Archive for the ‘Japan’ Category

Notes From Underground: Hey CNBC, New York Is Not the Most Powerful City In the World

August 27, 2015

At 8:00 a.m. EST, CNBC‘s announcer says, “From The Most Powerful City In the World, This Is Squawk Box.” What bothers me is the squawking about your importance. What irritates me even more is that Beijing has been the most powerful city when it comes to moving markets. Every other idea spewed this week has been about the impact of the Chinese authorities and the policy impact from the Politburo that “destroyed” trillions of equity market value. It even appears that the Chinese are dominating the discussion in Jackson Hole, Wyoming where the Kansas City Fed is hosting their annual symposium. Even New York Fed President Bill Dudley, aka Less Compelling, cites the Chinese as the reason to be less compelled to raise rates at the September meeting.

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Notes From Underground: A Desultory Philippic on the Markets, the Fed and World Finances

August 17, 2015

One of my favorite songs by Simon and Garfunkel is “A Simple Desultory Philippic” in which the duo takes the time to mock and criticize the world of culture and politics that surround them. Desultory means lacking a style or plan, while Philippic connotes a word for a tirade or rant. Will my readers entertain my desire to craft my own simple desultory philippic?

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Notes From Underground: Signs of Madness in the Global Financial System

December 9, 2014

From time zone to time zone, there are signs of a broken financial system. This past weekend’s issue of Barron’s had a splendid article by Jonathan Laing titled, “Why Beijing’s Troubles Could Get a Lot Worse.” Laing interviews  Anne Stevenson-Yang  from J Capital Research. Stevenson-Yang is a long-time China watcher, speaks fluent Mandarin and has lived in China for many years. In the interview, Laing asks her about many of the problems that the media covers, but one of the keys in the Q&A was the following:

Q: How bad can the situation be when the Chinese economy grew by 7.3% in the latest quarter?

A: “People are crazy if they believe any government statistics, which, of course are largely fabricated. In China, the Heisenberg uncertainty principle of physics holds sway, whereby the mere observation of economic numbers changes their behavior. For a time we started to look at numbers like electric-power production and freight traffic to get a line on actual economic growth because no one believed the gross-domestic-product figures. It didn’t take long for Beijing to figure this out and start doctoring those numbers, too.”

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Notes From Underground: The Significance of Japan’s Monetary Action

November 11, 2014

A Reuters story today (“Kuroda Sprang Easing Surprise to Head Off Damaging Inflation Forecast”) suggested that the move by the BOJ was a rapid and expedient effort by Governor Kuroda to prevent the markets from believing that the previous Japanese actions to “ignite” inflation had been a failure. The BOJ had been trying to target 2 percent inflation but the recent fall in oil and energy prices was placing downward pressures on inflation, calling into question previous attempts by the Japanese authorities to raise inflation expectations.

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Notes From Underground: Larry Summers In Mister October

October 7, 2014

There is not doubt that Larry Summers is excited by October G-20 and IMF meetings as the top policy makers meet to discuss the state of the world economy and other significant global interests. It’s a time when the media is focused on the world’s leaders and Mr. Summers likes the role of being a major player. There is no question about Summer’s academic qualifications and his wealth of policy making experience. If success in the field of economics was based on eugenics, well, Larry Summers would certainly have a Nobel Prize. My one major criticism of Secretary Summers was his running interference for Robert Rubin and Sandy Weil in their efforts to repeal Glass-Steagall, which even Mr. Weil has admitted was a great mistake. In today’s Financial Times, Larry Summers had an op-ed, “Why Public Investment Really Is A Free Lunch.”

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Notes From Underground: Why All the Noise From Friday’s Unemployment Data?

April 6, 2014

Friday’s jobs data was almost as the pundits had predicted. Why was there so much activity when the nonfarm payrolls and average hourly earnings and length of work week were basically the right on the consensus predictions? Yes, I’m aware that the “whisper number” was 250,000-plus due to the removal of harsh weather conditions. However, if that was the case, the dollar should have weakened and the short-end of the U.S. yield curve OUGHT to have outperformed the long end resulting in a STEEPENING of the 2/10 (none of which occurred). The 2/10 curve actually flattened as the U.S. stock markets began selling off, a drop initiated by the Nasdaq 100’s key momentum stocks. The weekly charts of the S&P and the Nasdaq took different turns as the SPOOs closed higher on the week and the Nasdaq closed lower, an indication of some reallocation from the momentum-oriented stocks to the more solid large-cap, earnings-based equities.

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Notes From Underground: Banking On A Growth Story

March 13, 2014

The pundits have been pontificating about the low valuations of European financial stocks–based on correlations to other developed-market financials–and proclaiming it’s time to purchase the “undervalued.” Why, this is the greatest no-brainer since sub-prime debt and Orange County Treasurer Robert Citron buying very risky inverse floaters prior to 1994 (sarcasm intended). The only problem with the pundits pushing European bank stocks is the following chart of Deutsche Bank. There is a great disconnect between the huge U.S. banks and Deutsche Bank. Even more significant is that the massive Swiss Banks (UBS and Credit Suisse) are holding their rallies despite settling with financial regulators in many different markets. What is wrong with the crown  jewel of Europe and Germany?

Deutsche Bank Stock Price (1-Year)

It is a similar problem for the large Japanese banks, which have been underperforming the Nikkei rally and the euphoria about the success of ABENOMICS. If Japan is on the road to some inflation and increased economic activity, the banks are supremely undervalued and efficient market theory maintains that it can’t be so. It appears that there is a major disconnect between reality and perception. The Japanese banks OUGHT TO BE outperforming all the global financials because of the aggressive action they have taken to offload their hoard of JGBs. Japanese banks are acting rationally by selling off a potential depreciating asset to the market’s largest buyer: the BOJ. According to a Bloomberg article by Finbarr Flynn and Monami Yui  from January 31, Sumitomo Mitsui cut its JGB holdings by 56 percent.

