Summary:
One, two major events in December: the Federal Reserve's interest rate cut and the yen's interest rate hike.
Two, black swan event: an unexpected interest rate hike by the yen could trigger a global crisis.
Three, why would an unexpected interest rate hike by the yen cause global capital markets to plunge?
Four, why does the Bank of Japan, this grandson, have conflicts with the Federal Reserve, the grandfather?
Five, will the United States allow Japan to suck its own blood?
Six, what should we do to protect our meager assets?
Image from the internet
Main text:
One, two major events in December: the Federal Reserve's interest rate cut and the yen's interest rate hike.
The results of the Federal Reserve and the Japanese yen's monetary policy meetings will be released in December, which are relatively close in time.
According to the Federal Reserve's official website, the FOMC meeting is scheduled for December 9-10. A rate cut is widely expected.
Resolution announced: 2:00 p.m. Eastern Time, Wednesday, December 10.
Converted to Beijing time: 3:00 AM on Thursday, December 11th.
Press Conference by the Chairman: 2:30 PM Eastern Time → 3:30 AM Beijing Time. (Note: Eastern Time is 13 hours behind Beijing Time; Daylight Saving Time has ended in the US in December.)
The Bank of Japan's interest rate decision will be held on December 18-19 (Thursday to Friday), and a rate hike is expected.
Resolution to be announced: Approximately 11:00-11:30 AM Beijing time, Friday, December 19th.
Bank President's Press Conference: Around 3:00 PM Beijing Time
The two countries announce the results of their monetary policy meetings approximately eight days apart. Theoretically, any fluctuations are possible during and after these eight days.
Just a reminder: There is a possibility of black swan events between 11:00 AM on December 11th and 19th, and thereafter.
To put it simply: After December 19th, the capital market may experience fluctuations that are beyond what people can imagine.
Let's put it simply:
The US interest rate cut is like the US turning on a tap, letting dollars flow out freely, making it easy to borrow cheap money everywhere.
A yen interest rate hike is like Japan suddenly becoming a super vortex, forcibly drawing money from all over the world (especially those borrowing yen to buy assets in other countries) back to Japan. The vortex is so huge that it can be described as "returning to the void level".
Result: With money being released and withdrawn simultaneously, the money will surge wildly like a tide, causing global markets to sway.
Note: "Guixu" is a bottomless abyss at the end of the world in the Classic of Mountains and Seas. It is like a super whirlpool, into which all the water from rivers, lakes and seas will eventually flow, and it can never be filled.
The term "bottomless pit" is used to describe Japan's interest rate hikes as an attraction so great that they could swallow up global funds.
II. Black Swan Event: A Larger-than-Expected Interest Rate Hike by the Japanese Yen Could Trigger Global Market Crashes.
The Federal Reserve's expectation management regarding interest rate cuts has been quite effective, and global capital markets have become accustomed to it. However, the yen's interest rate hike is a rare phenomenon in decades, especially when combined with the Fed's rate cuts, which will have a huge impact on global capital markets.
In particular, if the yen raises interest rates more than expected, even by a slightly larger margin, it could cause a global financial crisis.
The general expectation is that the yen will raise interest rates by 25 basis points. What would happen if it exceeds that? We can roughly simulate it:
If the yen raises interest rates significantly, the effect can be visualized as:
1. The Japanese yen is like it has been given a "stimulant" - the USD/JPY exchange rate may jump (appreciate) from around 155 to 140 or even lower in an instant, and the wave of carry trade unwinding will amplify the volatility.
2. Japanese stocks are on a short-term rollercoaster ride – soaring interest rates and discounted valuations could see the Nikkei index fall by more than 5% intraday, and it wouldn't be surprising if highly leveraged real estate and infrastructure stocks hit their daily limit down.
3. Japanese government bond yields "rocket launch" - the yield on 10-year government bonds can soar by 30 to 40 basis points in a single day, reaching a new high since 2008, and financial institutions holding long-term bonds have seen a sharp increase in unrealized losses.
