Japan steps through the looking-glass

If you ever had any doubts about the importance of expectations in determining financial asset prices, consider the reaction to Friday's BOJ announcement in comparison with the December ECB policy change.  While the ECB arguably delivered the more substantial easing- cutting the deposit rate 10 bps on the entire stock of excess reserve deposits rather than 20 bps on marginal new ones- the ECB was a disappointment and the BOJ a pleasant surprise in aggregate, thus producing despair and rapture in financial asset pricing, respectively.

As an aside, one does wonder about the point of the whole forward guidance thing when central bankers flat out lie, as Kuroda appeared to do before the Diet and the SNB did before removing the peg last year.   Dissembling or remaining silent about potential policy options is one thing, but saying "we're not gonna do this" a few days before you do it has implications- or at least it should- on your communications strategy moving forwards, as well as those of your central bank colleagues around the world.  Fool me once, shame on you, fool me twice, shame on me.

In any event, the history of Kuroda's shocking monetary announcements (sample size of three: April 4 2013, October 31 2014, and last Friday) suggests that there is more upside to come for the Nikkei and USD/JPY.  That being said, the reaction so far has been a little more muted than the previous two shockers, if only marginally.

However, there are a number of reasons to be skeptical of the move to negative rates.   For one, the policy doesn't touch the existing stock of excess reserve deposits, so it won't exactly incentivize immediate lending.  Insofar as it will push the entire JGB curve lower and possibly flatter, it could be seen as a negative for the financial sector.  Indeed, the whole QQE campaign hasn't exactly been stellar for Japan's banks.  Readers will be shocked to see that as the JGB curve has flattened, the Topix Bank Index has lagged the Nikkei in virtual lockstep.


The notable exception to this was the immediate aftermath of the April 2013 QQE announcement (remember when selling JGBs was a thing?), though the relationship quickly reasserted itself.  In fact, the TSE bank index closed last Friday lower than it did the day after that April '13 policy shocker.


That's a lot of money spent for little impact on the engine room of a modern economy.  While Macro Man isn't naive enough to think that Kuroda's measures are actually designed to work via the real economy (as opposed to impacting financial markets), he does wonder if it's possible to generate 2% inflation when your banks are getting kicked in the groin.  Henceforth it will be worth monitoring the performance of Japanese banks for possible adverse consequences of the new policy.

While it's true that bank lending is up 3.3%, it's also the case that it had turned positive well before Kuroda or even Abe assumed office.   In fact, despite the veritable Mount Fuji of money thrown at Japan's asset markets, the rate of lending growth has barely budged since the onset of hyper-aggressive monetary policy.  But hey, at least they've managed to get Mrs. Watanabe and the pensions to buy stocks and sell yen and multi-year highs (and lows).  What could go wrong?



An obvious answer is that China could choose to devalue its currency again, which would a) leave Japan's TWI not much lower than it was before NIRP, and possibly higher, and b) almost certainly leave Japanese equities lower courtesy of global risk aversion.  That's the funny (and tragic) thing about competitive devaluations and beggar-thy-neighbour policies; no one ever has the last move.

Ironically enough, perhaps Japan's greatest friend in this regard is gaijin hedge fund managers.   By pimping their anti-China bets so aggressively, these chaps could well encourage the Chinese to forestall any exchange rate adjustment so as to thwart the ambitions of "foreign devil" speculators. While the Chinese are selling USD at a furious rate, there are still plenty of FX reserves for the time being....time, that is, to let the foreign devils stew on their negative carry trades for a while.

In the meantime, add Japan to the list of countries that has stepped through the looking glass and entered the world of negative rates.   Whether it finds the White Knight to rescue it remains to be seen...

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Anonymous
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February 1, 2016 at 7:46 AM ×

As society moves away from cash to paying for everything digitally, debt straddled governments are moving interest rates into negative territory. Essentially, this is a brazen tax being levied onto the public–to better perpetuate a false sense of stability in government balance sheets. By charging you to borrow your money, basic laws of nature and decency are are being egregiously discarded and burned at the altar of the banks... At the present, more than $5.5 trillion in government bonds are trading with a negative yield. Theoretically, the more governments borrow, the more they make!

How splendid.

This is a very depraved and sordid scandal in the making that will end up with people in the streets with kerosene lanterns and pitched forks.

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Anonymous
admin
February 1, 2016 at 7:53 AM ×

Abee - relating to previous post. Being down 10% is no big deal in itself. The fact that it happens within 20-40 trading days of FED move and while othera continue to ease warranta attention. The FED et al say they expect volatilty when shifting to raises yet, they baulk when it actually comes.

