Japan

The long awaited day is finally here by which we, of course, mean the day when nobody has any idea what the Fed will do, the Fed included. Putting today in perspective, there have been just about 700 rate cuts globally in the 3,367 days since the last Fed rate hike on June 29, 2006, while central banks have bought $15 trillion in assets, and vast portions of the world are now in negative interest rate territory.

Kyle Bass shared his macro views during the “Squawk on the Street”

The evening started with disappointing Japanese trade data cross the board - weakest imports, exports, and trade balance in 6 months - which follows the largest selling of Japanese stocks by foreigners ever. China opened with the first rise in margin debt in 6 days, stocks were lower  in the pre-open after last night's epic farce ramp. PBOC strengthened the Yuan fix modestly and also injected another CNY 40 billion.

News That Matters

"Every day brings another reason why the Federal Reserve should hold off before raising interest rates... First and foremost there was the recent plunge in stock prices."

Will she raise or will she not? As financial markets focus on whether we will see a Fed rate hike this week, investors may be in for a rude awakening.

Ffor whatever reason starting in the last hour of trading and continuing until the close, the Shanghai Composite - after trading largely unchanged - went from red on the day to up 4.9% after hitting 5.9% minutes before the close - the biggest one day surge since March 2009 - and nearly erasing the 6.1% drop from the past two days in just about 60 minutes of trading, providing a solid hour of laughter to bystanders and observers in the process.

Who would have thought that decades of ZIRP, an aborted attempt to hike rates over a decade ago, and the annual monetization of well over 10% of sovereign debt would lead to a toxic debt spiral, regardless of how many "Abenomics" arrows one throws at it? Apparently Standard and Poors just had its a-ha subprime flashbulb moment and moments ago, a little over 4 years after it downgraded the US from its legendary AAA-rating which led to angry phone calls from Tim Geithner and a painful US government lawsuit, downgraded Japan from AA- to A+.  The reason: rising doubt Abenomics is working.

Chinese equity markets are holding modest 'bounce' gains after two days of carnage. After 3 days of stronger fixes PBOC devalued the Yuan but the Ministry of Finance made it clear that "devaluation is not aimed at boosting exports," which makes us wonder, is it aimed at selling Treasuries? No additional direct liquidity injections but anxiety grows as China National Erzhong Group Co. may miss an interest payment later this month after one of its creditors filed a restructuring request, putting it at risk of becoming the second state-owned company to default in the nation’s onshore bond market.

"It Does Not Work"

Usually, we don’t stop to think about how the whole economy works together. A major reason is that we have been lacking data to see long-term relationships. What we are doing now is building debt to unsustainably high levels, thanks to today’s high cost of producing energy products. This can be turned around. To do so would require immediate production of huge quantities of incredibly cheap energy products - that is oil at less than $20 per barrel in 2014$, and other energy products with comparably cheap cost structures. Of course, such a low-price, high-growth scenario isn’t really sustainable in a finite world either.

The tone from investors in the latest Bank of America survey is clear: as Michael Harnett summarizes it, the one prevailing theme is "unambiguous pessimism."  Bottom line: either markets soar, or something bad is about to happen: to wit: "Unambiguous pessimism means risk assets riper for a rally (note investors don’t want a Fed hike this week). If no rally, then markets ominously hinting “recession” and/or “default” imminent." Good luck Janet.

Almost two weeks after we explained why any hope for a QQE boost by the BOJ is a myth, and that any increase in monetization will simply lead to a faster tapering and ultimately halt of Kuroda's bond purchases the market finally grasped this, when overnight the BOJ not only did not easy further as some - certainly the USDJPY - had expected, but kept its QE at the JPY80 trillion level and failed to offer any hints of further easing that many had hoped for, pushing the Nikkei down from up almost 400 point intraday to virtually unchanged and sending the USDJPY back under 120. JGBs also traded lower on concerns there may not be much more QE to frontrun.

Nahhh ... The Problem Is NOT ENOUGH Debt! </sarc>