4. Global “carry trade” liquidation – The trillions of dollars borrowed to buy US dollars, US stocks, and emerging market assets in Japanese yen will be liquidated in the opposite direction, causing US stocks, gold, Bitcoin, etc. to plummet simultaneously, and the volatility index (VIX) to soar.
5. Japan is facing a double blow: mortgage and corporate loan interest rates jumped all at once, causing a sharp drop in housing demand and putting pressure on housing prices; at the same time, the strong yen is hurting the profits of exporters such as Toyota and Nintendo, and the economic recovery may be stalled.
In short: A slightly aggressive interest rate hike in the Japanese yen would be a global "shock therapy" level of tightening, causing a global capital market upheaval of tsunami magnitude.
III. Why did the unexpected interest rate hike by the Japanese yen cause a plunge in global capital markets?
"Yen arbitrage" is a perverse and devilish mechanism.
Imagine this. A group of "speculative pirates" around the world have discovered a free ATM: Japanese interest rates are so low they're practically free (0.5%), while US bonds offer 5% interest. So they frantically borrow yen → exchange it for dollars → buy US bonds, US stocks, and Bitcoin, making a 4.5% profit on the exchange rate difference, and can even leverage it up 10 times—this is "yen carry trade."
Now Japan has suddenly announced that it will raise interest rates to 0.75% and also allow the yen to appreciate!
It's like an ATM suddenly announcing: "Starting today, you'll be charged interest on loans, and the yen has become more valuable!"
The pirates panicked instantly. The dominoes had been knocked over:
1. The cost of borrowing Japanese yen has increased, and profits have been eaten up.
2. If the yen appreciates by 1%, they will lose 1% if they exchange it back into US dollars.
3. If the margin is insufficient, the bank will force liquidation.
So all the pirates did three things at the same time:
1) Buy back Japanese yen.
2) Sell US stocks/Bitcoin (for cash).
3) Paying off debts.
What will be the result?
US stocks and Bitcoin plummeted → other investors followed suit and sold off → global risk assets "plunged into the sea";
The yen surged → more pirates were forced to liquidate their positions → the vortex grew larger and larger;
Liquidity evaporates instantly → no one in the market is willing to buy → prices plummet.
This is what is known as the "Ruin-level vortex"—all the water (capital) is sucked into the bottomless pit of Japan, while the ocean (global market) outside dries up.
This twisted logic stems from one reason: the Japanese yen is "the world's largest safe-haven arbitrage asset."
Because Japan simultaneously meets three devilish conditions:
1. Extremely low interest rates: Nearly 0% for the past 30 years, borrowing money is practically free.
2. Currency stability: The Bank of Japan has pledged not to act recklessly, so borrowing yen is not a risk of being suddenly "fleeced".
3. It is freely convertible: The Japanese yen is accepted worldwide like cash, and you can borrow and repay it whenever you want.
Therefore, global hedge funds, Japanese housewives ("Mrs. Watanabe"), and Wall Street giants (including Buffett and Soros) are all scrambling to borrow yen. It is both the cheapest financing currency and the safest safe haven—when the market panics, funds flow back to Japan, pushing up the yen's value.
How much yen carry trade money is circulating globally? At least $4-5 trillion, with the most exaggerated estimate being $14-20 trillion.
If this "exaggerated" statement is true, what does it mean?
Exceeding the entire market capitalization of the Chinese stock market;
That's enough to buy up all the Bitcoin in the world five times over.
These funds float like ghosts in: US stocks (Apple, Tesla), US bonds, gold, Bitcoin, and even Argentine peso bonds.
What gives these people and institutions the right to borrow Japanese yen? Is it by using facial recognition?
no.
They need collateral. That's why they have to make a quick getaway as soon as the yen raises interest rates.
No matter who wants to borrow money, they always have to give the bank something as collateral; the collateral is divided into three layers:
1. Advanced players: Use US Treasury bonds and German government bonds as collateral – the safest option, and borrow Japanese yen at the lowest interest rate.
2. Intermediate players: Use US stocks (S&P 500 ETF) and gold as collateral – medium risk, slightly higher interest rate.
3. Crazy Players: Using Bitcoin, Tesla stock, and Argentine bonds as collateral – the highest risk, but also the highest return.
