As I mentioned last January, one of the biggest things happening on the margin is the decline of the Japanese yen. It has now fallen to 101 yen/$, a level not seen since late 2008. The big decline of the yen marks what will most likely prove to be the end of Japan's deflation affliction, and it is causing a significant improvement in the economic fundamentals of the Japanese economy.
The chart above shows just how strong the yen was, having reached an all-time high against the dollar of almost 75 in late 2011. By my calculations, that made the yen approximately 50% overvalued vis a vis the dollar. For 40 years the yen had been rising (off and on) against the dollar, from almost 400 to 75: roughly a five-fold increase in its value. This was a near-constant source of pain for Japan's exporters, since they were continuously forced to cut costs in order to remain competitive in international markets. Now the deflationary pressure has been relieved, and in a rather big way.
As this next chart shows, the value of the yen and the level of the Japanese stock market have been closely correlated for the past several years, especially since mid-November: the yen has dropped over 20%, from 79 to 101, and the Nikkei 225 has soared by 68%, marking one of the sharpest equity rallies in memory.
What's good for Japan is good for the U.S.: since mid-November the S&P 500 is up 20%.
Gold is telling us that Japan's new monetary policy is not likely to be inflationary; since mid-November, gold in yen terms is up only 5%, while it has declined 15% in dollar terms. Indeed, gold's fall suggests that investors may be realizing that buying productive assets is likely to be more rewarding in the long run than speculating on commodity prices.
The return of a more healthy growth outlook in Japan has already made equity investments in general more attractive than speculating in commodities, which are about flat since mid-November. As the chart above shows, the market cap of global equities is up 18% ($5.7 trillion!) since mid-November. The increase in the value of global equity markets since mid-November has been of the same order of magnitude as the value of the world's entire stock of gold, which is estimated to be as much as 175,000 tons, or roughly $8 trillion at today's prices.
Well, it took the Bank of Japan 20 years to figure it out, but they have: Inflation is not longer the enemy. Recession is, weak demand is.
ReplyDeleteMaybe even excessive savings, and capital gluts are what ails us.
These are newish problems. People save for retirement, college, to buy a house, start a business, economic security. They keep saving, even as interest rates go to zero.
In higher income societies, this may become a chronic problem.
So what should central banks do? They go to ZLB, and still demand is weak, inflation is falling, and people keep saving. That was Japan.
The answer is quantitative easing, and it may have to become a conventional and permanent tool.
Slowly, America's right-wing is gravitating to this point of view.
The left-wing is still stuck on government deficits (Krugman). Japan tried government deficits, and they do not work. Japan tried tight money, and it did not work.
You know, dogma fails. Tight money does not work, and government deficits do not work.
The Fed printing a lot of money, and buying up debt aggressively---that is what will work.And is working in Japan.
Maybe heavy QE is not PC, or ideologically correct, or what fits into an economic model.
But sometimes, you just have to go with what works.
BTW, the latest PCE inflation rate, March, y-o-y is....ready?.....1 percent.
ReplyDelete1 percent.
Do you ever think every public agency--the USDA, HUD, Defense, or the Fed---is always fighting the last war, around which it has usually built an exalted and thus inviolate and sacred mission statement?
Schaeffer's Investor Intelligence
ReplyDeleteThis is measure of sentiment among investment advisors.
Date % Bullish % Bearish
05/08------52.1---------19.8
05/01------47.9---------18.8
04/24------44.3---------19.6
04/17------47.4---------20.6
04/10------50.5---------20.6
04/03------52-----------19.4
03/27------49.5---------19.6
03/20------47.4---------18.6
03/13------50-----------18.8
03/06------44.2---------21.1
02/27------46.3---------21.1
02/20------48.4---------22.1
02/13------52.6---------21.1
AS I recall the highest Bullish reading since the recession was 63% in April 2010. The next highest was 54% in January 2012.
