With Friends Like Japan Who Needs Acne?

Tyler Durden's picture

From Nic Lenoir of ICAP

If you were worried about the Portuguese auction tomorrow fear not! Japan decided to be proactive fighting this latest break-out of European sovereign CDS rates and extend a very unselfish hand. Indeed how could one doubt their good intentions? All they want is to make sure their currency stops appreciating in order to keep the youth unenployment rate in Italy around 29%. Following China's lead Japan announced they would buy European bonds. With only 200% debt to GDP ratio it makes sense for them to go ahead and chip in to help Portugal throw bad money after an even worse structural issue. China gets relatively little bad press for supporting European markets as conventional wisdom assumes their official 20% debt to GDP ratio is accurate. Other analysts much better informed on the subject than I am, in fact some even created a fund dedicated to benefit from when China's economic miracle is exposed for the ponzi scheme it is, claim actual numbers are much closer to 120% but the people's republic uses all sorts of accounting trickery and local government vehicles to disguise the true extent of its indebtedness. Japan however shall not benefit from the general public's stupidity with debt levels well publicized. Indeed as we discussed many times before, Japan's public debt is astronomical. To date they were able to keep growing their debt because they started their lost quarter century with a savings rate around 8%. That savings rate is now negative which means Japan will at some point in the future, when exactly is anyone's guess, will have to rely on foreign demand to finance their debt. Now I don't know for you, but if US Treasuries are considered toxic by a lot of fund managers out there, how many people do you really think will line up to buy 10Y JGBs yielding 1.18%? Obviously Japan's announcement had not so much to do with their desire to rescue Portuguese finances, but instead is aimed in my opinion to the obvious secondary effect of weakening the JPY. That will work to temporarily slow down the fall of EURJPY, but when it comes to USDJPY it is exclusively driven by the 2Y UST/JGB rate spread. So if Japan really wants to weaken the Yen they might as well start dumping their 2Y treasuries. With the time interval between solvency crises shrinking exponentially as the eventual end game approaches, I have my doubts as to how much good will come from this touching display of Eurasian brotherly love. Perhaps is this why the Dollar index refuses to trade South this morning...

All this should however be supportive of our 10s/30s steepener recommendation. The market appears to be stalling a little bit here but the trade moved 14bps already and I expect at least another 10 from it. Another similar trade that was brought to my attention by a friend and wise trader is the 2Y-forward 2/10 steepener. While this trade has not traded as well as the 10s/30s the last week, it has a uge advantage when it comes to positive roll: the 2s/10s curve trades around 272bps spot, and 146bps 2Y forward. That means approximately 5bps of positive roll in your pocket each month. We are trading still slightly above the key trend support which comes around 130bps (see chart). While it would the ideal level to get the trade on, it might worth adding into the trades on pull-backs as the very positive roll makes the opportunity cost of being greedy more expensive.

Directionally to me 10Y Treasury futures, bond futures, or bund futures, all look like they are shaping a consolidation in the form of a bear flag before making new lows. The Bund has a big resistance area around 1.2691/1.2705, meanwhile the equivalent level for the 10Y UST future looks like 121-09/121-14. At these levels I will consider expressing shorts, especially in light of the fact that a Fixed Income sell-off would likely cause our 10s30s to retrace some of our gains temporarily.

As far as equities go the chart looks like a manipulated market that no one wants in. Dismal volumes despite all the bullish revisions of forecasts indicate that the P/E ratio of 12 is not enough to entice that many people to jump in. Perhaps is it because investors realize that the entire US GDP itself is fabricated by monetary stimulus and that without it those earnings are in no way sustainable? Record earnings are driven by a modest recovery in sales (see attached chart) coming at a very expensive public cost, and a lot of cost-cutting that will further burden the public deficit via the cost of social programs. If you thought earnings could drop by over 50% in just a snap if the monetary experiments end, why would pay more than 12 times "artificial" earnings? In any case, volume speaks louder than words, and it seems that to date the US stock market has failed to really convince many investors. Thank God for those first day of the month and POMO-induced cash injections!

Good luck trading,


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Salinger's picture

whsle inventories .... splat

tom's picture

Right on ... notice also that Japan is saying it will buy the Eurozone bailout bonds, not Portuguese or Spanish or Italian bonds.

buzzsaw99's picture

USDJPY it is exclusively driven by the 2Y UST/JGB rate spread. So if Japan really wants to weaken the Yen they might as well start dumping their 2Y treasuries...