I think most can agree the direction of the markets should the FED continue on its path at a quarterly pace. Most would probably bet on an overshoot to downside as opposed to undershoot.

Thw central bankers are doing to same as OPEC. They will devalue in a race to bottom to maintain market share.

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amplitudeinthehouse
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February 1, 2016 at 8:02 AM ×

Let's rename this blog MacroManVIP. When our bottom line falls below a certain threshold , we'll call in the CBC spread traders that have utilized our blog's recommendations and demand 10% of earnings for trades targeted against fellow wall street hedge fund traders. This includes the Veuve Clicquot complementary champagne and the promotion from a swing trader to the daily head trader of a New York City hedge fund that we think we have the right to skim the daily takings of such a business that was seeded through our blog. No , amps hasn't lost it..he knows its all a laugh.

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Nico G
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February 1, 2016 at 8:22 AM ×

great analogy amp as Clicquot best represents world equities at present: flashy and delivering horrible value

that orange etiquette was the greatest marketing feat in the history of booze - and the crowds drink it like t's golden just like they drink CBs' words

central bankers are the second only best marketer in the world after those assholes at LVMH

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Nico G
admin
February 1, 2016 at 8:28 AM ×

as much as i told our VIP forum to not sell into the low 1800s hole on that famous bottom day, caution here is highly highly advised against la complacencie générale

do not forget the technical damage inflicted last month and tighten your exit if you are still trailing this bounce (got out 1% ago)

no-one should jump in the spoos now with imaginary, mushroomesque vision of momo and target of 1960 or 2020 - a wave of fear is coming your way to take the weak hands out of the tape

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Rossco
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February 1, 2016 at 9:08 AM ×

so Nico how was your week off equities ?? come back angry ??

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February 1, 2016 at 9:33 AM ×

{NSN O1UNNV6JTSE8}

TPNBank Index Japan Bank stocks start to look European... love this title :)

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Nico G
admin
February 1, 2016 at 9:52 AM ×

Hey ross absolutely good reset ready to enter the arena with no bias

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amplitudeinthehouse
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February 1, 2016 at 9:52 AM ×

Macro Man take your 50m or 100m trade and ..................................bet it on the tennis :)

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Anonymous
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February 1, 2016 at 1:02 PM ×

Out with the "New" in with the "Old" Carry Trade? EUR/JPY having impact one euroland equities?

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Bruce in Tennessee
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February 1, 2016 at 1:35 PM ×

http://www.wsj.com/articles/currency-war-u-s-hedge-funds-mount-new-attacks-on-chinas-yuan-1454236202

"Some of the biggest names in the hedge-fund industry are piling up bets against China’s currency, setting up a showdown between Wall Street and the leaders of the world’s second-largest economy. Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar."

...the game's afoot...

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Macro Man
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February 1, 2016 at 1:56 PM ×

I guess I can quit wondering if people actually read the articles...

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washedup
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February 1, 2016 at 2:01 PM ×

Um, yes binT- China ain't a western democracy for one, which is what they are used to fight the battles with. If I were one of these masters of the universe's I would be purchasing 'guide to waterboarding' and 'sleep deprivation for dummies', or at the very least cancel any travel plans to the eastern hemisphere.
Brag about a short currency bet vs a dictatorship that still has 3 TN in reserves (heading south fast or not) , zero scruples and no real accountability, certainly not to MTM accounting like their opponents, on the front page of every newspaper - how smart - the game is indeed afoot - the movie made on the subject in a few years may be called 'the big wedgie..'

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Polemic
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February 1, 2016 at 2:16 PM ×

MM- Yeah Japan whatevvvveerrrrrr. Now,back to my views to everything else......

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hipper
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February 1, 2016 at 2:46 PM ×

Maybe Kuroda lied to create the bigger gap between expectations and outcome to maximize the boom. If that's the case it's just too tragicomic. Or then he was speaking the truth at the present, which goes to only demonstrate how erratically and hastily all this stuff is designed. It's like CB HFT equivalent. The historical picture might show that the effect should be another one and a half, two weeks at most. And in any case touching only a portion of reserves is a much more diluted effect than the shocking headlines might've implied.

I think (like many here) in the big picture what's still going on re: CB is that their influence is diminishing. Presuming no one else presents dovish surprises within a month BOJ becomes a fade, and when they eventually do we're back to square one anyway (so this only affects how long it takes to fade). So whatever one thought USD/JPY, EURJPY, EURUSD and SPX were going to do before the event, please carry on.

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Anonymous
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February 1, 2016 at 3:36 PM ×

@washed(2:01)

X2.

Paulson will remember his investment in SeeNOforest forever.

