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Kuroda, Bubbles and King Dollar
October 31, 2014
Kuroda stokes stock prices and king dollar.
When it seems almost impossible, things somehow get even crazier. By Thursday afternoon (thinking ahead to my Friday writing project), I was discerning a backdrop increasingly reminiscent of the summer of 2012. Jumping a quick 50 bps, Greek bond yields traded above 8% on Thursday. Italian bonds and CDS were under pressure, as part of general concerns weighing on Europe’s vulnerable periphery (not to mention that nine Italian banks failed ECB stress tests). German bunds were in melt-up (record low yields with widening periphery spreads). It was also apparent that the direction of the yen and stability of yen “carry trades” were crucial to acutely unstable global markets – keys to the “risk on, risk off” speculative market dynamic. A strong yen would be problematic, perhaps even inciting deleveraging of trades in Greek, Portuguese, Italian and Spanish debt.
I guess I shouldn’t have been surprised to awaken early Friday morning and see that the Bank of Japan (BOJ) had stunned global markets with an up to 30% boost in its QE “money” printing operation (to $725bn annually!). A couple strategists offered apt quotes: “It was great timing for Kuroda.” “The timing of all this was very clever.” Clever indeed.
October 31 – Bloomberg (Kelly Bit): “Julian Robertson, the billionaire founder of Tiger Management LLC, called global monetary policy, such as Japan’s surprise expanded stimulus today, dangerous as central banks push bond yields down and create a bubble. ‘The monetary authorities all over the world are trying to cheapen their own currencies -- it’s a race everywhere and I’m not sure it’s the best thing to do,’ Robertson said… ‘We have a bubble developing because we have forced bonds to almost no yield and it’s really the thing that’s the most dangerous going on economically in the world.”
In the twelve trading sessions since the October 16th 1,813 (“Bullard”) low, the S&P500 rallied almost 11%. The semiconductors have surged about 18% from October 15th lows and the Biotechs 22%. The Nasdaq100 has jumped 12% and the Transports almost 14%. The small caps have rallied almost 13%.
With the Fed about to conclude QE, a couple weeks back global markets were facing their first serious bout of de-risking/deleveraging without certainty that the Fed was there as the market’s reliable liquidity backstop. Federal Reserve Bank presidents Bullard and Williams were quick to come to the markets’ defense, affirming market expectations that additional QE would be provided as needed. There have been as well leaks that the ECB was considering corporate bonds purchases, buying that would significantly increase the odds of Draghi making good on his talk of a Trillion euro ECB balance sheet expansion. And then Friday, the world sees more “shock and awe” from the BOJ’s Haruhiko Kuroda.
For yet another week that will draw the attention of future historians, there were scores of notable headlines: WSJ: “Kuroda Bazooka Round Two.” “Reuters: “Fed Set to End One Crisis Chapter Even as Global Risks Rise.” Financial Times: “Fed’s Grand Experiment Draws to a Close.” Wall Street Journal: “Fed Set to End QE3, but not the QE Concept.”
The week also saw commentators absolutely lavish praise upon the Fed and its QE measures.
Clearly, it’s ridiculously early to pass judgment on history’s greatest monetary experiment.
After all, QE is a global phenomenon that hasn’t yet come even close to running its course. And it’s a global Bubble, with both the BOJ and ECB both pushing ahead with even more aggressive global monetary inflation. Importantly, the hope that the ECB would grab the QE baton from Yellen has been fulfilled at the forceful hands of Draghi and Kuroda.
I noted above that the backdrop is reminiscent of the summer of 2012. At that time, the global financial system was at much greater risk than generally perceived. Markets were at the brink of a crisis of confidence in Italian debt, which would have triggered a crisis of confidence in Italian banks, European banks more generally and the euro currency. A run on European banks and the euro would have raised serious issues for the emerging markets and global leveraged speculating community, not to mention counter-party and derivative issues.
