Yen

Mind versus technicals. 

Daily news.

The vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose jobs are to manage investors' money or advise investors on how to allocate their capital. 

All you need to read.

Just a matter of when?

Japan recently made waves with the news that its total debt would hit north of one quadrillion yen over the next several months: a number greater than the GDP of the entire Eurozone. Yet the one saving grace for Japan has long been the strawman that the bulk of its debt is locally held, and thus the risk of a sharp sell off is minimal as the capital has to be recycled within the borders of Japan, especially as the USA and soon the rest of the world will provide the same returns on debt as Japan, which has been locked in a 30 year deleveraging cycle, does. However, one thing that continues to be widely ignored is the demographic top that Japanese society is experiencing as ever more workers enter retirement, and there is no replenishment of young workers (perhaps Spain can export some of its youth to Tokyo?). This may change soon because as the AP reports, the Japanese population will be cut by 30% by 2060. Furthermore the country's workforce of people aged 15 to 65 will shrink to half the population (a BLS wet dream as under those conditions the US unemployment rate would be very negative). Alas, the prospect of Japan's population of 128 million dropping by 1 million every year over the coming decades, should be sufficiently sobering. This naturally means that any existing paper supply-demand equilibrium will soon have to start being reevaluated. But by 2060 we will likely have bigger problems than placing the 1 billion googol in JJBs that have to find a buyer to fund the country's deficit. Lastly, we would love to see one of those charts showing how many working people will have to fund each and every retiree by the year 2060, first in Japan, and then in every other country.

A strong yen strikes again. 

A brief and comprehensive summary of the main events in the past week, both good and bad.

With everything from stocks and bonds to 'roo bellies rising as one trade, it may be a good time to ask: what's priced into the market's uptrend? We say "bad news is priced in" when negative news is well-known and the market has absorbed that information via the repricing process. When the market has absorbed all the "good news," then we say the market is "priced to perfection:" that is, the market has not just priced in good news, it has priced in the expectation of further good news. Markets that are priced to perfection are fiendishly sensitive to unexpected bad news that disrupts the expectation of continuing positive news. So what have global markets priced into this uptrend across virtually all markets? 

Somehow the fact that the PIIGS can issue Bills (sub 1-year debt) in an environment in which both the ECB and the Fed have made any debt investment under 3 years risk free is taken as a positive sign. But in a continent starved for even the most optically irrelevant good news, this may be all it gets, which it did last night after Italy auctioned off €8 billion 182 bills at a 1.97% rate, the lowest since May. A far more relevant question is where peripheral debt with a maturity greater than 3 years, and thus with implicit risk, would price. But for now at least some of the banks appear to be dipping their toe into a very short-term carry trade, with ECB deposits declining from €484.1 billion to €464.8 billion overnight. Whether or not this is on the back of the assumption that a Greek default is contained remains to be seen: it would be truly laughable if Europe believes things are ok and thus underutilizes the next LTRO in one month only to find itself with a several trillion euro shortfall 3 weeks later. Yet this, being Europe, is the most likely outcome. Offsetting Bill issuance optimism is the ongoing uncertainty over the outcome of the Greek PSI talks, which for now at least have stalled with the cash coupon being the straw man sticking point. The truth is that if hedge funds want a default to proceed with international litigation arbitrage, that most lucrative of hedge fund strategies, they will get a default. Everything else is irrelevant. Below is Bloomberg's summary of how the newsflow is affecting markets.

Yesterday the Japanese Finance Ministry made a whopper of an announcement: in the year ending March 2013, total Japanese debt will surpass one quadrillion yen, or ¥1,086,000,000,000,000. This is roughly in line with the Zero Hedge expectations that by this March total Japanese debt would surpass one quadrillion yen. In USD terms, at today's exchange rate, this is precisely $14 trillion. And while smaller than America's $15.4 trillion (net of all post debt ceiling breach auctions), which was $14 trillion about a year ago, the GDP backing this notional amount of debt, which just so happens is greater than the GDP of the entire Euro area, is a modest ¥481 trillion, so by the end of the next fiscal year, Japan will have a Debt to GDP ratio of 225%. And that's not counting all the household and financial debt. So prepare to add quadrillion to the vernacular. At this exponential rate of increase quintillion will appear some time in 2015 and so on. Yet the scariest conclusion is that as Bloomberg economist Joseph Brusuelas points out, America is not only next, it already is Japan. Actually scratch that, America is worse than Japan, which at least generated a real housing bubble in the years just preceding the onset of its multi-decade credit crunch, something not even America could do in comparable terms. More importantly, "the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so." The Japanese may be better than America in most things, but when it comes to destroying its economy, the US has no equal. Brusuelas' conclusion: "If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two." So... go all in?

For a new investor in gold and silver, here is the most lucid piece of advice I can offer. Identifying severe undervaluation points in gold and silver, buying gold and silver assets during these times, and not worrying about interim short-term volatility, even if the immediate volatility is downward, is much more likely to impact your accumulation of wealth in a positive manner than trying to perfectly time market tops and bottoms in the highly manipulated gold and silver game.

• Angela Merkel casts doubt on saving Greece from financial meltdown (Guardian)
• Germany Rejects ‘Indecent’ Call to ECB on Greece, Meister Says (Bloomberg)
• Obama Calls for Higher Taxes on Wealthy (Bloomberg)
• Fed set to push back timing of eventual rate hike (Reuters)
• Recession Looms As UK Economy Shrinks By 0.2%, more than expected (SKY)
• King Says BOE Can Increase Bond Purchases If Needed to Meet Inflation Goal (Bloomberg)
• When One Quadrillion Yen is not enough: Japan's first trade deficit since 1980 raises debt doubts (Reuters)
• Sarkozy to quit if he loses poll (FT)
• U.S. Shifts Policy on Nuclear Pacts (WSJ)
• ECB under pressure over Greek bond hit (FT)

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."

All you need to read.