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Anonymous
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February 1, 2016 at 3:49 PM ×

Anybody see this?

http://www.wsj.com/articles/currency-war-u-s-hedge-funds-mount-new-attacks-on-chinas-yuan-1454236202

How will Chinese voters react???

:-)

- Whammer

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February 1, 2016 at 3:49 PM ×

While 5.5 trln dollar govies are negative, nobody cares about
apple 3.45 2/2045 @83.7
dow 4 3/8 11/2042 @85.5
ford 4.75 1/2043 4.75 @92

some serious widening in good names... happy to buy them

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thegreyman
admin
February 1, 2016 at 3:50 PM ×

Link to the Alphabetical List of MLP Universe with historical data and columns of % increase/decrease of all prices

https://docs.google.com/spreadsheets/d/1nOH3U936Cie4ZmoKCeXmf7--loZi4Tlh2HGkPbGOew4/edit#gid=0

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Anonymous
admin
February 1, 2016 at 4:09 PM ×

On http://www.wsj.com/articles/currency-war-u-s-hedge-funds-mount-new-attacks-on-chinas-yuan-1454236202

Let me just say that those HF guys might know something that regular people do not know. For one thing, the political risk of infight at the top of the Party is intensifying right now and there is strong possibility that we are going to have a showdown this year or maybe realy next year. If you pay attention to China politics and some of signs from the past few days are worrying.

Since I do not have any inside information but can only rely on some obscure signs, I have not idea when the showdown occurs, could even be as early as this March. However, I would imagine that those HF managers surely have much better information sources than I do.

That is why I am pessimistic, as leaders in China are probably preoccupied on other potential dengerous stuff than fixing the economy.

One last thing, the link of a China slowdown to the US domestic market seems to be mostly psychologic. So a 2008 style crash should not be in the card, but a 2011 style correction looks to be certain thing to me.

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Macro Man
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February 1, 2016 at 4:20 PM ×

I would not assume that just because someone's name is in the paper that they have some secret squirrel information. It was only a few years ago that Kyle Bass was in the headlines for betting against JGBs and Bill Ackman was betting on a HKD reval. In my opinion, each of these investment cases completely ignored political or reputational considerations, and each was wrong.

While it is true that there is strong underlying capital account pressure for the RMB to devalue, it is in my opinion kind of ludicrous to forecast 40% or to treat China as some other emerging market, because it isn't- it's the second largest economy in the world. The sort of current account adjustment that would occur if China devalued 20%, let alone 40%, would be devastating for the rest of the world, which is a factor that might not grab headlines but is surely a real consideration behind the scenes.

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washedup
admin
February 1, 2016 at 4:56 PM ×

@MM fully agreed - as long we are on the topic of reputational considerations, it wouldn't shock me if the Chinese Govt has a higher approval rating among US citizens than american hedge fund managers - do the people who made billions on subprime as people lost their homes run around gleefully, turgid manhood in hand, drooling over the prospect of doom and gloom in China leading to a 40% pay day?
These guys still act like its 2004 - quite amazing - business conditions have changed a lot. At that level of the game if you don't manage the politics you are naive.

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Anonymous
admin
February 1, 2016 at 7:08 PM ×

A couple of paragraphs from:

http://qz.com/588511/a-crackdown-on-hong-kong-booksellers-reflects-the-deep-divides-in-chinas-communist-party/

Because of his dictatorial style, China’s president Xi Jinping has lost all of his allies within the Communist Party. As public anger grows over the country’s economic slowdown, it’s an opportune time for Xi’s political opponents to take him down—and former presidents Jiang Zemin and Hu Jintao are ready to do so. So claims "2016: Collapse of the Communist Party of China", a book written in Chinese under the pseudonym Dongfang Liang, or “Bright East".

Since coming to power, Xi has clamped down on free speech, human rights lawyers, journalists, and activists, while jailing huge numbers of rivals. The crackdown is part of a “public opinion struggle” in the party’s ideological work, aiming to promote its core socialist beliefs and banish values that counter them, Xi explained in Aug. of 2013 — but there are many who believe it is also a way to wipe out dissenting voices inside his own party.

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Anonymous
admin
February 1, 2016 at 8:47 PM ×

If I was Yellen, I would use the PPT to push the spoos back up towards prev highs, then raise rates another 25bps. When the spoos fall again, I would repeat. Thus stocks would be supported and rates rise. US equity bears would get slaughtered and would end up paying the bill. Genius.

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Anonymous
admin
February 1, 2016 at 8:54 PM ×

Here's why valuations make no sense: we have FB about to become America's fourth largest company. Remember this is a silly internet application for egotistical retards to post inane crap, and in return have adverts shoved in their faces. No human of intelligence or dignity would use such a thing. The company makes nothing of value, only employs about 12k people and has no future (go ask anyone under the age of 18 what they thing of FB - the response will not be positive). Yet we are to believe it is worth $324bn. I despair.

