The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover. The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance. That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.
A discussion of gold and US Treasury report on foreign exchange.
Curious how Abenomics is progressing six months after its announcement? These charts courtesy of Diapason should provide a convenient status update.
The Treasury Department planted a "dirty bomb" at the Bank of Japan, and tossed a grenade at the Swiss National Bank.
It is the yen, not the dollar, that is the key currency in the foreign exchange market.
Friday saw panic selling in gold as the metal broke $1,500 in a free-fall move. Is this a sign of “risk on” or something more sinister? Perhaps Cyprus is a major seller or there’s a large margin call somewhere. Some even assert some countries with debt problems are selling gold to raise capital to finance their country’s needs.
Gold was Bitcoin'd (or Baumgartner'd) as it suffered its biggest daily drop since LTRO2 on 2/29/12. The JPY rallied over 1% - its biggest rise in 7 weeks. 10Y Treasuries had their best day in 7 weeks. Macro data was absymal. But it was evident that the only thing mattered was a new high close for the Dow - as we noted 10 minutes before the close:
EURUSD must ramp over 1.31 for green DJIA
— zerohedge (@zerohedge) April 12, 2013
And thanks to some help from the old ramp standbys - HYG and VIX - they nearly made it (but not quite) as the Dow ended -0.08 points rallying 75 points off the lows on the worst macro data day in months, with the EURUSD ramping just the right amount over 1.31.
Overnight, Japanese government bond (JGB) markets had yet another turbulent trading session. Despite reassurances from Kuroda that the bond-buying plan would continue as expected, JGB prices (and even more so yields) smashed around in a huge relative range. The market is already extremely anxious of this disorderly behavior as Japanese interest rate implied volatility (used to hedge against - or bet on - disorderly markets) have spiked to ten-year highs (and to their 3rd highest ever). This is no surprise as the following charts show, the realized volatility in this market is at generational extremes. So we are one week into the biggest and most experimental monetization scheme ever in history and the quadrillion Yen bond market is in total disarray. What could go wrong?
- Korean Nuclear Worries Raised (WSJ)
- Och-Ziff, With Strategy from a 30-Year-Old Debt Specialist, Racks Up Big Score (WSJ)
- Japan's big "Abenomics" gamble: how to tell if it's paying off (Reuters)
- Kuroda walks a two-year tightrope (FT)
- China Rebound at Risk as Xi Curbs Officials’ Spending (BBG)
- BOJ Said to Consider Boosting Outlook for Inflation (BBG) - for energy prices? Absolutely: by double digits
- Cyprus May Loosen Bank Restrictions in Days (WSJ)
- Cyprus mulls early EU structural funds (Reuters)
- Russia slashes 2013 growth forecast (FT)
- Japan, U.S. Agree on Trade-Talks Entry (WSJ)
- IMF Trims U.S. Growth Outlook in Draft Report Citing Fiscal Cuts (BBG)
- Mexico Is Picking Up the Peso (WSJ)
Among the surprises of the week: the dollar has not gone above JPY100, JGB yields have risen this week, Portuguese bond yields have fallen.
Typically the public enters the market after a large run up, in time to buy at the top. Not there yet.
Mainstream Media Awakens to the fact that Fukushima Is Still a Total Mess
A discussion of what investors who are being displaced by BOJ purchases are going to do. It may not be as simple as rushing to buy foreign assets that people are anticipating.
Futures green? Check. Overnight ramp in either the EURUSD or USDJPY carry funding pair? Check? Lack of good economic news and plethora of economic misses? Check. In short, all the ingredients for continued New Normal record highs, driven only by the central bank liquidity tsunami are here. The weakness started with Australia's stunning unemployment jump overnight which saw a 36,100 drop in jobs on just 7,500 expected. A miss in Chinese auto sales was next, with 1.59MM cars sole in March, below the 1.596 expected, and even despite the surge in M2 and loan data, the Shanghai Composite closed down once again, dropping 0.29% to 2219.6. Nikkei continued its deranged liquidity-fueled ways, rising 1.96% even as Kuroda is starting to become quite concerned about the rapid move in the Yen, saying he "may adjust policy before the 2% target is reached if the economy and other indicators are growing rapidly." They aren't, and won't be, but if the Nikkei225 is confused for the economy, he just may push on the breaks which would send the only reason for the latest rally, the USDJPY tumbling. Finally, looking at Europe, Italy sold well less than the maximum €6 billion targeted in 2016, 2017 and 2028 bonds, which dented some of the enthusiasm for Italian paper although with Japanese money desperate to be parked somewhere, it will continue going into European and all other fixed income, distorting market signals for a long time. In short, expect the central-bank risk levitation to continue as all the deteriorating fundamentals and reality are ignored once more, and hopium and P/E multiple expansion are the only story in town.
Soros’ yen “avalanche” would appear to have begun with the yen having fallen by 9.5% against gold in 5 trading days since last Thursday leading to record nominal highs in the yen at over 0.1577 million yen per ounce this morning.
The higher gold prices have led to a curious anomaly in Japan where the public has again been selling gold in cash for gold schemes, often due to being under financial pressure, while some Japanese investors and savers have diversified into gold coins and bars both of which have seen an increase in demand in recent days.