If Abenomics is ultimately successful, why would any investor want to hold bonds that will be a negative yield as inflation levels rise? BUT IF BANKS LIKE SUMITOMO are raising cash by selling JGBs what are they doing with the cash? If the Japanese economy was indeed growing, domestic loans should be rising. Flynn and Yui report that domestic loans increased by only 4.3 percent last year. Also, Tokyo-based Moody’s analyst Graem Knowd notes: “Banks need to rebalance their portfolios away from JGBs. It it turns out that Abenomics hasn’t worked and only ended up leaving Japan with a bigger pile of debt” and a “doomsday scenario for JGBs isn’t a zero probability scenario.” Again, if the banks are invoking the correct policy, why has the market failed to raise their equity valuations. (I am buying some of the banks on a very slow and correction only basis–in my opinion this is a low risk valuation relative to the pricing of other global equities.)

Bringing more focus to the efforts of the Japanese banks to rebalance their assets away from JGBs is the recent discussions taking place in Japan over the issue of the Government Pension Investment Fund (GPIF). The Japanese public pension fund has 1.26 TRILLION DOLLARS in assets and targets a very conservative style of investment. Currently, the GPIF invests 60 percent in JGBs and 12 percent in Japanese equities, according to a March 5 Reuters article. Prime Minister Abe’s government is “… pressing the GPIF to buy more stocks and invest relatively less in bonds to generate higher returns for Japan’s fast-greying population.” The issue of maintaining a decent rate of return on its national pension will be a challenge for the administrators of the fund. If not JGBs, what will be the most efficient mix of assets? Regardless, the Japanese banks are pressing ahead and dumping questionable assets on the major buyer of last resort, the BOJ.

The theme of banks continues through an article from March 7 piece in the International Financing Review by Gore and Whittall, “Eurozone Banks’ Sovereign Exposure Hits New High.” This is a very serious issue for it creates the potential for an adverse feedback loop that can bring the European economy to a depression. “Banks in the region now hold about 1.75 trillion euros in government debt, equivalent to 5.7 percent of their assets, and the highest relative exposure since 2006, according to ECB data. In Italy and Spain, roughly one in every 10 euros in the entire banking system is now on loan to governments.” The Eurozone banks are loading up with sovereign bonds because under the Basel rules sovereign debt is deemed a “riskless” asset and therefore banks need not to hold reserves to protect sovereigns in case of a stress event.

Let’s remember that it was only 18 months ago that the European bond markets were under great strain and President Draghi announced that the ECB would do “whatever it takes” to secure the European sovereign debt market as well as the Euro currency itself. As the article goes on to say, “Banks’ holdings of government bonds have risen by 355 billion euros–or about 25 percent–since the liquidity injections in 2011 and early 2012. Banks in fiscally weak countries have increased their purchases the most, with Italian, Portuguese and Spanish banks increasing their holdings by 62%, 52% and 45%, respectively.” Look at the chart of Deutsche Bank again and one gets the sense of a negative feedback loop in full development, which should raise a yellow caution flag. Now, how about those sanctions on Russia?

 

Notes From Underground: The Market Looks to Germany and Japan

February 9, 2014

Yes, the U.S. unemployment data grabbed the headlines on Friday as the non farm payroll headline number was lower than consensus again. More importantly, the revision to the very weak December payrolls of 74,000 jobs was only revised upwards by 1,000. Average hourly earnings and hours worked were also weak and after the initial drop in the stock indices, equity markets spent the entire day rallying. It seems weak data powers the equity markets’ understanding of the Fed’s forward guidance. Tapering is not tightening and the Fed will keep rates low for a very long time and let the 6.5% unemployment threshold be a mere “candle in the wind.” The Canadian data was better than expected but did substantiate Thursday’s strength in the IVEY PMI. The strong global equity markets were also supported by diminished fears from the emerging markets as investors have lost the sense of urgency to flee all EMs.

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Notes From Underground: Back From Vacation and Was Subjected To the Government Shutdown

October 7, 2013

As I drove along the Blue Ridge Parkway many of the Federally manned information spots and federally run conveniences were closed. But it did not detract from the grandeur of the Carolina mountains and majestic valleys. The Parkway itself was an allegory for the markets as it winds it way a forest of trees with danger all along the way. It is best to stop at the lookouts along the way as an astute trader/investor would take the time to analyze charts to see where the road leads. The present standoff in Washington has brought profits to the SHORTS, but as Friday’s rally revealed. This market is fraught with danger for bulls and bears alike. More important than the shutdown of some federal government operations is the looming issue of the DEBT CEILING. Many analysts have rightfully pointed out that the government defaulted in 1979 and although Treasury bill yields rose 60 basis points, the overall effect was minimal. Beware of faulty historical correlations.

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Notes From Underground: Month-End, Quarter-End and Oh Yes, a New Fiscal Year in the U.S.

September 30, 2013

Tonight’s agenda brings an announcement from Australia as the RBA meets to decide its forward monetary policy. Interest rates are currently at 2.5% on the overnight cash rate (OCR). Consensus is for no change and I would agree with that for the Aussie dollar has been stable and the 2/10 yield curve is a healthy 135 basis points positive slope. Confusion reigns around the world as politics is causing uncertainty in much of the developed world’s economies. Expect the RBA Governor to note risks to global growth and that the Aussie bank will remain vigilant. Also, with a new government elected in early September the bank will want to see what types of fiscal policy will be enacted before embarking on a change in current monetary policy.

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