Bear Market

Has Abenomics failed? Impossible, Abe's fans will say: he has barely had a chance to explore his policies. That maybe true, but one major problem with Japanese society is that it is very impatient when it comes to its politicians. In fact, the median tenure in office of each of its last 10 prime ministers is precisely 419 days, or just over 1 year. And Abe is already six months into his term (his second term, of course: let's not forget he quit his first stint as PM after exactly 365 days due to diarrhea). What is worse is that the key variable that has kept his approval rating high has been the stock market: worse, because the stock market is now in freefall, and with few favorable things Abe can point to in the economy (recall that his entire policy is based on a stock-market driven wealth effect - no Nikkei ramp, no wealth effect, no inflation), he suddenly finds himself in a support vacuum.

"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."

 

"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."

 

"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"

There can be no doubt that the global growth, earnings, incomes and fundamental story remains very subdued. But at the same time financial markets, hooked on central bank ‘heroin’, have created an enormous and – in the long run – untenable gap between themselves and the real economy’s fundamentals. This gap is getting to dangerous levels, with positioning, sentiment, speculation, margin and leverage running at levels unseen since 2006/2007. ‘Tapering’ is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come. Rather, we feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy.

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.

What you hear is a giant hissing sound. And what you get is capital destruction and wealth transfer.

$1.4 trillion in QE bought a bear market for Japan. Good luck to the rest of the QE crowd.

• Global shares pummeled, dollar slumps as rout gathers pace (Reuters)
• Hong Kong to Handle NSA Leaker Extradition Based on Law (BBG)
• Lululemon chairman sold $50 million in stock before CEO's surprise departure (Reuters)
• Companies scramble for consumer data (FT)
• Traders Pay for an Early Peek at Key Data (WSJ)
• When innovation dies: Apple looking at bigger iPhone screens, multiple colors (Reuters)
• Washington pushed EU to dilute data protection (FT)
• Japan-U.S. drill to retake remote island kicks off (Japan Times)
• EM economies in danger of overheating, World Bank says (FT)
• Don't forget the Indian crisis: Chidambaram seeks to quell concerns over rupee (FT)

In the brief but tempestuous fight between Abe and the "deflation monster", the latter is now victoriously romping through an irradiated Tokyo, if last night's epic (ongoing) collapse in the Nikkei is any indication: down 6.4%, crushing anyone who listened to Goldman's "buy Nikkei" recommendation which has now been stopped out at a major loss in three days, and now well in bear-market territory, it would appear that a neurotic Mrs. Watanabe is finally with done with daytrading the Pennikkeistock market, and demands Shirakawa's deflationary, triumphal return to finally clam the market. Only this time the Japan's selling tsunami is finally starting to spill, if not to the US just yet (it will) then certainly to Asia, where the Shanghai Composite which was down 2.7%, and is once again well down for the year, and virtually all other Asian stock markets. Except for Pakistan - the Karachi Stock Exchange is an island of stability in the Asian sea of red.

"It all began with Greece," and as Mark Grant notes today, "somebody, somewhere is going to take a hit." It appears the 'news' is piling up thick and fast in the 'islands' nation. As Reuters reports, Greece did not receive any binding bids for natural gas producer DEPA. This was part of the asset-sale program demanded by the TROIKA, with Hellenic Petroleum's sale later in the year now potentially on hold. The sad truth is that the country cannot pay their bills, cannot pay their pension obligations, cannot fund social services and is just about out of money to even run their government. The reality is; they are bankrupt again and there is no way out without some form of debt forgiveness and more money. Debt forgiveness, alone, will not cut the mustard now by itself and some kind of end game may well be near. That is increasingly reflected in 2012's no-brainer trade as GGBs are now back below 60 and down over 10% from their highs and the Athens Stock Index just entered bear market territory, down 20% from its highs.

Succinctly summarizing the positive and negative news, data, and market events of the week...

Over the past three weeks, there have been numerous headlines insinuating that a freefall in oil prices is underway. Last week we read that the various causes were a slowdown in China’s economy, OPEC’s decision not to cut production, and America’s growing oil production. Based on the headlines, one might suspect that we were right in the middle of a major bear market for oil. Just how far had the price of West Texas Intermediate (WTI) fallen? Before the last couple of day's surge to over $96 a barrel, all the way to $92 a barrel. Keep in mind that WTI opened 2013 at $93.14 a barrel. Since then it has traded between $98/bbl and $86/bbl - so despite the bearish headlines, WTI is still trading above the average over the past 12 months. So is the 'crash' coming? 

The uncertainty about when the Fed will begin tapering its programme of asset purchases has increased volatility, both pushing and pulling on global financial markets. “at this juncture, the markets are more concerned about tapering than about weak [US and global] growth,” says MIG Bank’s Chief Economist, Luciano Jannelli.

France Prohibits Sending Currency, “Coins And Precious Metals” By Mail

France has prohibited the sending of currency, “coins and precious metals” by mail.

In new legislation which was enacted May 23rd, the French government decreed that it is forbidden to send all forms of currency - coins and cash and all forms of precious metals – coins, bars and jewellery by mail.

This is coming our way, whether investors like it or not. The signs are all in place with the economy weakening, corporate profits set to fall, multiple Hindenberg omens and more.

• Reports on surveillance of Americans fuel debate over privacy, security (Reuters)
• Apple to Yahoo Deny Providing Direct Access to Spy Agency (Bloomberg)
• Misfired 2010 email alerted IRS officials in Washington of targeting (Reuters)
• Spy vs Spy: Cyber disputes loom large as Obama meets China's Xi (Reuters)
• When NSA Calls, Companies Answer (WSJ)
• How the Robots Lost: High-Frequency Trading's Rise and Fall (BBG)
• Japan's Pension Fund to Buy More Stocks  (WSJ)
• ‘Frankenstein’ CDOs twitch back to life (FT)
• China’s ‘great power’ call to the US could stir friction (FT)
• Toyota Tries on Corolla Look That’s Just Different Enough (BBG)