Bank of Japan

Bank of Japan Governor Kuroda has managed to do it again. In his now daily missives on "deflation mindset being over", "economy is on the right track", "QQE is working", and his best yet "BoJ has no plan to finance government debt", Kuroda unleashed the ultimate idiocy last night when he proclaimed "it is desirable for FX to move in a stable manner." USDJPY has fallen over 2 handles for the biggest surge in JPY strength in 6 months... to which Amari noted "Kuroda didn't intend to move market with his remarks." Irony indeed.

For once Mario Draghi was right. A day after the European central bank head warned of a spike in volatility, volatility did just that, with markets everywhere from China to Europe seeing volatility explode.

If U.S. equities feel brittle, they should. Yes, central bank liquidity from Japan and Europe may well push global equity markets higher.  But what we really need is a pullback – that classic 10% correction that flushes out weak hands, reestablishes the discipline of “Risk” in the “Risk-Return” equation, and shows capital markets how to do more than just follow central bank liquidity.  So watch June’s price action in U.S. stocks very carefully, because this process needs to start now.  The bull market that began in March 2009 is now an ancient bovine indeed.  After all, better 10% now than 20% or more later in the year.  The first is inconvenient.  The second is unwelcomed.

Yesterday Japan amazed everyone when it reported that its unemployment rate had dropped yet again, this time to 3.3%, the lowest since April 1997. The paradox is that while the number of Japan's unemployed dropped by 20,000, the number of those employed plunged by 280,000! Or as Goldman calls, it "growth in jobholders looks to have peaked amid a lack of recovery momentum in the economy"

As another example of "has the world gone mad?" - we present the following words of wisdom from BoJ Governor Kuroda-san:

*KURODA DOESN'T SEE ANY ASSET BUBBLE OR STOCK MARKET BUBBLE, OR ANY 'FINANCIAL EXCESS' IN ECONOMY

And in the interests of sanity, we highly suggest he not look at the chart below...

While yesterday most markets were closed and unable to express their concerns at the very strong showing of "anti-austerity" parties in Spain's municipal election from Sunday, then today they have free reign to do just that, and as a result European stocks are broadly lower, alongside the EURUSD which dripped under 1.09 earlier today, with Spanish banks among the worst performers: Shares of Banco Sabadell, Bankia, Caixabank and Popular were down 1.8 to 2.3% earlier this morning, and while the stronger dollar was a gift to both the Nikkei and Europe in early trading, after opening in the green, Spain's IBEX has since slid into the red on concerns of what happens if the Greek anti-status quo contagion finally shifts to the Pyrenees.

The global Central Banks, driven by their Keynesian lunacy, have induced the single largest misallocation of capital in history.

• U.S. vows to continue patrols after China warns spy plane (Reuters)
• Bank of Japan Chief Cheers On Tokyo’s Surging Stocks (WSJ)
• Merkel Stamps Out Optimism on Greece After Tsipras Talks (BBG)
• Greece sees reforms deal with lenders in next 10 days (Reuters)
• Why Greece’s Syriza party is not sticking to the script on an IMF deal (Channel4)
• Why Does Putin Care Who Runs a Tiny Balkan Nation? Gas Pipelines (BBG)
• U.S. Stock-Index Futures Are Little Changed Before Yellen Speech (BBG)
• German Business Confidence Declines as Risks Cloud Outlook (BBG)

The highlight of the overnight newsflow may have been the BOJ's preannounced statement that it is keeping its QE unchanged (which comes as no surprise after a few weeks ago the BOJ adimitted it would be unable to keep inflation "stable" at the 2% in the required timeframe), but the highlight of overnight markets was certainly China, where the Banzai Buyers have reemerged, leading to another whopping +2.8% session for the Shanghai Composite which has now risen to a fresh 7 years high.

The big news overnight was neither the Chinese manufacturing PMI miss nor the just as unpleasant (and important) German manufacturing and service PMI misses, but that speculation about a rate hike continues to grow louder despite the abysmal economic data lately, with the latest vote of support of a 25 bps rate increase coming from Goldman which overnight updated its "Fed staff model" and found surprisingly little slack in the economy suggesting that the recent push to blame reality for not complying with economist models (and hence the need for double seasonal adjustments) is gaining steam, and as we first suggested earlier this week, it may just happen that the Fed completely ignores recent data, and pushes on to tighten conditions, if only to rerun the great Trichet experiment of the summer of 2011 when the smallest of rate hikes resulted in a double dip recession.

The uncertainty surrounding the inevitability, if not the exact timing, of multiple and possibly overlapping volatility drivers is itself a source of volatility. For the average person, these signs can be scary. Taking steps to avoid the circus as much as possible, such as extracting money from the markets, securing personal assets, and waiting out the swings, can be a source of emotional comfort and future financial stability.

A robust economy would allow central banks to raise rates and still allow debts to be paid down. But that is not what is happening. And it won’t happen. Junkies rarely go out and get a job... and gradually “taper off” their habit. No. They have to crash... hit bottom... and sink into such misery that they have no choice but to go cold turkey. Now, major central banks are committed to QE and ZIRP forever. They have created an economy that is addicted to EZ money. It will have to be smashed to smithereens before the feds change their policies.

Central bank liquidity lines like those the Fed used to bailout the world seven years ago have become a fixture of the post crisis financial system. Since 2009, China has essentially blanketed the globe with yuan liquidity lines, inking swap agreements with nearly three dozen countries with the primary goal of increasing the degree to which the renminbi is used in international trade.

A look at the economic data and market psychology as a new week begins.

Explaining all that is wrong with the fraudulent US "jobs recovery" using the case study of Japan.