Via Bill Blain of Mint Partners [11],
“The numbers all go to eleven, right across the board..”
As another woeful week wends to a weary close... what we got to look forward to? Although markets appeared to be shooting off in every direction, I do expect we'll see clearer direction soon. Oversold stock prices perhaps suggest some upside to come? The big trade of the moment, Japan, got a tad obscured last few sessions by stock market reversals, Gold and European wobbles, but I'm expecting that trade is back on the tracks.
Despite the noisy criticism earlier this week of Yen "competitive" devaluation, the G20 meeting said nothing.
- *G-20 PLEDGES TO AVOID COMPETITIVE DEVALUATION ON FOREX
- *G-20 WILL BE MINDFUL OF NEGATIVE EFFECTS OF MONETARY EASING
- *G-20 SAYS IT WILL RESIST ALL FORMS OF PROTECTIONISM
- *G-20 SAYS BOJ POLICY ACTIONS AIMED AT STOPPING DEFLATION
I suspect certain individuals were quietly sat in the comfy chair, had global reality gently explained to them with the aid of some rusty dental equipment, were slapped around a bit and told to shut it.
So instead of bellicose economic self-interest, or nationalist statements complaining about the 20% decline in yen, there was complicit G20 acceptance of the need for a weaker Japanese currency in order to boost the Japanese manufacturing sector to trigger regional (and hence global) growth. Predictably the Yen weakened and the Nikkei performed.
I love the quote Bloomberg carries from new BOJ governor Kuroda telling journalists: "We aren't intending to weaken the currency at all.." Oh... really.. As long as Japan can sign the pledge on “no competitive depreciation” without giggling we’ll be ok. So is the Japan story back on track? Reckon so. Watch for more signs of Japan export growth. It’s happening.
The next stage should be lower JGB yields squeezing Japanese investors into the global markets - triggering tighter US$ assets. It hasn't happened yet - the latest Japan flow figures actually show Japanese investors were net sellers foreign assets last week post BoJ Big Bang.
But, but and but again. Even though our Japan watcher Martin Malone predicted the BOJ move, Japanese investors were completely offside. It takes time for Japanese banks and insurance companies to change course - first they have to reach consensus among themselves how the market has changed, then they have to reach internal consensus about how to proceed. Meanwhile, many foreign investors have pre-empted them, buying the US$ markets. Still plenty of room for it to tighten further.
On the other hand, one market wag pointed out that by the time the Japanese get their acts together to buy, the effect will be fully priced in. He noted the Japanese are past-masters of the art of buying high, selling low. (Having worked for Japanese banks in the 80s and 90s, I have to concur...) So buy or sell dollar paper?
In Yoorp... what we got..? Cyprus? Slovenia? Oh, and the Italians still can't agree on a new president, so no government.. which is probably a good thing allowing Mario Monti to continue in place.. Italy creating a whole new definition of ungoverned.. but guess what... Italian bonds continue to tighten. Does the whole market just believe Europe is long term fixed, or is the suspension of disbelief a result of the chase for yield?
Meanwhile, in Washington the great and the good will be doing the canape circuit and glad handing themselves about what a good crisis they are all having. Listening to Radio 4 this morning I was struck by the honesty of a famous economist (interviewed at the IMF meeting) admitting the economic models had not worked nor performed as expected during through the crisis. So, I'll wait for a central banker to admit something similar - that they've pretty much been making it up as the crisis has blumbled along. (Blumbled... i like it... I've just invented a new word.)
And what of regulators? By some bizarre coincidence and a fluke of the time-space continuum, I got delivered a single paragraph of "A Child's guide to Financial History, 2113 Edition" that materialized in my mailbox:
"The clearest failures during the global financial crisis 2007-2021 were those of politics and regulation. Despite the initial failure of regulators to prevent crisis or to identify liquidity and risk management as the prime causes, they seized control of the financial system resulting in a decade of pointless over-regulation and focus on capital levels. This triggered a second crisis when the insane European Financial Transactions Taxes closed European markets. Regulators claimed success on the basis non-functioning markets meant an end to speculative trading."
I do suspect the warmest circle of financial hell is being reserved for those populist European politicians who've tried to appeal to voters with efforts to stem the financial tides, and punished markets for being markets. On the other hand, perhaps their extreme ignorance should be forgiven...? Nope... fire up the furnaces... and set Hell's temperature dial to 11.