Importantly, the risks were deeply systemic. Policy responses were systemic. Draghi moved forward with “Do Whatever it Takes,” followed soon by open-ended QE from Bernanke and Kuroda. I never bought into the notion that Fed “money” printing was about U.S. jobs. I don’t believe Kuroda’s move Friday was about Japanese inflation. Policy responses have been akin to Benjamin Strong’s 1927 “coup de Whiskey,” but on a multi-shot global basis (with chaser).
And over the past two years we’ve witnessed a 1927 to 1929-like market response, again on a globalized basis.
Predictably, throwing Trillions of “money” at a global Bubble has only exacerbated instability. Throwing Trillions of “money” at dangerously maladjusted global financial and economic “systems” will surely only worsen the addiction. I see Kuroda’s move as further evidence of global central bank desperation. Global risks have inflated profoundly since 2012.
October 28 – Bloomberg (Candice Zachariahs and Lukanyo Mnyanda): “For European Central Bank President Mario Draghi, the price of a weaker euro to boost the economy and stave off deflation is a record exodus from the continent’s financial assets. Domestic and foreign investors spurred 187.7 billion euros ($239bn) of fixed-income outflows from the euro area in the six months through August, the most in ECB data going back to the currency’s debut in 1999.”
.
Europe is again experiencing alarming outflows, even surpassing 2012 levels. Almost $240bn in six months, wow! And for the first time in a couple years I and others are monitoring ECB “Target2” balances (Eurozone central bank inter-bank balances). Target2 balances have surged euro 67bn in two months, the biggest move since the spring of 2012. Notably, Bank of Italy Target2 liabilities jumped $67bn in two months to $197bn, as “money” owed to the German Bundesbank moves higher. A quiet run from Italy?
I have posited that borrowing at zero in a devaluing yen to play higher global yields is likely history’s greatest speculative wager. I have pondered how Draghi’s “Do Whatever it Takes” market backstop for European periphery debt created the world’s most attractive higher-yielding securities for leveraging. I’ve as well presumed that the “yen carry trade” has likely played a significant role in financing a Europe periphery bond Bubble. Especially over recent weeks of global market instability, I’ve pondered the consequences of a “yen carry” unwind. To this point, the weak euro has not hurt those leveraged in European periphery debt – not if these speculations were financed by borrowing in a devaluing yen. But in a world of increasingly vulnerable speculators and a heightened risk of de-leveraging, a yen rally could have very well pushed European debt markets over the cliff. When it comes to global monetary policymaking, I do not believe in coincidences. Kuroda to the rescue.
There remain these two parallel universes. There’s the Truman Show World: Kuroda has essentially nothing to do with the great U.S. bull market. It is instead driven by robust economic fundamentals, including strong GDP and corporate profits. The U.S. is simply the best place in the world to invest – and American equities are a friggin’ slam dunk, all-in buy.
King Dollar is confirmation of all that is good in the U.S.
The alternative universe is a totally different world: Kuroda is one of a very select group of leading central bankers working desperately to sustain a runaway global financial Bubble.
There’s a historic experiment in “money” printing that is at the brink of failure. Around the world there are speculative financial market Bubbles of unprecedented proportions at risk of bursting. History’s Greatest Credit Bubble already has serious cracks. Moreover, the incredible widening gap between (Truman Show) securities prices and deteriorating (bursting Bubble) fundamental prospects boosts the likelihood of a global market accident.
One of these days, global central banks will lose control. For now, they will continue to print “money,” spur destabilizing speculation and exacerbate global imbalances. Importantly, their measures continue to promote wealth redistribution and inequality – within nations and among nations. Bernanke previously referred to Kuroda’s policy as “enrich thy neighbor.” I wonder if Japan’s neighbors these days see it in such rosy light. With Draghi and Kuroda promoting King Dollar, I wonder how commodity-related companies and countries are feeling about the state of the world. Gold sank below $1,200 this week, crude traded below $80 and the GSCI Commodities Index traded to new four-year lows. Central bank policies are inflicting some real (inequitable) damage this time around.
