Click on the image to watch Rick Santelli and I discuss EURO/YEN and the European auto industry.
Tonight’s BLOG headline is attributable to my friend KM after a long conversation about the IMF and G-20 meetings that took place in Washington during the past four days. It appears that Japanese monetary policy was not the subject of derision but rather applauded as a strong measure to lift Japan’s domestic economy out of two decades of malaise. Let me be as clear as possible: There is a full frontal assault being waged on the German model of GROWTH THROUGH AUSTERITY. The first shot fired was several months ago when IMF economist Olivier Blanchard delivered a paper stating that the previous belief that the negative impact on GDP from austerity was not a multiplier effect of 0.5% but rather a greater measure of 0.9-1.5% in its impact so a decease in fiscal spending would create a much greater slowdown than previously thought. The battle was waged in the efforts to limit the sequestration in the U.S. even as IMF Managing Director Lagarde cautioned that U.S. tightening is “too much, too fast and it’s in the wrong place. It’s not right for the U.S. economy and it’s not right for the world.”
Over and over, financial news airwaves are filled with noise about since the Bank of Japan–under the supervision of Governor Kuroda–has embarked on a massive dose of Quantitative Easing, there has been no real outflow of YEN around the world. The only problem with this bloviating is that its devoid of fact. The BOJ’s action, or rather, call to action has led to a drop in European bond yields as well as a new pillar of support for U.S. Treasuries. Further proof is last night’s employment data from Australia, which was much weaker than expected (a 36,000 job loss and a 0.2% jump in the unemployment rate to 5.6%), but the AUSSIE DOLLAR rallied after an initial selloff as Japanese investors are seeking higher returns. A favorite place for higher yields for Japanese seekers has been Australia and New Zealand. Many financial institutions offer what are known as Urudashi and Samurai bonds. These are bonds issued in Japan in foreign currency of usually kiwi and Aussie. Those who say that the Japanese don’t invest afar and remain in Japan–what is called HOME BIAS–are badly misinformed.
Today we got follow-through in the global equity markets as the EUR/YEN cross rallied to three-year highs since the YEN was, again, the chief recipient of the Bank of Japan’s (BOJ) enhanced efforts to bring forth inflation from a long time deflation-plagued economy. The Japanese investors were busy sending forth YEN in search of yield but also buying NIKKEI stocks in a return for domestic yield. A positive outcome from the sudden desire of Japanese investors into equities may mean an increase in corporate democracy as the demand for dividends is going to increase. The corporate culture in Japan has always been anti-shareholder as the predominant thought is that management owns corporations and the shareholders should be quiet and not make waves. The status quo has been challenged by some foreign activist investors and always rebuffed in a very anti-democratic show of defiance. As the desire for an income stream for investors, look for the ABE government to be supportive of increased democratization of corporate Japan. The flow of corporate money to investors would aid domestic demand, especially as bond returns go negative.
The central banks were in play today and while the Bank of England held to its present course, the Bank of Japan declared that they were now in full battle gear and announced a very aggressive monetary policy agenda. I was surprised by the tenacity of the announced program and certainly by its timing. The recent movements in the YEN, and,especially the EUR/YEN crossrate meant that the BOJ and the Japanese Finance Ministry had some breathing space to allow some of the ill effects of the Cypriot crisis to calm. No such by the BOJ as they “damned the torpedoes and announced full speed ahead.” If other central banks wish to muddle about that is their business but the Japanese are determined to end the deflation that has plagued their economy. The steps that the BOJ announced, which had the greatest impact on the YEN and the Nikkei were:
Two events roiled the currency market this morning. First, the GDP numbers out of many European economies were weaker than expected. The softness of European economic activity has stirred the complacency of recent buyers of EUROs and caused some unwinding of the EUR/YEN and EUR/GBP cross rates. The second event that unnerved recent buyers of EUROs was a comment by the ECB Governor from Portugal, Vitor Constancio. It was reported that Mr. Constancio said in response to recent Euro strength that “… negative rates always possible.”
