Financial Tsunami

Although the footage and the numbers continue to come in from Japan on today's massive 8.9 quake and 30-foot tsunami wave, Tyler Durden argues that the real wave felt 'round the world may be the financial devastation, and it could not have come at a worse time.

Two months ago many were scratching their heads when Japan announced it was buying Eurozone bonds.  After all - why would Europe want to have a marginal buyer (or as the case may be seller) of its debt be the country that is known by all to be the most indebted entity in the world? Of course, it became promptly clear that it was not the Japanese government doing the buying, but mostly its financial companies, with an emphasis on its insurance and reinsurance companies.

Fast forward to today when Japanese insurance companies are getting pummeled in local trading on concerns the payoffs to the decimated Japanese infrastructure will be unprecedented. So what will happen? Why a scramble for liquidity of course, just like we saw back in September 2008, when cash stricken companies sold all their liquid assets first, resulting in a toxic loop of self-fulfilling prophecy selling which almost tobbled the $25 trillion shadow banking system.

And what will said Japanese insurance companies sell first? Why the very same Eurozone bonds they acquired with so much pomp and circumstance, by the minions of the insolvent Eurozone, back in January of course. Furthermore, now that Japan will have no choice but to launch a mini round of Quantitative Easing and flood the market with JGBs, there will be a dramatic spike in supply for sovereign paper, which of course means yields across the board will rise. 

Japanese insurance and reinsurance companies will need to raise a lot of cash, quickly.  They're going to sell Eurozone bonds in order to do it, and as Europe faces this one-two punch of a bond market blowout and oil prices through the roof, it may simply be too much for the EU to handle.  Even though Japan takes disaster preparedness seriously and has invested hundreds of millions in quake-proofing the country, this one was so bad that the damage is still going to be in the billions if not tens of billions of dollars, not to mention the major loss of life.

The upshot is Europe just got kicked when it was down and the double barrels of a Japan sell-off and Libyan turmoil may break the system.