But Still Ready to Take
More Air
The Fiscal Cliff theater was
great drama, but the real show for traders took the stage Sunday December 16th
in Japan. The curtain went up for the newly elected Prime Minister of Japan
as the star actor in the global fiat currency drama.
Japan's incoming leader Shinzo
Abe's opening line was to vow to ram through full-blown reflation policies to
pull his country out of slump and drive down the yen, warning Japan's central
bank not to defy the will of the people. The profound shift in economic
strategy by the world's top creditor nation with a quadrillion Yen debt,
could prove powerful for the global economy as a new variant of the
"carry trade" seen earlier this decade, but potentially on a much
larger scale.
"It is tremendously
important for global growth, and markets are starting to take note"
~ Lars Christensen from Danske
Bank
"We think this could
be the beginning of a fresh reflation cycle for the global system, combining
with the US recovery to mark a turning point in the crisis,"
~ Simon Derrick from BNY
Mellon.
Mr Abe's Liberal Democratic
Party (LDP) won a landslide, securing a two-thirds "super-majority"
in the Diet with allies that can override senate vetoes. Armed with a
crushing mandate, Mr Abe said he would "set a policy accord" with
the Bank of Japan for a mandatory inflation target of 2pc, backed by
"unlimited" monetary stimulus.
"It's very rare for
monetary policy to be the focus of an election. We campaigned on the need to
beat deflation, and our argument has won strong support. I hope the Bank of
Japan accepts the results and takes an appropriate decision,"
The menace behind his words
did not have to be spelled out. Shinzo Abe has already threatened to change
the Bank of Japan's governing law if it refuses to comply. "An all-out
attack on deflation is on its way," said Jesper Koll, Japanese equity
chief at JP Morgan. Mr. Abe plans to empower an economic council to
"spearhead" a shift in fiscal and monetary strategy,
eviscerating the central bank's independence.
The council is to set a 3pc
growth target for nominal GDP,
embracing a theory pushed by a small band of "market monetarists"
around the world. "This is a big deal. There has been no nominal GDP
growth in Japan for 15 years," said Mr Christensen.
The LDP plans what some have
dubbed a " currency warfare fund" to weaken the yen with a
blitz of foreign bond purchases, copying Switzerland's success in capping the
franc.
The effect of Switzerland's
unlimited bond purchases has been to finance most of the eurozone's budget
deficits for the last year with printed money. If Japan tries to do this -
with a vastly bigger economy - it would amount a blast of quantitative easing
for the world.
Japan's curse as creditor
nation with $3 trillion of net assets abroad is that safe-haven flows
cause the yen to strengthen during a crisis, tightening policy in a
"pro-cyclical" fashion when least wanted, this time due to the
Fukushima nuclear disaster and Europe's sovereign debt saga.
In the last 90 days the US,
EU and now Japan have announced "unlimited", "Uncapped"
monetary policy with UK's soon to be bank of England Governor, Carney
indicating he wants inflation & growth targeting also when he assumes the
reins.
The US Now has someone other
than the FED to buy US Treasury Debt > Abe's New Japan
Larger Image
Goal: Sustained Negative Real Interest Rates
The Fed's action are about the
debt market and financing the US debt. All announcements have had this as a
planned and timed goal.
The goal has been to get
interest REAL interest rates as low as possible, and the expected duration to
be as long as possible.
The result have been much
harsher than the official chart (above), when inflation is realistically
factored (below)
Objective: A 1.0 - 1.2% 10Y US Treasury Yield
This has been a long term
strategy since Paul Volcker initiated major changes in Fed Policy
It has placed the world's fiat
currencies on a race to debase.
Trader Watch:
Our analysis which we have
been calling throughout 2012 is that we are headed to 1.0 to 1.2% on the 10
Year US Treasury. The pattern below corroborates this outlook with an
interesting analogy.
Market have reacted to this
strategic and obvious debasement by:
- Stampeding,
relentlessly into the Bond Market and creating a disturbing potentially
destabilizing bond bubble.
A
bubble that could pop with a disappointing post Fiscal Cliff debt ceiling
resolution and consequential downgrade of the US debt.
- Pricing PE
Equities equivalent to High Yield Junk
Conclusion
We can expect the MACRO
DRIVER$ to be:
1.
US Treasuries to
continue to rally in moving ever closer towards 1.0-1.2% (see charts below)
2.
The US dollar in
the near term to strengthen against the Yen, but weaken against the Euro.
3.
Equities to rally
on a weaker US dollar, until the US debt is threatened with another downgrade
in Q1 2013 which will have a potentially disastrous fall-out on credit and
risk pricing.
4.
Equities will fall
on the re-pricing of credit and risk, earnings revenue and margin issues and
slowing real global growth.
This chart shows what we
presently anticipate . " THIS IS A MAJOR INFLECTION POINT.
Expect a correction and
consolidation."
Remember: Financial Repression
is at work here and US Bond Yields and Interest Rates MUST be further
reduced.
We presently expect the 10
Year US Treasury Bill to eventually break below 1% which supports the
potential target shown above.
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