Thursday brings the announcements from two of the major rate setters in Europe: the Bank of England and the European Central Bank. First the BOE will announce at 6:00 a.m. CST and consensus says the bank will keep rates steady at 0.50% and the QE program at 375 billion pounds. Though the U.K. economy is soft, Governor Mervyn King will maintain a steady path so to keep his options available in case the global economy begins a new downturn. The present BOE head is retiring July 1 so it would be prudent to let his successor have as many tools to work with in a new regime.
It was only a year ago that the PRECIOUS METALS were laboring under the continued selling of GOLD and SILVER as the John Paulson hedge funds were liquidating long positions to meet the huge amount of redemptions by long-time investors exiting the decade’s best performing FUNDS. In a repeat, Morgan Stanley announced today that it was redeeming its investors out of Paulson’s two largest funds after another year of questionable performance. In today’s world where one hedge fund can hold massive positions, divestment by disgruntled investors can initiate massive corrections. In 1980, when the Hunt Brothers caused great turmoil in the silver markets, they had a mere BILLION DOLLARS to play with (the Paulson funds control close to $15 billion under management.) As traders and investors it’s our job to be cognizant of all the animals in the jungle. When the elephants retrace their steps from the watering hole, small animals can get crushed (Niederhoffer).
Wow, what a long strange trip it has been. This quarter has certainly been visited by the four horsemen of the apocalypse. Every time the market thinks it has seen a cataclysmic event, something new arrives on the stage. Floods in Australia, earthquakes in New Zealand and Japan, high food prices and riots in the world over, and of course there is always war breaking out somewhere. In a prior time (THINK 1960s), we had a different hedge group writing: IT’S GOOD NEWS WEEK by the HEDGEHOPPERS.
All these calamities and still the equity markets in the U.S. have rallied and the DOLLAR has failed to invoke its haven status. The only explanation I can discern from this action is that EASY MONEY from our friends at the FED has trumped all else. It seems that DOLLAR-based investors are searching for any type of investment that can yield more than inflation. Risky assets get bid up as money scours the investment map. Commodities, high-dividend yield stocks, high-yield corporate bonds are all desired.
Yet, as the Financial Times reported today, the demand for MUNI BONDS isn’t there post Meredith Whitney as the yields are insufficient to overcome the fear of default. At least GREECE pays you a true risk yield to purchase its SOVEREIGN DEBT. The end of the quarter leaves me thinking that the FED and all the other QE-providing BANKS have so perverted the global interest markets that the decision to remove the monetary stimulus will create a great deal of volatility. The question is, when?
The coming quarter will begin to answer that question but the political stage will continue to surprise as 2012 brings forth many elections. In May, the Canadians will go to the polls and the Portuguese will follow. I am certain that other Parliamentary Governments will fall as the austerity budgets begin to take a toll on voters of many Western nations. As the quarter comes to an end, the EUR/YEN cross that has been the barometer of so much of the risk on/risk off paradigm, is breaking out to new highs since the second quarter of 2010. Is this a reflection of the G-7 intervention or merely the need for Japanese investors to seek higher yields outside of Japan?
The FT reported yesterday that several macro hedge funds suffered severe losses from the March 17 YEN rally that sent the DOLLAR/YEN rate to 76-plus. As the quarter ends, there are more questions than answers but I sincerely hope that the FED will begin to remove some of the haze that engulfs global financial markets. The politics will create volatility. Responsible central bank policies would do much to help remove some of the greater uncertainties. For many, this was certainly a “WINTER OF DISCONTENT.” Being a CUBS FAN, it is time for HOPE to SPRING ETERNAL.Hey Bernanke, PLAY BALL.
This weekend was a slow news weekend for impact-worthy events. The Chinese PMI data was somewhat tepid but not as weak as expected. Again, we state that we don’t trust the Chinese data at all. We must remember how the U.S. data is so badly flawed, so why should we trust the economic releases of an economy that is so ostensibly government controlled? Good, bad or ugly, we have very little respect for Chinese data. We hope we are clear on that but we report it only for the initial impact it can have on trades.