On Dec 22, 2008, I announced that my good friend Dork Yenbuyer and I decided to go all in and invest our life savings in the asset of our choosing, his being yen and mine oil. To recap, here are our initial investments:
– Mr. Yenbuyer invested USD $10,000 at an exchange rate of USD $1 = JPY 89.81 and received 898,100 yen.
– I bought 233 barrels of oil at $42.96/barrel, also a $10,000 investment.
Today, here is where we would be if we immediately liquidated our positions:
– Yenbuyer: at a rate of 89.92, he is down about $12 or a value of $9987.77
– I am not doing nearly so well: 233 barrels of oil at the current price of 35.82 = $8346.06.
How are the prospects?
The yen continues to look good:
The Economist notes that forces appear aligned in favor of further yen appreciation. The article quotes former finance ministry bigwig Eisuke Sakakibara predicting that once the rate hits 85, it “will trigger a wave of stop-loss orders, sending the exchange rate quickly to ¥80 or even ¥75,” precipitating crisis response by the government to intervene, possibly in concert with the US and other G7 nations.
Oil, on the other hand, not so much. With demand likely down for the full year, prices seem to hang on whether OPEC will seriously cut production:
Tough decisions ahead
Despite oil’s record slide from $147 last year to the sub-$40 level, as production cut by OPEC is not a simple matter. Historically, when the market has been oversupplied and the price trend is bearish, some OPEC member become reluctant to cut production, in order to maintain needed revenue to fund government spending, Felson said. That tactic to maintain revenue at all costs has historically driven prices even lower, as was the case in 1997-1999. Hence, those who assume that $30 represents a floor for oil, are assuming incorrectly, he said.
“So far, it looks like a repeat of the late-1990s market. If anything, the pressure to continue to pump oil may be greater now, given the large increase in social spending many OPEC nations undertook during the oil price boom. But the reality is that OPEC must cut production now, or else,” Felson said. “If OPEC doesn’t cut again, we will see prices fall into the mid-$20 range.”
I read in some business rag (The Economist? BusinessWeek?) that the yen would have to appreciate to around 50 per USD to equal its 1995 high in inflation-adjusted terms. Wish I had a link, but it’s certainly an easily-replicable calculation.
On top of that, one gets the sense that there might be a Plaza Accord-style devaluation in the USD in the next few years. What a great way to hit the “reset” button on all of the US debt held by China, et al. (and note that the Plaza Accord didn’t scare off foreigners from buying USD-denominated debt instruments).