Notes From Underground

In a September 11 post, I criticized the Japanese Central Banks’s policy for its technical approach to attempt to steepen its 2/10 yield. I wrote the following:

Message to Governor Kuroda from Yra Harris: If the BOJ wishes to steepen the curve then get the Ministry of Finance to issue all new debt in a period of TWO YEARS OR LESS. Then, stop buying any sovereign debt beyond two years and I GUARANTEE THE CURVE WILL STEEPEN DRAMATICALLY.

My criticism has proved correct for the BOJ‘s policy has been misconstrued for the Japanese. The curve has steepened a wee bit since Kuroda’s announcement. Since that time the yield curves of the other developed economies have steepened far more dramatically and that is in the face of major asset purchases from the Draghi-led European Central Bank. The ECB‘s December 8 meeting has caused a major steepening of the German and Dutch 2/10 yield curves because the ECB removed some of the largest restrictions on the purchases of German and Dutch short-term paper. The two-year German SCHATZ has seen its yield drop to -80 basis points from -60 basis points while 10-year bund yields have risen.

Governor Kuroda needs a lesson on how to affect a real planned outcome. I bring this up because Monday night we will hear from Governor Kuroda as he announces the results of today’s BOJ meeting. The previous policy of keeping JGBs pegged to ZERO is failing and flawed. It is resulting in a rapid depreciation of the YEN. If the BOJ is forced to continued its ZERO-based 10-year yield the Japanese central bank will have monetized the Ministry of Finance’s debt and the result may be far more inflation than the authorities have anticipated. The NIKKEI has been a star performer since the BOJ embarked on its flawed policy since Japanese insurers and pension funds are chasing the Nikkei higher to find “responsible” returns. They cannot compete with the BOJ‘s printing press-manufactured wealth.

Pay attention to any rescission of the plan to “steepen the yield curve.” A change in the plan MAY result in a rally in the YEN and the market is heavily short. I am aware that the YEN and its crosses are still STRONGER on the year, but the weakening of the YEN since the TRUMP election has been severe. Be aware of market action if Kuroda is to announce any change in its policy.

***Tomorrow, Chair Yellen is expected to speak on the U.S. labor market in a mid-year commencement address at the University of Baltimore (1:30 p.m. EST). The FED chair will probably tell the graduates that the FED‘s QE policy has resulted in the most robust job market in more than a decade. But, she may speak to the issue of WAGES needing to be higher to help graduates overcome the enormous burden of college loans. THIS IS MERE CONJECTURE but the Fed Chair raised concerns over comments made at the FOMC press conference last week.

She discussed that at full employment it is not necessary to embark on a massive fiscal plan of infrastructure projects and possible tax cuts. This was an important statement from the FED chair for the markets have interpreted it to mean that the FED may react quicker in raising rates to counteract any heightened inflation expectations from an overstimulated economy. The idea of fiscal stimulus at a time of full employment challenges the FED‘s economic model. The FED OUGHT TO BE MORE AGGRESSIVE RAISING RATES IF IT FEARS THE ECONOMY WILL OVERHEAT. Yet it will be interesting to see if Yellen puts on her labor economist hat and falls back on talking about WAGES just catching up to PROFITS. At this point the “running a high pressure” hotter for longer economy may be worth the pain.

Bottom line for Yellen: DO YOU PRESSURE THE TRUMP STIMULUS PLAN AND COOL THE ECONOMY OR ALLOW THE AMERICAN WORKER TO EXPERIENCE THE MONETARY ILLUSION OF INFLATION PRODUCED WAGE GAINS? If wages rise relative to corporate profits then Yellen will deem it a successful approach.

***Questions to ponder for 2017: Are Donald Trump and Wilbur Ross prone to push for inflation? Donald Trump is a real estate developer and has gained most of his wealth in times of inflation. Financing real assets with massive debt loads is the idea for real estate entrepreneurs. Wilbur Ross is an expert vulture capitalist who buys severely distressed assets with borrowed money and hopes for central bank and government financing to create asset price inflation.

Ross has done exceedingly well in purchasing Irish banks but his involvement in Greece still has the jury out. The IMF and Germany have pushed for more austerity for Greece and the IMF also wants a write-down of Greek debt to lower the burden on the Greek financial and social systems. Ross and others have suffered large losses in Greece because of the inability of the Greeks to inflate away their debt losses. Greek banks are still stuck with too little capital and too many nonperforming loan portfolios.

Also, the Greek government is too heavily in debt to absorb the banks losses as in Ireland. Well Wilbur, will your bet on the inflation horse finally payoff? Hmm, it should provide an interesting topic for the confirmation hearing. But bottom line is that Trump and Ross may have more in common with Chair Yellen than they would all care to admit. All of this potentially sets up to make 2017 a most volatile year in a broad range of asset classes. In China it is the year of the ROOSTER so with two cocks and a hen the barnyard is sure to get noisy.

Tags: BOJ, curve steepening, ECB, Fed, inflation, JGBs, Kuroda, QE, Schatz, Trump, wage growth, Wilbur Ross, Yen

This entry was posted on December 18, 2016 at 7:49 pm and is filed under BoJ, Debt Market, ECB, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.