To give a simple example: You buy one Bitcoin when it's priced at $50,000. Then you mortgage it to a Japanese bank, and the bank lends you $40,000 at an 80% ratio. You then add another $10,000 to buy one more Bitcoin.
If you want to continue playing, you can borrow $40,000 for a second Bitcoin. If you add $10,000, you can buy another Bitcoin.
Then you keep playing, and the third Bitcoin can be borrowed for $40,000. As long as you add $10,000, you can buy another Bitcoin.
You're happy, keep playing, and your fifth Bitcoin arrives in your account.
So what's your situation now? You've only spent $90,000, have 5 bitcoins, and a $160,000 loan.
If Bitcoin rises to $100,000, how much money will you make? $250,000.
At this point, you can repay the loan to the bank, and instantly you'll have $340,000. That's more than tripled.
But what if Bitcoin doesn't rise in price, but instead the Japanese yen does? You don't have enough Bitcoin to use as collateral, and the bank asks you to provide additional margin, which you happen to lack. What do you do?
The only option is to sell the Bitcoin I have to pay off the yen loan.
At this time, many people just like you are doing the same thing, so will the price of Bitcoin plummet?
What would you do if the price of Bitcoin dropped to $32,000?
Your initial $90,000 investment has been completely wiped out, and your Bitcoin holdings have been transferred to the Bank of Japan.
This leads to the four-step death of these arbitrage funds after the yen's interest rate hike.
Step 1: Close the position.
The pirates who borrowed Japanese yen sold off US stocks/Bitcoins in a frenzy, converted them into US dollars, and then used those dollars to buy yen to pay off their debts.
Step Two: The Yen Soars.
Everyone bought Japanese yen, causing the USD/JPY exchange rate to plummet from 150 to 140 → those pirates who didn't close their positions suffered even greater losses.
Step 3: Forced stop loss.
The bank sees the collateral (US stocks) price falling and demands additional margin → The pirates have no money and can only continue selling.
Step 4: Liquidity Black Hole.
Too many sell orders in the market, no one dares to buy → price plummets → triggers more stop-loss orders → a vicious cycle.
Extending this death spiral to global capital markets would result in a global "plunge into the sea".
US stocks fell: the sell-off started with tech stocks, with the Nasdaq falling 3-5% in one day.
Bitcoin crashes: 8% drop in 24 hours, $1 billion in liquidations.
Emerging markets are suffering: funds borrowed in yen to invest in the Vietnamese and Indian stock markets are also fleeing, causing these markets to fall as well.
Gold briefly broke through support levels: Yen appreciation → Dollar weakening → Gold should have risen, but the liquidity crisis prompted investors to sell gold for cash first.
The Japanese yen has undergone a dramatic turnaround: it has instead surged by 5-7%, becoming a "safe-haven vampire."
Image summary:
The global capital market is like a group of people having a party on the beach, with yen carry trades being everyone's "free beer." Suddenly, Japan announces that the beer will be charged for, and everyone panics and jumps into the sea (selling assets), trying to swim back to Japan (grabbing yen). As a result, so many people jump into the sea that the water (liquidity) is churned up, and even those that can swim (gold, US Treasury bonds) are dragged into the water.
The final outcome: either the Bank of Japan urgently halts interest rate hikes and the party resumes; or everyone drowns, and Japan alone makes it ashore.
IV. Why is the Bank of Japan, this grandson, fighting with the Federal Reserve, grandfather?
The yen's interest rate hike is actually a backstab to the Federal Reserve's interest rate cuts.
The Bank of Japan is really going head-to-head with the Federal Reserve, trying to take advantage of its weakness to its advantage.
They've reversed the Heavenly Gang.
US dollar interest rate cuts + Japanese yen interest rate hikes = the yen's "vampire" mechanism against the dollar.
The Federal Reserve cuts interest rates: the economy is overheating, and quantitative easing cools it down → the dollar weakens, and the attractiveness of US bonds and stocks decreases → global capital begins to "dislike" dollar assets.
