Archive - May 2013 - Story

Presenting the key assets JPY108 trillion ($1.16 trillion) GPIF pension fund as of September 2012:

• JPY 68.3 trillion in government bonds: 64%
• JPY 12.6 trillion in foreign stocks: 12%
• JPY 12 trillion in Japanese stocks: 11%
• JPY 9.6 trillion in foreign bonds: 9%

In other words, the fact that the GPIF's overall domestic equity allocation will not decline from 11%, or a little over $100 billion, is the main catalyst for today's move.  Putting $100 billion in context: this is how much liquidity the BOJ injects in the stock market in under two months.

One look at the 5%+ plunge in the Nikkei overnight and one would be allowed to wonder if this was it for Abenomics: with a 15% drop from recent highs, and the TOPIX Real Estate index down by more than 20%+ since mid-April, entering a bear market, what's worse is that even the "wealth effect" Mrs Watanabe fanatics would be excused from having much hope going forward. The problem, however, is that in a world in which only the USDJPY matters as a risk signal, and only the stock market remains as a last bastion of "hope", the overnight weakness pushing the dollar yen to just 50 pips above 100 threatened to crush the manipulated rally and force everyone to doubt the sustainability of central planning. So, sure enough, literally seconds we got the much needed stick save without which everything could have come tumbling down, namely based on an unsourced article out of Reuters that Japan's Public Pension Fund is considering a change to its portfolio strategy that could allow domestic equity share of investments to rise in rallying market. The immediate result was an instantaneous surge in the USDJPY which in turn dragged global risk higher across the board, simply due to what algos deemed as yet another procyclical last minute rescue. More importantly this was nothing but a squeeze catalyst coming at just the right time before market open to prevent a rout in global equities. Ironically, that we are back to the Reuters "sticksave" unsourced article, indicates just how weak the reality behind the scenes must be.

The Neo-Cons and the Neo-Libs have the same objective, total centralization and the dissolution of U.S. sovereignty.  Both parties are merely continuing the perpetual game of good-cop vs. bad-cop, switching roles every decade or so to keep the public confused and dependent on the system rather than enforcing their own solutions.  Barack Obama is nothing more than a fulcrum point - a useful piece of leverage meant to push Americans from one fake initiative to the next, or to divide us completely.  Our fight is not with Obama, it is with ALL globalists who obstruct our liberty, regardless of what party they are affiliated with.  If we allow the debate, and the battle, to be framed around the superficial Obama presidency, then we have allowed ourselves to be co-opted, and any revolutionary action we take afterwards will end exactly like the fabricated Bolshevik rebellion; it won’t mean a damn thing.

When even the political elite are voicing concerns about the possible social implications of youth unemployment rates in Europe being so egregiously high, you know that there are problems. The question many have is that until now riots have been few and far between (most notably Sweden and Switzerland recently); so why are the main areas of massive unemployment not seeing the widespread chaos? The answer, perhaps unsurprisingly, is in government handouts but as Stratfor notes, time is running out for the benefit-beholden generation and perhaps the governments will finally see what so many have been fearful of.

Over 1.2 million people filed for bankruptcy in 2012, more than double the lows of 600,000 in 2006 (and yet the stock market is at all-time highs?). The following infographic provides some clarfying data on the increasingly necessary option but it is the 'signs you are in danger of bankruptcy' section that enthralled us - and perhaps is worth a read by some on Capitol Hill.

Abenomics is riddled with inconsistencies. He wants the world's biggest bond market to sit still while he tells them they are going to lose money year-after-year (if his inflation goals are met). He wants to spark a renaissance by lowering the JPY and creating inflation but he doesn't want real wages to drop. Of course, the CNBC anchor's ironic perspective that the 80% domestic bond holdings of JGBs will 'patriotically sit back and take the loss' is in jest but it suggests something has to give in the nation so troubled. In fact, as Diapason's Sean Corrigan notes, that is not what has been happening, "every time the BoJ is in, the institutional investors are very happy to dump their holdings to them." On the bright side, another CNBC apparatchik offers, this institutional selling will lead to buying other more productive assets to which Corrigan slams "great, so we have yet another mispriced set of capital in the world, that'll help won't it!" The discussion, summarized perfectly in this brief clip, extends from the rate rise implications on bank capital to the effect on the deficit, and from the circular failure of the competitive devaluation argument.

