rates.
Below is a screenshot of the Japan Topix which fell 12% today worse since 1987.
So while Japan Topix collapsed, there is a multiple variable side effect that occurs. This dramatic loss led to Japan investors to liquidate the overseas(US, EU, etc) investments to raise capital.
There is also the Yen/Carry trade (where foreigners borrow yen for other investments. These people also lost a fortune and had to unwind their positions.
Caution on Global Level
The point is everyone is watching the Fed and only domestic capital. But this Japan crash can cause a liquidity crisis for the world as investors who are losing lots of money simply have to sell assets to avoid margin calls and break even. This may come to fruition in September.
Yen “Carry Trade”
So the Fed has been raising rates, yet the Bank of Japan have kept the rates on money the same/unchanged. So investors borrowed cheap Yen to make higher return investments in dollars or euros. This sending Japanese currency lower.
Now a weaker Yen (Japanese Currency) creates the illusion of a valuable stock market and better earnings of Japanese stocks. This is due to if currency is higher, assets are cheaper in the terms of that currency. Same as if you take dollars overseas, you can afford much more assets/food/etc. This enticed foreign investors in the Japanese stock market. So much that these foreign investors bought 60bln in stocks.
Then you have investors crowding into a Short(selling) the Yen trade — betting on it to depreciate further in Japanese currency. These traders were caught off guard and this fueled the opposite direction upward (causing a short squeeze). They now have to cover their losses and bidding up the Yen in the process. This also accelerates the collapse of the Japanese stock market.
Why This Matters?
- Interest Rates will likely Move Higher (due to war)
- If Rates increase, Carry trade will be less viable in Japan
- This will shift capital flows – Japan will be risk of defaulting
- Japan is largest creditor in world
- Japanese own 10.6 trillion in foreign assets in 2023
- Japanese are big buyers of US and Australian loan obligations
- As Yen(Currency) goes higher, these investors need to dump foreign holdings
- This sets off a LIQUIDITY CRISIS (weakening asset prices, especially in Europe)
- This will be like Russia in 1998 during liquidity crisis
- International Capital flows matter
September / October Is Important
This may be a similar pattern in the Dow Jones below from1998 (which was also during the Russian Liquidity Crisis). So there is now caution on the possible US stock rally upward into Aug 28th. September may be hostile and I will be trying to raise capital into this time period for stocks.
” I have sent friends and family an chart of the similar patten from 1998 ” — I will not post it publicly because I was not smart enough or old enough to correlate it back to 1998.