The Bank of Japan's grandson raises interest rates: seizing the opportunity when the grandfather was easing monetary policy, suddenly tightening the yen tap → the yen becomes more expensive, and the cost of borrowing yen soars → global yen carry trade funds of 1-5 trillion US dollars are forced to repay debts.
The blood-sucking process is as follows:
Arbitrage funds first withdraw money from US stocks and bonds and convert it into US dollars → US stocks and bonds are drained of funds and fall;
Using US dollars to buy Japanese yen to pay off debts → The yen surged, and the dollar weakened further;
After the yen appreciated, more funds felt that "the yen is more valuable" and continued to flow in → the vortex accelerated, and dollar assets were drained.
To put it more vividly, it's like the grandfather is bleeding money (lowering interest rates), and the grandson is taking the opportunity to insert a straw (raising interest rates) into the grandfather's vein and suck it out, diverting all the money that should have flowed to the American market to Japan.
Of course, as a dutiful son of the United States, Japan doesn't dare to clash with the Federal Reserve. The real situation is: grandfather and grandson each have their own agendas, and as a result, their calculations backfired.
Grandpa (the Federal Reserve)'s logic is: the US economy has a fever, and the fever won't go down (inflation once surged to 9%). Grandpa force-fed fever reducers (raised interest rates to 5.5%), and now the fever has finally gone too far (employment is declining and consumption is weak), so he has to quickly replenish the body (cut interest rates), otherwise it will go into shock.
Grandpa's goal was to achieve a soft landing for the US economy. It didn't matter if some money flowed out, and it didn't matter if the dollar was weak.
The logic of Sun Tzu (the Bank of Japan) is: the Japanese economy has been a zombie for 30 years, lying in the morgue for a long time (deflation). Recently, it has finally come back to life (inflation has exceeded 2% for 43 consecutive months), but its body is still very weak (debt is 2.5 times GDP).
Sun Tzu's goal was to expel the cold energy (zero interest rate) from his body while he still had some warmth, otherwise inflation would steal all the people's savings.
But the actual effect was mutual conflict. Because: the grandson's medicine for dispelling cold became the grandfather's death warrant.
5. Will the United States allow Japan to leech off its own resources?
There will be schemes within schemes within schemes.
The United States will not allow Japan to leech off it like this; instead, it will "hold Japan by the balls and make it dance within a pre-drawn circle."
Back then, Yellen could make the Bank of Japan hesitate to intervene in the exchange rate with just a word, and Kazuo Ueda himself was a spy for the Federal Reserve, so how could he make Japan so rebellious?
In this game of interest rate hikes and cuts, the United States also has cards to play, and can even use this opportunity to indirectly drain Japan's resources.
Just like a weak person using the "Star Absorbing Technique" will only leave an opening for Ren Woxing to absorb their internal energy, turning him into a dried-up corpse.
How do you perform reverse life steal? The path is:
The appreciation of the yen led to a sharp drop in profits for Japanese export companies, which in turn caused stock price collapses, allowing American capital to acquire them at low prices.
Interest rate hikes trigger Japan's debt crisis → Yen assets plummet → Dollars flow back to buy US Treasuries;
Forcing Japan to increase its military spending contribution → Japan's finances become more strained → American arms dealers make huge profits.
Of course, there are even more elaborate and complex methods. Because Japan is one of the largest outward investors in East and Southeast Asia, it also uses the yen as a remote control tool to leech off resources from the East, Southeast Asia, South Asia, and other regions. The path is:
The yen appreciated, leading to a capital outflow back to Japan;
These countries experienced a triple blow to their stocks, currencies, and bonds, resulting in a sharp drop in asset prices.
The US dollar entered the market to reap the rewards.
This is a small reverse operation by the Federal Reserve when it was releasing liquidity: the US itself released liquidity, and then raised interest rates in the yen to prevent the released liquidity from flowing elsewhere (such as Tokyo, Europe, and Southeast Asia), so that it all fell on the US and Japan.
Moreover, there is a painful truth behind this: Japan's interest rate hike is a "suicidal self-rescue," and it may become the fattest victim through this rate hike, becoming the biggest winner of this round of dollar tide.
Just think about it simply: Japan's debt is 250% of its GDP, so raising interest rates is like stabbing itself in the heart. But why do it anyway?