While some (such as Bloomberg) see the unprecedented rise in orders to withdraw copper supplies from inventory at the LME as an indication of "improving demand," we suspect the huge demand bias from Asia (read China) suggests more is at play here than 'hope' in economic surprises. While the reasons are still unclear, the timing of this spike in demand is very close to our recently discussed concerns over the collapse in the Chinese Copper Financing Deal (CFFD) rehypothecation-based funding system. The unlimited "collateral" capacity of the previously described funding chains means that there may simply not be enough copper in bonded warehouses to meet the Letter of Credit needs once the copper warrants start being demanded upon LC termination. So, perhaps, the surge in LME delivery requests reflects a desperate demand for physical copper to meet these unwinding funding deals' needs. Either way, just as we saw gold vaults promptly emptied post the mid-April precious metals crash (especially that of JPMorgan), this sudden surge in physical demand bears very close watching.

Spot the difference - one of these charts is an algorthmically-controlled oscillation and the other is... hhmm

UPDATE: JPY weakening rapidly back to US day-session lows (101.25), equities rising modestly (still down ~2%), JGBs tumbling back to unchanged. The correlation is in motion now so the BoJ will have to decide what they want...

...And cue Amari, Kuroda, or Abe proclaiming that it's all under control. Japanese stocks (the broader TOPIX index) are now down 3% with financials and utilities getting monkey-hammered. JPY is surging back under the Maginot line of 101.00 to its strongest since the big-break-of 100.00 day three weeks ago. JGBs are rallying (so that's one thing) but are half-way to being halted limit-up. But - with the rally in JGBs, hedgers are scrambling to protect gains as JGB implied vol surges back over 48% (its highest in over a month). So, apart from that...

“The Federal Reserve, any central bank, should not be asked to do too much to undertake responsibilities that it cannot responsibly meet with its appropriately limited powers,” Volcker said. He said a central bank’s basic responsibility is for a “stable currency.” “Credibility is an enormous asset,” Volcker said. “Once earned, it must not be frittered away by yielding to the notion that a little inflation right now is a good a thing, a good thing to release animal spirits and to pep up investment.”  “The implicit assumption behind that siren call must be that the inflation rate can be manipulated to reach economic objectives,” according to Volcker. “Up today, maybe a little more tomorrow and then pulled back on command. Good luck in that. All experience demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.”

"When prices rise, this trade works. It's not anything more sophisticated than that," said Christopher Thornberg, an economist with Beacon Economics in Los Angeles.

To an extent that reveals a thorough misunderstanding of the market forces, the financial media has failed to consider the different motivations and beliefs that drive the different types of investors who are active in the gold market. By treating the gold market as if it were comprised of just one type of investor, analysts have drawn false conclusions about the recent volatility.

What happened in Japan last week (a 14% decline after a 85% rally since last fall) is an example of markets getting ahead of the facts on the ground. How much optimism was priced into the success of Japan’s monetary policy bazooka? As JPMorgan's Michael Cemblaest notes, P/E multiples rose from 11x to 17x since last Labor Day, and breakeven inflation implied by (admittedly thin) Japanese JGB-i bond markets rose to 2%, a level Japan has not seen consistently since 1990. On top of that, net long positions on the Tokyo Stock exchange were close to the highest levels in 20 years, and foreign participation in Japanese equity markets was also elevated. It did not take much detailed market research to see that Japan had become a crowded and popular trade. But what happens next? After a 70% run-up over 6 months, how have stocks performed? The answer may surprise many...

As the markets elevate higher on the back of the global central bank interventions it is important to keep in context the historical tendencies of the markets over time. Here we are once again with markets, driven by inflows of liquidity from Central Banks, hitting all-time highs. Of course, the chorus of justifications have come to the forefront as to why "this time is different." The current level of overbought conditions, combined with extreme complacency, in the market leave unwitting investors in danger of a more severe correction than currently anticipated. There is virtually no “bullish” argument that will withstand real scrutiny. Yield analysis is flawed because of the artificial interest rate suppression. It is the same for equity risk premium analysis. However, because the optimistic analysis supports the underlying psychological greed - all real scrutiny that would reveal evidence to contrary is dismissed. However, it is "willful blindness" that eventually leads to a dislocation in the markets. In this regard let's review the three most common arguments used to support the current market exuberance.

Presenting a quick and painful, for some, lesson in duration and bond math.