The excerpt below is taken from pages 176-177 of Liar’s Poker by Michael Lewis.
“…What if there is a massive earthquake in Tokyo? Tokyo is reduced to rubble. Investors in Japan panic. They are selling yen and trying to get their money out of the Japanese stock market. What do you do?
…What Alexander would do is put money into Japan on the assumption that since everyone was trying to get out, there must be some bargains. he would buy precisely those securities in Japan that appeared the least desirable to others. First, the stocks of Japanese insurance companies. The world would probably assume that ordinary insurance companies had a great deal of exposure, when in fact, the risk resides mainly with Western insurers and with a special Japanese earthquake insurance company that’s been socking away premium for decades. The shares of ordinary insurers would be cheap…
…With the economy in temporary disrepair, the government would lower interest rate to encourage rebuilding and simply order the banks to lend…the short-term panic could well be overshadowed by the long-term repatriation of Japanese capital…Well, to Alexander, it would suggest buying yen. The Japanese would buy yen…The yen would appreciate not just because the Japanese were buying it but because foreign speculators would eventually see the Japanese buying it and rush to join them. If the yen collapsed immediately after the quake, it would further encourage Alexander…”
The graph below, show this strategy would have worked.
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