Dispassionate discussion of the investment climate.
The US dollar looks vulnerable to additional losses next week. While we had correctly anticipated the greenback's losses last week, we had expected it to begin recovering ahead of the weekend. This did not materialize and, leaving aside the yen, the dollar finished the week near its lows. Generally speaking, the technical outlook for the greenback has soured and, in fact, warn of some risk accelerated losses in the period ahead.
Two days ago, when we posted ""Frustrated" Liquidity Addicts Demand Moar From BOJ As Nikkei Rally Stalls", we suggested that more QE from the Bank of Japan is just around the corner (and likely to take place as early as April) as the only real "driver" behind Abenomics, the surge in the stock market had stalled for nearly 6 months. 48 hours later, and 700 points in the Nikkei higher, the realization that indeed more QE is coming has swept through the market like wildfire. So what will the Bank of Japan's expansion of quantitative easing look like, when supposedly only $75 billion per month amounting to a whopping 70% of all new issuance, is not enough? According to Goldman "the BoJ could take the lead in this reallocation process by notably increasing its purchases of risky assets, such as ETFs and RIETS, or even outright equities – say purchasing a wide range of Japanese equities by index weight." It may get even better: "the BoJ is likely to consider more unorthodox policy to push up inflation expectations" - like paradropping NGDP, better known as paradropping yen (a move Yellen herself is now contemplating as we previewed back in September).
We have seen a confluence of events that suggests we may be reaching the terminal point of the financial markets merry-go-round – that point just before the ride stops suddenly and unexpectedly and the passengers are thrown from their seats. Having waited with increasing concern to see what might transpire from the gridlocked US political system, the market was rewarded with a few more months’ grace before the next agonising debate about raising the US debt ceiling. There was widespread relief, if not outright jubilation. Stock markets rose, in some cases to all-time highs. But let there be no misunderstanding on this point: the US administration is hopelessly bankrupt. (As are those of the UK, most of western Europe, and Japan.) The market preferred to sit tight on the ride, for the time being.
Many observers believe the U.S. dollar (USD) will lose its status as the world's reserve currency sooner rather than later. Proponents of this view often mention China's agreements with various trading partners to settle trade in their own currencies rather than the dollar as evidence of this trend. More substantial evidence can be found in the diversification of reserves held by many nations. One set of observers has long held that the ideal replacement for the dollar is a hybrid currency issued by the IMF called SDRs. However, since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo. Boiled down to its essence, the SDR is presented as a shortcut solution to deeply seated problems. The reserve currency problem cannot be fixed by a basket of fiat currencies, as fiat currencies (and the trade imbalances they generate) are the problem.
Earlier today we reported that the Japanese cries of "more QE" have not only started but are getting progressively louder, when after a massive initial surge in the first half of the year following an epic currency dilution, the Nikkei's performance since May has largely been one big dud, which is putting not only the psychological "wealth effect" at risk, but also is tearing Abenomics apart, since perhaps the only key variable for the Prime Minister's plan of "growth" is the constant increase in the stock market, much the same as in the US. But while the market has gone nowhere fast, it is the economy that is truly starting to crack at the seams, as was confirmed hours ago when Japan reported that in the third quarter its economy grew an annualized 1.9%, following a quarter when the GDP grew at more than double that pace or 4.3%, which in turn succeeded a quarter with 3.8% growth. What's worse, in nominal terms, the actual third quarter growth was a paltry 0.4%: the lowest in all of 2013 while actual nominal consumption plunged to the lowest level since just after the start of Abenomics.
"Frustrated" Liquidity Addicts Demand Moar From BOJ As Nikkei Rally Stalls, Abenomics Founders And "Hope Fades"Submitted by Tyler Durden on 11/13/2013 09:25 -0500
While the only topic of discussion for "sophisticated" investors everywhere is when (and if) the Fed will ever dare to reduce its monthly flow injection into US markets from $85 billion to a paltry $75 billion, everyone has forgotten that across the Pacific, for the past seven months the BOJ has been calmly injecting another $75 billion each and every month into the market, with no risk of this liquidity boost ever being tapered (since the broad 2% inflation target relies on ever broader wage increases that will never come). However, much to Japan's chagrin, in the current insta-globally fungible capital markets, over the past five months the bulk of this liquidity has found its way to the US stock bubble, leaving the Nikkei in the dust. As a result, the local Japanese liquidity junkies have started to loudly complain once again, and now the FT reports that "as excitement over the world’s second-biggest stock market has faded, some are now crying out for another jump-start." In other words: the BOJ must do "moar" to push the Nikkei bubble even higher following its rangebound trade since May which, worst of all, is now the primary reason why "hope is fading."
The operator of Japan's wrecked Fukushima nuclear plant will double the pay of contract workers as part of a revamp of operations at the station, after coming under criticism for its handling of clean-up efforts. Reuters reports, hazard pay for the thousands of workers on short-term contracts will be increased from 10,000 yen ($100) to 20,000 yen a day, Tokyo Electric Power Co said in a statement on Friday. The plan released on Friday also lays out improvements to the management of hundreds of thousands of tonnes of contaminated water building up, which comes from groundwater mixing with coolant poured over melted uranium rods. All of this as the riskiest phase of the decommissioning of Fukushima begins soon...
A dispassionate overview of the investment climate and what to expect this week.
"Debt matters... even if it is possible to pretend for many years that it doesn't," is the painful truth that, author of "Avoiding The Fall", Michael Pettis offers for the current state of most western economies. Specifically, Pettis points out that Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but, as Kyle Bass has previously warned, if Abenomics is 'successful', ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.
As suggested here last week, the dollar moved higher over the past five sessions. Although it finished the week on a firm note, I suspect we may have a pullback before seeing higher levels. Here is why.
TedBits - Newsletter
Having now tripled since August, Bitcoin's break above $300 ($324 highs) raises an important thought experiment - can a digital currency act as a global reserve currency?
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Just as the European 'markets' have entirely disconnected from fundamental reality, Japan's bond market - the largest in the world - "is dead, with only the BoJ driving prices," Mizuho warns. Crucially, once again just as in Europe, "these low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems." Market functions are sacrificed for the sake of ending deflation, but "liquidity has evaporated as the BOJ has gobbled up most of the market." This means that a reduction in monetary stimulus could cause a rapid drop in bond prices, which, just as in the US, "will make it difficult for the BOJ to normalize policy." Simply put, as Bloomberg notes, the BoJ has killed the nation’s sovereign bond market, leaving it unable to reflect either the success of stimulus policies or fiscal risks.