We heard from several central banks in the last few days, and what they had to say was just one more reminder that we are in a Hill Street Blues financial world. So, hey, let’s be careful out there - and then some!
Yogi Berra, one of the keenest observers of the human condition, is said to have once remarked "It is tough to make predictions, especially about the future." And so it is.
Holidays in Europe and Asia left things quiet overnight after some traders used the last day of April to frontrun the old "sell in May and go away" market adage. Market closures also kept the Chinese day trading hordes from using a tiny beat on the official manufacturing PMI print as an excuse to pile more money into the country's equity mania, while Japanese shares ended mostly unchanged as investors fret over when the BoJ will deliver the next shot of monetary heroin. In the US we'll get a look at ISM manufacturing and the latest read on consumer confidence as we head into the weekend.
"The Q1 US GDP data was a major disappointment to the market as business investment declined due to the intensifying US profits recession. Only the biggest inventory build in history stopped the economy subsiding into a recessionary quagmire. The US economy is struggling and the Fed will ultimately re-engage the QE spigot. Talk is growing that China will soon be doing the same as local authorities struggle to issue debt. But this week we want to focus on Japan, having just made my fist visit to that fine nation for over a decade! Japan, the third largest economy in the world, is also in trouble (see chart below) and will soon be increasing its off-the-scale QE programme to an out-of-this-world QE programme." - Albert Edwards
Japanese stocks and USDJPY are back below the lows of the US day-session following The Bank of Japan's decision not to stimulate further (despite all the collapsing economic evidence one might need to do such a thing). Investors were clearly hoping for moar (even if economists weren't). With GDP expectations collapsing, BoJ still voted 8-1 not to increase QQE keeping monetary base growth expectations flat. The result is a 500 point drop in The Nikkei from this morning's highs and around 1 handle drop in USDJPY... for now.
In the Common Knowledge Game, fundamentals – whether they are of the stock-picking sort or the macroeconomic sort – don’t matter a whit, and your personal view of those fundamentals matters even less. The only thing that matters is whether or not the QE-works lesson has been absorbed by the learning process of investment professionals, and that’s driven by the lesson’s transformation into common knowledge by Missionaries (like Deutsche Bank's Torsten Slok).
Thus, the mistaken conceit of monetarism is on full display, especially in Japan, as they boil down their efforts to substitute financial wealth for true wealth as if they could simply conjure industrious creation from nothing. And Japan is proving useful as the full and complete refutation of every facet of such a notion, even if the mainstream resists so far confessing it.
"An 'oil-debt nexus' could create a vicious circle whereby overindebted companies pump more oil to ensure they can pay interest on their loans, adding to the current global oil glut, and further depressing energy prices," WSJ notes, citing a BIS report. The interplay between the industry's growing debt pile and falling prices is a microcosm of the deflationary dynamic that’s taking hold in the macroeconomy and that serves, in Citi's words, to destroy creative destruction, creating "zombies" along the way.
Overnight we got the latest proof that there is nothing worse for an economy than to be run by a bunch of central planning academics who get "advice" from Paul Krugman. The reason: Japan's retail sales which crashed by 9.7% Y/Y, the biggest annual drop in history. To be sure, the biggest reason for the annual drop was the base effect with the surge in demand last March ahead of the April 2014 consumption tax hike, but the drop was bigger than what consensus had expected, as expectations were for a -7.3% drop. And confirming that things are getting worse on a sequential basis as well, was the 1.9% drop in sales in March compared to a 0.7% increase in February. In fact, as the chart belows show, on an indexed basis, the March retail sales print was one of the worst since last year's tax hike.
Any entity or investor who is using aggressive leverage in US Dollars will be at risk of imploding
- Nepal earthquake toll crosses 3700 (Reuters)
- Greeks Add Pressure on Tsipras to Compromise as Talks Resume (BBG)
- With No Deal on Greek Bailout Aid in Sight, Some in Europe Suggest ‘Plan B’ (WSJ)
- BOJ Shouldn’t Ease Further; Yen Fell Enough: Business Lobby Head (BBG)
- Clinton Foundation admits making mistakes on taxes (Reuters)
- Here’s the Old Nemesis Starting to Spook Bond Traders Again (BBG)
- Deutsche Bank to Trim Investment Banking (WSJ)
- China’s Stocks Rise to Seven-Year High on SOE Merger Speculation (BBG)
It has been a story of two markets so far, with China's Shanghai Composite up another 3% in today's continuation of the most ridiculous, banana-stand driven move of the New Normal (and there have been many ridiculous moves in the past 6 years) on the previously reported hints that the PBOC is gearing up to start its own QE, while Europe and the Eurostoxx are lagging, if only for the time being until Citadel and Virtu engage in today's preapproved risk-on momentum ignition, on Greek jitters, the same jitters that last week were "fixed"and sent Greek stocks and bonds soaring. Needless to say, neither Greek bonds nor stocks aren't soaring following what has been the worst week for Greece in months.
With the USDJPY's ascent to 125, 150 and higher having seemingly stalled just under 120, with concerns that the BOJ may not monetize more than 100% of its net debt issuance suddenly surfacing, the BOJ and the Nikkei would take any help they could get. They got just that an hour ago when Fitch downgraded Japan's credit rating from A+ to A, citing lack of sufficient structural fiscal measures in FY15 budget to replace deferred consumption tax increase.
It feels like not a single soul is worried about the increasing amount of negative interest rates around the world. Ignorance or indifference?
The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons. It is worth noting that the U.S. refuses to allow their gold reserves to be publicly audited and the Bundesbank is having difficulty repatriating much of its gold stored with the Federal Reserve. This has led many analysts to speculate that the U.S.’s gold reserves have been leased out or sold or are encumbered as part of an ongoing effort to manipulate gold prices.