I doubt that would work with the bernank on the loose. I like the attitude of those old effers in Japan, it is a whole generation of Gandhis. Japan is hosed because even if they dropped yen from helicopters the people would just hoard it or pay off debts. I hope they enjoy the 100 year depression. As long as the japanese banks survive that's all that really matters. [/sarcasm]

cocoablini's picture

Since this is a global trainwreck, where would one go anyway. After 30 years, the YEN is still hard as nails. The US dollar is having higher lows, no matter what the printing press does.
Welcome to the Matrix and you are stuck with this ridiculous risk swapation norm. Swapping as the whole system goes into i solvency, trying to make as many credits as possible so you can trade them in for your new ponzi, the Globo world currency. Where bankers get it all.
Yesterday, Sarkozi the whore, was lecturing the Callow one on global exchange currencies...

goldmiddelfinger's picture

China, Japan, whoever is buying this European crap has to have an ulterior motive because it's crap they're buying.

jakethesnake76's picture

Good charts and analysis, BTW atleast to a novice like me, and hey i got some Alison Krauss going on in the Background to sooth me while i read the latest good news :)

Rodent Freikorps's picture

So could you call this an international version of the reach-around?

whydtinogo's picture

So few people see it as ccy intervention around these parts - most think its a vote of confidence in Portugal - FFS!

RobotTrader's picture

The global "trainwreck" I'm watching is the relentless rise in the NY Composite, despite the wailings and screaming from the double dippers.

After all, why not spend the new found wealth from a rising stock market to buy a few bonds to help out some friends?

Oh regional Indian's picture

Classic. What pray is a Japanese citizen's direct interest in Portuguese fiscal health? is this the butterfly flapping it's wings in the Pacific to quell a storm in Europa? Yes, Europa, no typo there.

The daily reminders that we are firmly in 1984 territory are stunning in their regularity and their magnitude.

Japan has long been a loaner of cheap money through their "development" bank to India. It has been an unmitigated curse in the larger picture. The amount of Industrial India "owned" by Japan is quite shocking. 

The unfolding picture does not look pretty.

Japanese "love", ugh!




Stuck on Zero's picture

Since mercantilist Japan has huge piles of T bills in its vaults when it loans money to the EU it is really just handing them US Treasury notes.   Debt for debt!

DonutBoy's picture

You answered your own question.  As the Euro falls exports to Europe fall.  The exports are in the direct interest of Japan's citizens.

What would you do if you worked for the BOJ?  Your population is too aged to be net savers any longer.  They will be net sellers soon.  You need foreign buyers or you need to print yen to cover the gap.  That's inevitable.

I know what I would do.  I would print yen now, while it is propped up by the myth of being a safe-haven, and buy hard assets everywhere they'd take my money.  I'd buy rare-earth mines, gold, oil fields, coal mines.  Japan has no official sovereign wealth fund - but they know what's coming.  It would not surprise me if they have a mechanism to put foreign assets in Japanese hands while they can.

monopoly's picture

We move higher, but is it real or just our worthless dollar moving us around. Not sure, but have no interest in false rises. But, no shorts.

Caviar Emptor's picture

Of course! This is the pattern you expect when reaching the tipping point where money has become "funny". If Japan were playing with the real marbles, they'd be preaching austerity to the Portuguese, sermonizing about how their wealth has been built on self-sacrifice and delayed gratification. 

"Japan Inc" (to use the catch phrase from the halcyon 1980s) has been bailed out non-stop through the back door since 2009 to compensate for cratering US demand and the bailout of GM. It sits at a critical strategic node in the Pacific. Quid-pro-quo. 

Bail out another alliance nation's government using FRN's? Why Not?? It's not even "real" and there's lots lots more where that came from. Anything to prevent a global downturn that might hurt Toyota and Sony and put Japan's unemployment level at even more uncomfortable levels. Political instability has been on a sharp rise forcing a government coalition collapse and a changing of the guard about every 6-9 months. That's the psychology.

Oh regional Indian's picture

Caviar, Japan's real problem, especially with regards to employment, is that it is tryly a machine world there. No numbers on-hand, but with deep interaction (work, visits, friendships), I know this first hand.

Most of Japanese manufacturing is robotized. All traditional Japanese skill is being lost due to the generational disconnect. Generational disconnect was launched through the whole gaming/manga/otaku culture and is widening ever faster. Old=bad in Japan and it is full of them (old people) and jobless youth.

In the age of machines, Japan is th eposter child for reasons to launch the Butlerian Jihad. Now.




Ferg .'s picture

This is really quite sad . On top of the liquidity provisions to troubled banks , IMF interventions , ECB periphery asset purchases and Chinese assurances to buy PIIGS bonds we now have a very public announcement from Japan , a country with an abysmal debt load and with little or no prospects of alleviation , that it will be tapping into it's foreign exchange reserves to buy Eurozone debt .

This really is it . Kitchen sink is being ripped up and thrown in .

Rodent Freikorps's picture

Since the Japanese are dying off, couldn't they just take out a reverse mortgage on the home islands?

tom's picture

It's funny that Japan's making such a splash with its promise to buy Eurozone bailout bonds. It's not like those are the hard ones to sell, as they're backed by all the more or less sound northern European states. Maybe the real message they're sending is to Germany: "Go ahead and increase that bailout fund, we'll buy debt if you're backing it. As for Portugal and Spain, just get that over with."

ThirdCoastSurfer's picture

How is this not the dreaded "Beggar Thy Neighbor" policy that is partially blamed for exacerbating the global Great Depression?