OECD Composite Leading Indicators
ReplyDeleteComposite leading indicators point to growth picking up in most major economies.
10/04/2013 - Composite leading indicators (CLIs), designed to anticipate turning-points in economic activity relative to trend, point to growth picking up in most major economies.
In the United States and Japan, the CLIs continue to point to economic growth firming. The CLI for China provides a more positive outlook compared with last month’s assessment, with the CLI now pointing towards growth picking up.
In the Euro Area as a whole, and in particular in Germany, the CLIs continue to indicate a pick-up in growth. The CLIs point to no further decline in growth in France and to a positive change in momentum in Italy.
The CLIs for the United Kingdom, Canada, Brazil and Russia point to growth close to trend rates while the CLI for India indicates weakening growth.
AAII Investor Sentiment Survey
ReplyDeleteBullish---40.8%
up 9.8
Neutral---31.8%
down 1.3
Bearish---27.4%
down 8.5
Long-Term Average:
Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%
A few weeks ago the Bullish percent plunged to only 23%.
Short JPY is my generatinal theme. Been great so far. However, I would argue there is nothing good about the Japanese situation long term.
ReplyDeleteI respond that rather than the being the end of Japan’s deflation affliction, the value of both its Treasury Debt, JGB and the value of its Stocks, NKY, EWY, JSC, DXJ, will be going into strong deflation as investors are derisking on Japan’s excessive credit policy. Japanese Treasury Bonds, as seen in their inverse, JGBS, are trading higher, as Doug Noland of Prudent Bear reports the 10-year government bond yield jumped 13 bps to the highest level since February and Tyler Durden of Zero Hedge reports JGB Futures halted limit down, which stands for now, in contrast with Japan Equity, EWJ, and Japan Small Cap Equity, JSC, rallying higher.
ReplyDeleteThe pursuit of Global ZIRP has produced all the fiat asset inflation that can be attained: the world stands at peak seignirage, that is peak moneyness from the world central bankers interest rates cuts and other intervention initiatives.
Today’s central bank leaders are modern day Nephelim, that is giants amongst us. Trust in their Liberal Schemes of Quantative Easing has produced great gains for the speculative leveraged investment community, and has produced a fantastic moral risk enduced prosperity supporting a blossoming recreational consumer driven consumptive economy, with a huge amount of disposable wealth existing in savings accounts as evidenced by the awesome rise in M2 Money.
A number of nations are already evidencing price inflation because of the misguided policies of their central banks, these include Brazil, EWZ, China, YAO, and Argentina, ARG. And now India, in attempt to cut off price inflation, is attempting to restrict gold imports.
The global government credit bubble, that is Aggregate Credit, AGG, burst this week, the week ending May 10, 2013, with ZROZ, EDV, TLT, MUB, MBB, GOVT, and BLV, LQD, and BWX, PICB, and JNK, trading lower. And as a result, competitive currrency devaluation commenced, in the leading individual currencies, FXA, FXY, FXS, ICN, FXF, FXB, FXE, BZF, and the emerging market currencies, CEW, as well.
A rising US Dollar, $USD, UUP, up this week near its late March high, and a Steepening 10 30 Yield Curve, $TNX:$TYX, beginning this month, that is May 2013, seen in the Steepner ETF, STPP, steepening, means that the monetary authority of the world central banks, has crossed the rubicon of sound monetary policy, and is starting to make “money good” investments bad.
Investors deleveraged out of commodities, DBC, in particular, Gold, GLD, which is both a commodity, and a currency, as well as Oil, USO.
And at the end of the week, once again investors are derisking out of the Emerging Markets, EEM. Of note investors sold out of Korea, EWY, largely on fears of a possilbe war with North Korea. And investors sold out of New Zealand, ENZL, which as been a currency carry trade darling largely on the basis of the dynamics of debt held in its banks.
Yield bearing investment trading lower this week included Australia Dividends, AUSE, Global Utilities, DBU, and Electric Utilities, XLU.