John Taylor of FX Concepts is angry.
Stability Breeds Instability
In three words our title describes one of the basic foundation blocks of Hyman Minsky's theories.
The idea is so straightforward, so logical that you can feel the process in your bones, yet no central bank, no finance minister, no head of state has ever publically recognized it. We analysts seem to know it is there as we all talk about gearing up to make a return in these low interest rate, low volatility times. We know our investments, the equities we buy, the bonds we choose are the ones that are levered even if we aren't. Some incredible percentage of US corporate bonds are covenant lite, more than twice as many, percentage wise than at any peak before a crash, but we still buy. How else can anyone make a return that will get clients, make enough to cover the retirement benefits our pension is committed to, or (at the bottom of it all) keep our jobs? We know we are walking further out a tapering diving board but we have to do it. Why don't we face facts and study the principles behind the recurrent crashes? Of course, one individual cannot buck the trend because he/she will lose their job, before the inevitable top.
One of my great-grandfathers was a family hero because he, as the manager of a mutual fund company was being sued for under-investing as the crash arrived in 1929. He was acquitted. Maybe this underlies my belief in Minsky's understanding of financial development and my crusading for the yin and yang of cycles. I even liked reading Hegel, Pareto, and Shumpeter in school. What is the matter with us? Why can't we - especially our financial leaders - get it? Too much demos? Are we ruled by the Sun, the NY Post, and the Roman circus?
Dropping back to earth from 10,000 meters - unfortunately, not high enough to be safe - the Japanese yen and the Dollar Index in general went wild this past week rising from comatose - straight lining almost - seemingly out of nowhere. It wasn't actually the Japanese industrial production coming in at minus 3.3% instead of the forecasted minus 1.2% that was such a surprise. We and many other analysts have been saying the Japanese economy was acting worse than it did in 1997 when they last hiked the sales tax, but the authorities everywhere said nothing, there seem to be no vigilantes of any sort. This is not the 1970's or the 1980's, we don't call an idiotic policy by its name (with money, that is). Zero Hedge can rant on but no one follows them or, more important, does a real analysis of the situation.
So now, Japan is collapsing. So what? In the summer of 1997, at exactly the same time-span after the hike as today, the yen started a 30% decline over the next year. That's not our forecast, but it is now two standard deviations from it. Any takers? Even if there are there are enough benchmark hungers to make the collapse a minor probability. What about Europe? Politics don't matter. I remember the German grand coalition, all of society agreed on the right course - except a few and there was hell to pay. That stability led to political instability. We would not buy French, Italian, Spanish and other 5- and 10-year paper at under US rates. What are they thinking? We know and so did Minsky. It will not end well.