Trouble in Japan and the U.K. add up to a stronger U.S. dollar
Expect the dollar to keep moving higher in the near term.
Credit rating worries in Japan and disappointing economic numbers in the United Kingdom pretty much guarantee that the U.S. dollar will continue to gain on the yen and the pound.
On January 25 Standard & Poor’s lowered its credit outlook on Japan’s AA-rated sovereign debt to “negative” from “stable.” Japan’s government doesn’t have a plan to cut its budget deficits, S&P said. The cost of protecting against a default on Japanese government debt within the next five years in the derivatives market rose by 0.05 percentage points to 0.9 percentage points.
The long-term worry is that Japan’s aging population and stagnating economy will eat into one of the world’s largest pools of savings. Domestic Japanese investors hold 90% of the country’s debt.
The next financial crisis has a name and it’s the United Kingdom
It’s one thing when it’s Greece or Portugal. A credit downgrade or warning for those two countries isn’t exactly headline news for most investors. For most of our portfolios these are peripheral markets.
Ireland in trouble too? Yawn. Don’t own any Irish stocks.
Italy? What’s new? Italy’s always running a deficit.
Spain? That’s a surprise. Time to check the portfolio. But, whew, don’t own any Spanish stocks.
The United Kingdom? Whoa. Now we’re getting serious. How could the home of Big Ben, the Queen, the Bank of England, the pound sterling, and double-clotted cream be facing a credit downgrade? And maybe even worse. The cost of insuring against a U.K. default in the derivatives market is only slightly lower than the price of insuring against a default by Portugal.
I don’t think the United Kingdom is headed toward a default on its debt. But it is in the midst of a crisis that could reopen wounds in a global financial system that is still healing from the last crisis.
And it’s not even on the radar screen for most U.S.-based individual investors. I’d put a currency and credit crisis in the United Kingdom at the top of my list for huge potentially market-shaking—and unexpected–events in 2010. (For more on the most expected but still potentially market-shaking financial crisis of 2010—that is Japan—see my post http://jubakpicks.com/2010/01/04/japans-huge-budget-gamble-will-push-up-global-interest-rates/ )
Well, put it on your radar screen now. That fast-moving blip is one that you need to be tracking. A financial crisis in the United Kingdom would be bad enough on its own. But I’m 100% certain that the moment a crisis gets down and dirty nasty in London—and it’s certainly headed that way–investors around the world will start asking, If it can happen in the United Kingdom, why not in the United States?
