Here we go again. Bank of Japan Governor Kuroda “shocked and awed” the markets by taking BOJ deposit rates into negative territory in a HYBRID sort of way as it is a three-tiered methodology that does not apply to money already being held at the BOJ in reserve. Also, money that is deemed regulatory-type capital will receive ZERO interest and won’t be punished with a surcharge, but any new funds making it onto the reserve balance sheet of the BOJ will receive NEGATIVE INTEREST RATES. Kuroda-san delivered this shock after promising last week that the BOJ would not go negative on its deposit rate. Kuroda will learn hat if you keep intentionally pumping the markets with disinformation the markets will have their time when the BOJ needs it the most, like maybe selling off the massive JGB portfolio on its balance sheet. But through the power of negative compounding of interest earnings Kuroda has brought Stevie “Guitar” Miller’s words to life:
“Your cash ain’t nothing but trash and there ain’t no use in hangin’ around.”
So all Japanese bond and currency investors, take your money somewhere else. We don’t want it anymore. There were many suppositions about why Kuroda decided to surprise the markets. First, the BOJ governor cam under immense pressure at Davos to do something to generate an increase in Japanese inflation.
Another problem for Kuroda was that the architect of Abenomics, Amari, resigned this week putting more pressure on the BOJ to act. I am not accepting either of these reasons because the vote for NEGATIVE RATES was 5-4 in favor, so the decision for Kuroda was very contentious. If the pressure from outside sources was great and/or the domestic political situation so frought with risks, Kuroda would have been able to get a consensus rather than a close vote for the change in policy.
Secondly, In my OPINION Governor Kuroda went negative to impact the recent depreciation of the Chinese YUAN. It is noted that Kuroda was on the record at Davos advising the Chinese authorities to IMPOSE EXCHANGE CONTROLS to stem the outflow of hot money from China and thus slow the downward pressure on the YUAN. Instead of using reserves to slow the YUAN‘s depreciation capital controls would slow to a trickle the selling YUAN, especially by the speculators. The Wall Street Journal published an article online titled, “Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan.” It said some of the giants in currency trading–George Soros, Kyle Bass, Stanley Druckenmiller, David Tepper and David Einhorn–are taking LARGE SHORT positions on the YUAN in an anticipation of a large depreciation of the currency.
Last week, the main Chinese newspaper warned Soros about speculating against the people’s money. A major depreciation of the YUAN would result in a world-wide depression as it would force the Chinese to export deflation around the world through its EXCESS CAPACITY and weaker YUAN. It seems that KURODA wants to prevent the Chinese export of deflation around the world for the global debt load overhang is too large to deal with a renewed bout of GLOBAL DEFLATION. Exchange controls may be painful and a short-term fix but it appears that Kuroda is suggesting that it would be best for the world to avoid a YUAN depreciation. The large short YUAN position by the great minds of global macro is based on the horrendous balance sheets of Chinese banks. The only way to stem a raid on the currency is to raise interest rates to a high enough level to reverse the outflows, which would be a disaster for an overleveraged domestic economy.
So Soros, Bass et. al are betting that the Chinese have no alternative but to let the currency slide. The short YUAN is the logical outcome of global macro fundamentals, but be careful following in the path of elephants, especially if the Chinese authorities make a stand against the speculative capital. The G-20 could call a meeting and invoke some type of accord to have the FED and others develop policies to prevent the slide in the YUAN initiate a global depression. The Chinese could also create a GOLD-backed YUAN, which would make it a desirable holding for global investors. This is just the beginning of the currency wars as the BOJ has created the SPARK TO START A GLOBAL PRAIRIE FIRE.
My long-time readers have known that I’ve been a fundamental bull on GOLD but a technical bear to neutral. At the time of the ECB meeting I suggested that the gold/Swiss was a buy and that it could be the stairway to haven. The GOLD/SWISS had rallied strongly above its 200-day moving average. Well now the GOLD/EURO and GOLD/YUAN both closed above their 200-days for the week. In order to generate a total bullish scenario, the GOLD/YEN will have to have a weekly close above its 200-day, which is presently @137.243 YEN to an ounce of GOLD. On Friday the cross closed at 135.280 so we don’t have a complete picture of GOLD versus fiat currency.
