Massive Earthquake Shakes Japan; Markets Shaken by Eurozone Debt

The 8.9 magnitude earthquake in Japan has added to the other worries of speculators these days to exacerbate the correctionary forces already in place, and risky assets were sold today all around the world as even Japanese goverment bonds managed to appreciate in a quick flight to safety. To be sure, the cost of rebuilding and stimulating the economy after the earthquake will plunge Japan  deeper into the red, as it struggles with a budget deficit and a public debt that is monstrous even by the standards of our extraordinary times. Yet the buyers of Japanese bonds seem to believe that if the worst comes to pass, it is still better to have a guarantee that you can get your principal back, which explains the popularity of government debt in the midst of great concern about the viability of public finances and inflation risks.

We are equally surprised to learn from a report in Bloomberg that PIMCO is going to be starting a derivative-lite version of its main fund controlling $230 billion in assets. The new fund will use less leverage, purchase less high yield paper and generally avoid the more exotic forms of risk that have been favored by the financial market over the past decade. It is a sign of the changes that the finance world is going through, and the shift in mentality towards greater conservatism in all fields, that the world`s most successful bond fund which has beaten "98% of competitors over the past 24 years" is now averse to risk plays that have made it such a success and a popular name in its field.

In Libya, the Colonel`s mercenaries and regular Libyan armed forces units are reported to have regained control of some of the oil producing regions near the town of Sirta, where clashes were taking place in the past days, with Western leaders moving slowly towards more drastic action against the dictatorship in spite of a lack of leadership. Today, France went so far as to recognize the opposition movement`s leadership as the legitimate representative of the country, and while others have so far not taken this step, it should not be long before whatever remains of the regimes legitimacy is destroyed by the Colonel`s erratic and arbitrary decisions.

Nobody should be surprised that sovereign debt issues in the Eurozone are resurfacing in this highly pessimistic environment, and we note the rise in the yield of Portuguese debt as the country`s finance minister warns of the need to understand the consequences of the crisis. We don`t think that the minister was saying anything extreme, but the market, in its usual habit, is waking up to all the risks and dangers at the same time, and lumping junk European debt with all the rubbish out there at a time of  great tension.

In short, today is proving to be an active day with lots of gloom in the air, and we can only expect it to get worse before it gets better, especially as the true scope of Chinese tightening, Middle East Revolution, and the Eurozone crisis remain inadequately understood.