Bank of Japan
Non-ideologically laden overview of the key issues shaping the investment climate in the week ahead.
Futures Continue Levitation On More "Deescalation" Hopes Despite UK Warning Russia Of "Serious Consequences"Submitted by Tyler Durden on 08/15/2014 06:05 -0500
There were headlines for everyone this morning, but especially for fans of what is increasingly known as Russia's "Schrodinger Invasion" of East Ukraine: one which may or may not be happening depending on i) one's point of view and ii) how one is observing it.
While the mainstream media has become used to the daily buying of bonds by The Fed, mention that they are buying 'stocks' and suddenly one is labeled a conspiracy theory wonk - despite 1) the fact that they are, and 2) they have admitted that equity wealth creation is a policy tool. However, ignoring the almost daily vertical ramps in US stocks and volatility from a seemingly bottomless pit of margin; the Bank of Japan has been buying stocks (directly through ETFs) for years... and as the Nikkei began to turn down in early August, the WSJ reports the BoJ undertook the longest and largest consecutive buying streak since it started purchasing ETFs in December 2010.
This represents a tectonic shift in the financial markets. It does not mean that Central Banks will never engage in QE again. But it does show that they are increasingly aware that QE is no longer the “be all, end all” for monetary policy.
Japan’s QE was large enough that no one, not even the most stark raving mad Keynesian on the planet, could argue that it wasn’t big enough. Which is why the results are extremely disconcerting for Central Bankers at large.
- EU to weigh extensive sanctions on Russia (FT)
- U.S. lifts flight ban to Israel (Reuters)
- Russia says will cooperate with MH17 probe led by Netherlands (Reuters)
- Norway faces ‘concrete and credible’ terrorist threat (FT)
- Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
- But... but... PMI: Unilever Sales Growth Misses Estimates on Asian Slowdown (BBG)
- World’s Biggest Wealth Fund Reviews $8 Billion Russian Stake (BBG)
- Qualcomm latest US tech company to reverse in China (FT)
- Hamptons Home Sales Rise as Buyers Find More Inventory (BBG)
No one knows how this will play out. We all know on some level that it will not end well, but exactly how and when it will all backfire remains to be seen. We’ve already had two epic Crises in the last 15 years. By the look of things, we’re heading for a third one in the not to distant future.
Japan’s GDP may have declined in April and May, implying an overall collapse for Q2 not seen since 2009. Bloomberg's Nowcast estimate suggests that the hope-strewn pre-tax-hike pile up of a +6.7% annualized GDP growth in Q1 will come crashing back to earth as consensus GDP for Q2 is -4.85% and even bigger based on Bloomberg's models. As Bloomberg's Tom Orlik warns, this could take markets by surprise. The good news is that Abe's 3rd arrow has yet to reach escape velocity (any day now); below we highlight the entire package and how it will save the world...
Exactly 50 years ago last month the US Supreme Court ruled on the now famous case of Jacobellis v. Ohio. At stake was whether a French movie with graphic sexual content could be outlawed by the state via its obscenity laws. The court ruled that it could not because the film wasn’t hardcore pornography. How could they tell? In an explanation that has now turned into one of the most famous quotes in court history, Justice Potter Stewart explained that although he could not define exactly what hardcore porn was, “I know it when I see it” Like porn, asset bubbles are also hard to define, but given our economic history, and especially our recent economic history, we know it when we see it, and now we see it everywhere. We all see it. Apparently the only people that don’t see the bubbles are the people creating them.
A look at key events and data in the week ahead.
just to make sure that the abysmal Q1 GDP which has now spilled over into Q2 and will likely see the US economy growing in the mid-2% range, has a sufficiently broad "excuse" in the third quarter of the year, here comes - in the middle of July - the polar vortex 2.0. As WaPo reports, "However you choose to refer to the looming weather pattern, unseasonably chilly air is headed for parts of the northern and northeastern U.S at the height of summer early next week."
It is no secret that unlike other banks who, while directly intervening in the bond market only manipulate equity prices in relative secrecy (usually via HFT-transacting intermediaries such as Citadel), the Bank of Japan has historically had no problem with buying equities outright, traditionally in the form of REITs and equity-tracking ETFs. Which explains why overnight it was revealed that in order to boost the stock market, pardon, economy, the Bank of Japan is preparing to purchase exchange-traded funds based on the JPX-Nikkei Index 400 as an "option to boost the impact of unprecedented easing," according to people familiar with BOJ discussions.
Weak GDP growth with major currency devaluation? This is called stagflation. And it’s causing the Bank of Japan some doubt.
With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation's retirees savings will be greatly rotated to the stock market and away from the nation's largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the "all-talk" has turned to action...The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of 'wealth' - we can only imagine the GPIF risk models just got switch to '11'. As we explained last year, Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.