To fulfill the entire technical picture, GOLD in terms of U.S. dollars would have to have a weekly close above its 200-day moving average, which is currently 1133.10 on a daily continuation CQG chart. We have not had a complete technical picture in several years but with the Japanese announcing that YOUR CASH AIN’T NOTHING BUT TRASH. We need a haven. My opinion has constantly been that GOLD‘s rally would come not from the onset of a small amount of inflation but when the FEAR OF DEFLATION WAS RAISED TO A LEVEL THAT CAUSED THE WORLD’S CENTRAL BANKS TO PANIC. If Soros, Bass et. al have their way with the YUAN the time is well-nigh.
Tags: BOJ, China, Fed, Gold, JGBs, Kuroda, negative rates, Yen, Yuan
January 31, 2016 at 5:53 pm |
Yra
Your outlook for some kind of grand G-20 solution to the yuan problem is a good guess, as it seems likely that the chinese are not going to admit defeat/lose face easily. However, I think a G-20 Grand solution will not occur unless there is FIRST a horrific market sell off to focus the players’ attention and focus
January 31, 2016 at 7:28 pm |
Mike–you may well be correct that first a major horrific financial event need to take place.Time will tell but not too far away
January 31, 2016 at 7:14 pm |
With Kuroda reacting to a depreciating yuan with a step that contradicts his own recent words, he may have gained a short term gain with an immediate 2% drop in the yen, But the words of Friedrich Neitsche come to mind.
“I’m not upset that you lied to me, I’m upset that from now on I can’t believe you.”
Or as the lyricist wrote:
“He’s a lyin’ cheatin’ fool, he don’t deserve you..,”
Competitive devaluation races to the bottom never end well. The EM that have debt loads payable in the stronger dollar are looking at immediate disaster. Look for Venezuela and Puerto Rico to lead the pack waving their white flags.
Add to this combustible mixture a weak US .7% Q4 growth rate, with top lines shrinking and financially engineered bottom lines, and we are set for an interesting 2016. And how did the markets react on Friday? With a 2%+ short covering blow off with PPT help.
Bad news will once again be treated like bad news and there will be few safe havens. The major one will be one that will warm the hearts of the Auric Goldfingers. James Bond will be called upon by Carney and Yellin from his lounge in Jamaica, setting down his shaken but not stirred martini. But it will be too late.
January 31, 2016 at 7:26 pm |
Asherz–one of the great blog responses ever–Thanks
February 1, 2016 at 2:05 am
Such a great line, so true as well –
“I’m not upset that you lied to me, I’m upset that from now on I can’t believe you.”
February 1, 2016 at 7:15 am
Sounds like a Country song 🙂
February 2, 2016 at 10:24 am |
Adrian–yes Fredrich and the UBERMENSCH recorded it
January 31, 2016 at 11:16 pm |
Kuroda would be well served to pay more attention to their esteemed economist Richard Koo.
Instead of Mark Knoppfler.
“That ain’t workin’ that’s the way you do it
Money for nothin’ and your chicks for free”
Koo is well published on debt deleveraging. Even negative interest rates will not bring back companies and individuals to lever up. It is all about balance sheet repair. The ANIMAL spirits have left the House of the Rising Sun.
The marginal propensity to consume increases ever so slightly between 20 bps and -30 bps.
The largest risk to negative rates is not only currency depreciation, capital flight but cash runs on banks as consumer hold cash rather than leave it on deposit. This further weakens a fragile banking system that has virtually non-existent Net Interest Margins.
February 1, 2016 at 12:46 am |
Frankc–the Holy Grail of Global Macro and the balance sheet recession a favorite reference for this blog for six years–thanks for the reminder
February 1, 2016 at 8:24 am |
A relevant and well timed burn on Kuroda given the recent conclusion of the Korean comfort women deal.
February 1, 2016 at 7:40 am |
Has there ever been another time other of negative rates?
Is the economic term “In the long run we are dead” occurring at accelerated pace? It sure seems like it.
February 1, 2016 at 10:02 am |
Yra- Good interview with Santelli.
I am thinking that as the Central Banks loose control, the Treasury yield curve will steepen, even absent FED action.
