Notes From Underground: The Dutch may have windmill but markets have rumor mills

First things first: The Japanese Central Bank did in fact hold an emergency meeting Sunday. The market’s initial reaction was to sell the YEN. But the market was disappointed when the BOJ and MOF trotted out the same old, tired plans for stimulus at a press conference. There would be no intervention to halt the YEN appreciation, thus the market reversed the YEN selling and the DOLLAR was sold off by 150 pips. All the YEN crosses also reversed–the market punished the Japanese for TALKING LOUDLY AND CARRYING A LITTLE STICK. Moral of the story for Finance Minister NODA and MOF GOVERNOR SHIRAKAWA: Like a groom on the honeymoon, don’t promise more then you can deliver.

The markets are now going to test the resolve of the Japanese policy makers so the rest of this week should be more than interesting. The surest way to get the global equity markets to rally would be a massive selling of YEN. The world’s financial wizards may be able to solve DIFFERENTIAL EQUATIONS but they have very little understanding of markets.

The main rumor de jour was that the Bank of China’s main traders lost $430 billion trading the Chinese portfolio of U.S. Treasuries. When we first heard this rumor we laughed at how utterly absurd this news flash had to be. If China is long of Treasuries and rates are heading lower, the bonds are by design having a large capital appreciation. Also, if there was a trader stuck, those on the Street would have wind of it long ago. We have to ask: Who makes this stuff up and who could be gullible enough to even put it out there?

The doldrums of August always give rise to ridiculous rumors but the Chinese losses were the most mind numbing in 33 years. We don’t think anyone really traded on the Chinese rumor and therefore there was little damage done to the pricing patterns of many different assets. Even so, we always warn our readers to be prepared in their work so as not to be susceptible to the fantasies of the global trading community. It is really a slow time as the month ends tomorrow and portfolio managers live to fight another month. Be very wary of the rumors that wash up on the trading desks of dealers looking to create CHAOS. We will be looking forward to the unemployment number on FRIDAY as it will help the FED find out just how weak the underlying economy really is. There is not much elese to see this week unless the BOJ et al pull an intervention surprise. Evidently that places us in the camp of DON QUIXOTE as we tilt at rumor mills.

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