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Corey
admin
February 1, 2016 at 9:43 PM ×

I've always assumed that one of the prerequisites of running a HF was to be illuminati, so I'm a little disappointed to learn otherwise. Not obvious to me what advantage one gains by making their bets public.

MM - you have an opinion on what a fair deval would be for CNY? I'm assuming anything >10% is more sensational then real.

Nico - what tape are you reading, black gold?

Lotta follow through on BOJ..that says a lot about what the mkt thinks..

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washedup
admin
February 1, 2016 at 9:59 PM ×

"If I was Yellen, I would use the PPT to push the spoos back up towards prev highs, then raise rates another 25bps. When the spoos fall again, I would repeat. Thus stocks would be supported and rates rise. US equity bears would get slaughtered and would end up paying the bill. Genius"

That's actually not a bad idea and in the interest of 99.99% of the investing public - it amounts to a tax on pessimism, and obviously you get less of what you tax, which is the idea.
Only one problem with it - there IS NO PPT - get over it once and for all.

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Anonymous
admin
February 1, 2016 at 10:23 PM ×

Why do we have a limit of 40%, 20% or 10% on CNY devluation?

JPY, the currency of the 3rd largest economy, dropped 50% vs USD. EUR, the currency of the biggest economic region, dropped 33% from its peak. Never mind GBP, CAD, AUD...

Even USD index fell close to 17% from 2008 to 2011. I think the false assumption about the magnitude of CNY value is a little bit dangerous to our trading strategy.

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Polemic
admin
February 1, 2016 at 11:19 PM ×

Japanese cpi should be measured in usd terms. If it isn't rising in those terms then it's all a smoke and mirrors substitution game. Any idiot can induce inflation using zimbabwean economics. But it's the wrong type. Having said that the japanese are struggling even with zimbabwean economics. Send in Mugabe!

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Leftback
admin
February 1, 2016 at 11:35 PM ×

Thank goodness January is over. Sick and tired, you've been hangin' on me...

January

Am I the only one who thinks February will be very tricky? We are not completely flat here but much more defensive again and contemplating a February spent mainly in Hammock Mode after a sterling +2.0% performance in Jan to open the year.

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thegreyman
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February 2, 2016 at 12:26 AM ×

Preparing the public. It has begun...

http://www.cnbc.com/2016/02/01/why-the-fed-must-go-negative-on- interest-rates.html

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Rossco
admin
February 2, 2016 at 12:30 AM ×

While 5.5 trln dollar govies are negative, nobody cares about
apple 3.45 2/2045 @83.7
dow 4 3/8 11/2042 @85.5
ford 4.75 1/2043 4.75 @92

this is a fair point and as muuch as I dislike promoting it, the shiny stuff is up about 6% ytd with it's 0ish yield and needless to say, significantly more relative to some other currencies

liquidity preference theory may well make a comeback after all

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Leftback
admin
February 2, 2016 at 12:53 AM ×

Apologies MM, LB is still mulling his thoughts on Japan, but they can be summarized as follows: widow makers.... Kyle Bass not the first, nor the last to fancy making $B by shorting some JGBs but nobody has really made a penny on that trade to date. Of course one day it all blows up to Kingdom Come, but it's the timing of the thing that is so hard in this business, isn't it?

Now on to China, "do the people who made billions on subprime as people lost their homes run around gleefully, turgid manhood in hand, drooling over the prospect of doom and gloom in China leading to a 40% pay day?"

Very funny, washed. The answer is yes, they do, and now the PBoC will f*ck with them by not devaluing until positions change and/or theta has had his slow patient way with them.

If we are in a bear market, btw, then Thursday will be Sell The Rumour and Friday will be Buy the News. We await the week's data releases with interest as always, but will retreat to Full Hammock status on any sign of strength in the interim.

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Nico G
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February 2, 2016 at 5:34 AM ×

"If I was Yellen, I would use the PPT to push the spoos back up towards prev highs, then raise rates another 25bps. When the spoos fall again, I would repeat. Thus stocks would be supported and rates rise. US equity bears would get slaughtered and would end up paying the bill. Genius"

true that! equity bears paid the bill from 666 to 1074 and then from 2011 to 2015


Anon 8:54 - LOL !! despairing made one tad more bearable when voices like you are shared a million percent


Corey

that black gold:

https://www.youtube.com/watch?v=CqetZOhWWkY

the rest don't matter (i name my daughter after miss Brown)

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Corey
admin
February 2, 2016 at 10:29 AM ×

@ Nico - thanks, groovy!

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