People will be afraid they will not get their money back in a deflationary environment (with a massive debt overhang), and/or the dollars they get back in the future will be tremendously devalued.
What say you?
February 1, 2016 at 10:46 am |
Shocked –you are ahead of me as usual —i agree and this is a problem for the puzzle in the near term for several reasons but wil blog about it soon
February 1, 2016 at 4:36 pm |
I always thought of deflation as pushing the value of cash up, or assets down if you will.
“The Chinese could also create a GOLD-backed YUAN, which would make it a desirable holding for global investors.”
The world is a ghetto.
February 1, 2016 at 4:35 pm |
China 2016. No hard landing.
February 1, 2016 at 10:18 pm |
maybe this is obvious, but isn’t a depositor who is assessed a negative interest rate on bank deposits simply paying a wealth tax to the government, which has the opposite effect the government is intending, that is, a stimulus?
February 2, 2016 at 6:50 am |
Paul–absolutely which is why they are going to find a way to punish “hoarders” even more –a few months ago Andrew Haldane of the Bank of England suggested abolishing cash for the fear that savers would remove the money from the banking system and thus avoid the penalty of not spending—-that smells like a good cigar Paul
February 3, 2016 at 6:30 am
“…a few months ago Andrew Haldane of the Bank of England suggested abolishing cash for the fear that savers would remove the money from the banking system and thus avoid the penalty of not spending…”
I fear that is exactly what is going to happen. Calls are getting louder for a cashless society. You don´t need to follow Zerohedge for that. Just today the government over here in Germany is said to be discussing a proposal that payments greater than 5.000 are required to be made electronically only. And they have a nice excuse for that – the threat of terrorism.
and then there´s this:
“Still, most authorities reckon that Switzerland’s negative 0.75% is right around the lower bound, says Jon Faust, a former Federal Reserve adviser who is now director of the Center for Financial Economics at Johns Hopkins University. Above that, firms will start developing the infrastructure necessary to hold and transport large amounts of cash. Giant safes, fleets of armored cars, specially designed insurance products… not really the type of innovation a central bank wants to inculcate.”
->monetary policy is losing it´s effectiveness and we´re on a clear path into negative territory. but to make it work below a certain rate, you have to erase cash.
February 3, 2016 at 8:46 pm
Green AB–nice to hear from you and I was going to blog about that German announcement but had bigger fish to fry tonight but you make the salient point and no it is not a Z’H’ issue but becoming a universal right of citizenry—look forward to hearing and sharing about the Chancellor or as Mick jagger sings,Angie
February 2, 2016 at 6:21 am |
[…] Swiss Long Gold/Short Yen Long Gold/Short Yuan General Comments or Valuable Insight. http://yragharris.com/2016/01/31/trash/ The Gold spreads were the only note of interest last night. Both the Equity Indices and Oil have […]
February 4, 2016 at 5:53 pm |
Yra, I´d love to see you reporting more on the cashless issue. Today German newspaper FAZ is repoting that the ECB is preparing to get rid of EUR 500 notes. They´ve been working on it for a while now, it´s just a matter of communicating it to the public. Again – terrorism should be a nice excuse…
As for Angie and the refugee crisis – that is for another lengthy post. The people are getting really upset over here. The political climate has become nasty, hateful. I hate to see it. I´ve been very critical on Merkel in the past. Mainly because she was lacking a personal agenda. Always changing her mind if polls say she should. Stealing political themes/popular proposals from other parties. Kicking the can in the Euro crisis. Her moderating style showed in the polls. She has been very popular (at the cost of her political enemies). That is changing at a rapid pace. Calls are getting deafening to set a refugee limit, close our borders, shooting at illegal refugees, throw the government out and all kind of stupid stuff. A majority in her own party and traditional CDU voters hate what she´s doing. But the women is standing her ground and I give her a ton of respect for that.
Right wing populists refuse to acknowledge that there are only two solutions to dampen the flood of refugees into our country: a)end the war in Syria. or b)get the rest of Europe to share the burden. Both options are impossible to succeed at the moment. So she (together with the SPD) is doing what she can to handle the endless stream of migrants… I´m afraid the country could be on a wild ride if the refugee wave doesn´t stop this year. And that´s even without the economical threats coming from China and beyond.