The Japanese Market
Perhaps Brian Reynolds can bring a little more expertise to this subject, but I would like to comment on something central to my volatility thesis: debt.
The Japanese bond market over the last two days has given up almost all of its gains from the last three months, which is quite substantial. The Japanese banks are heavily weighted in these as well as U.S. bonds. There seems to me to be a tight web of cross-ownership of a ballooning debt bubble between the world's two largest economies.
This may only be a correction, and there may be intervention, because the stakes are very high. But if the erosion in the Japanese bond market were to continue it could eventually spill over into the U.S. bond market as Japanese banks are forced to make other asset sales. Japan is one of, if not the largest, foreign holder of U.S. debt. The dollar has already weakened; a further decline below 92 could signal the beginnings of U.S. bond selling by the Japanese, ironically who just bought a big chunk of them to support the yen.
Any reasonably significant blow to U.S. bond prices at this stage of our economic malaise could be deadly to stock prices. I will make that bet indirectly and cheaply by buying volatility
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