If interest rates are not raised, inflation will wipe out people's savings and the pension system will collapse.
Japan's latest interest rate hike seems more like a pledge of allegiance to the United States: Master, look, I'm obediently raising interest rates to lure global capital to Japan, but in the end they still have to buy US Treasury bonds, so they won't really threaten you.
It will basically be a "controlled nuclear explosion": the yen appreciates to 140, Japanese export companies are in despair, but American investors take the opportunity to buy up Japanese assets at rock-bottom prices - Japan bleeds, and the US sucks the blood.
Therefore, the reasonable conclusion is that this was a scheme orchestrated by the United States and coordinated by Japan to hunt down global yen carry trade funds. The target was trillions of dollars of speculative capital, with the majority of the profits going to the United States, while Japan merely got a small share to sustain itself.
VI. How can we protect what little we have?
The core idea is: don't be a speculative pirate, just be a fisherman watching the show from the shore.
Which assets will be the first to be smashed? (List of those who jumped into the sea)
1. US technology stocks.
The Nasdaq 100 is a favorite "collateral" for yen carry trades. Once these positions are liquidated, Apple, Tesla, and Nvidia will initially fall by 3-5%. Speculative positions with leverage ratios as high as 300:1 will instantly trigger a chain reaction of stop-loss orders.
2. Cryptocurrency.
Bitcoin and Ethereum are the ultimate collateral for "crazy players," and their prices can plummet by 8-10% within 24 hours, resulting in billions of dollars in liquidations. They have the worst liquidity and are the most vulnerable to market crashes.
3. Emerging market stock markets (Vietnam, India, Argentina).
Funds borrowed in yen to invest in these markets will be withdrawn quickly, leading to a double whammy of currency devaluation and stock market crash, similar to the 1997 Asian financial crisis.
4. Highly volatile commodities.
Industrial metals such as silver and copper were sold off due to risk-off sentiment, and gold may also break down temporarily due to liquidity constraints.
5. Japan's leading exporter.
Toyota, Sony, and Nintendo saw their profits squeezed due to the appreciation of the yen, with short-term declines exceeding 5%, but they may be targeted by foreign investors for bargain hunting in the medium term.
Which assets offer strong defensive capabilities? (A list of lifelines)
1. Cash and cash equivalents (core survival).
Keep 30-50% in cash or money market funds to enhance flexibility. Don't invest money you absolutely need; only use spare cash.
2. High-dividend defensive stocks (shields).
High-dividend stocks in sectors such as banking, utilities, green electricity, food, and healthcare continue to be attractive during periods of declining interest rates, effectively hedging against volatility. These stocks tend to fall less during bear markets, attracting capital when seeking safe haven.
3. Gold and US Treasury bonds (safe haven).
Gold is supported by a weakening dollar and safe-haven demand, but caution is advised regarding potential short-term sell-offs during a liquidity crisis. Short-term US Treasury bonds (1-3 years) offer the highest level of safety.
4. Chinese assets (low-correlation islands).
Chinese assets have a relatively low correlation with global volatility and good liquidity. High-dividend sectors in A-shares (banks, utilities) and Hong Kong stock index ETFs can be used for diversified allocation.
5. The Japanese yen itself (the center of the vortex).
Holding Japanese yen in cash (or a yen ETF) will directly generate exchange rate gains from yen appreciation. However, the risk is that the Bank of Japan may suddenly intervene in the exchange rate.
Three principles for personal survival
1. Zero leverage: Clear out all margin trading and leveraged products between December 17th and 19th. Don't be a pirate.
2. Halve holdings: Cut more than half of the holdings in overvalued technology stocks and emerging market funds.
3. Configuring a dumbbell strategy: Place cash and high-dividend defensive stocks on one end, and a small amount of gold and undervalued Chinese ETFs on the other end.
A reminder to everyone:
Don't try to catch fish in a whirlpool; that's a game for big fish. The only thing retail investors should do is: stay on the shore (with cash), fasten your life preserver (high-dividend stocks), stay away from the diving area (tech stocks), and wait for the water to be drained before going in to collect seashells.