This was another week to ponder some of my favorite Credit Bubble adages: “Bubbles tend to go to unimaginable extremes – then double!” “Things turn crazy in the ‘Terminal Phase’ of Bubble excess.” “Liquidity loves inflation.” “Central banks can create liquidity but they cannot dictate where it flows.” “It is a myth that central banks control a general price level.” “Credit Bubbles are all about wealth redistribution.”
Despite Kurodamania and record stock prices, I contend that the great global Credit Bubble has been pierced. Energy and commodities prices have collapsed, inflicting irreparable harm on scores of highly-indebted companies and economies. Importantly, King Dollar has turned increasingly destabilizing. I ponder how Putin today views “Western” policymaking that further pressures the price of it key national resource. The Bank of Russia Friday boosted interest-rates 150 bps to support its flagging currency. Ominously, the ruble sold off on the news, ending the session down 3.5%.
The bursting global Bubble thesis holds that others at the “periphery” are now at risk of a downward spiral of sinking commodities prices, “hot money” exodus, acute financial instability and economic vulnerability. In this regard, Brazil joins Russia at the top of the watch list.
Despite recessionary conditions, Brazil’s central bank raised rates Thursday to support its faltering currency. The real bounced 2.5% Thursday on the rate news, only to sink 3.0% in Friday’s Kuroda-induced King Dollar drubbing.
It’s worth noting that Brazil’s central bank has issued over $100bn of currency swaps, payable in local currency (reals). Writing these derivatives – insurance against a declining real – has allowed international speculators and investors to easily hedge their Brazilian currency exposure. And these types of arrangements work wonders – until they blow up. A big downward move in the real would require the “printing” of tens of billions of reals to pay on the central bank’s swap contracts – printing that would further depress the real and perhaps even risk a crisis of confidence. King Dollar is a big problem for a sadly vulnerable Brazil.
With the S&P500 having now recovered all losses from the recent bout of market instability, the bulls are ready for another leg higher. Certainly, investors and speculators alike have been reassured by the words and deeds from the Fed, ECB and BOJ. Worries that central bankers might not be there to backstop markets have been alleviated. The rabid bulls have been emboldened.
The mortgage finance Bubble was initially pierced in the spring of 2007, as subprime securities suffered losses and “hot money” flows abruptly reversed course. An aggressive Federal Reserve policy response helped push U.S. and global stocks to record highs in 2007’s fourth quarter.
These reflationary measures spurred Bubble excess, including a speculative run in equities and $145 crude. At best, however, these measures only slowed the deflating Bubble as it gravitated from subprime to prime mortgage Credit. I’ve always been convinced that 2007 reflationary measures only exacerbated the 2008 global crisis. International risk markets turned more speculative (and highly correlated), when general stability would have been better served by a more orderly deflating of Bubble excess.
Each bout of market instability (August ’07, November ’07, January ’08, March ’08 and July ‘08) worked to solidify the view that policymakers had everything under control and would not tolerate a crisis. After trading above 30 in five separate bouts of market turbulence (August ’07 through July ’08), the VIX dipped below 20 by late August 2008. About six week later, in the midst of a so-called “black swan” financial panic (central banks actually don't have things under control!), the VIX reached 80.
And this gets right to the heart of the fundamental problem with central bank (“Keynesian”) market manipulation and “money” printing: there’s a fine line between acting to lessen the effects of a bursting Bubble and measures that inflate and prolong precarious Bubble excess. As we’ve witnessed, the deeper policymakers fall into the market intervention and manipulation trap the greater the fragility. And the more acute the fragility the more quickly officials must intervene to ensure that things don’t start to come unglued. In the end, it regresses into desperate measures to hold collapse at bay – 2012 to 2014.
October 30 – Bloomberg (Ben Moshinsky): “The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates. The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120% of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board… Shadow banking ‘tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets… The current environment in advanced economies seems conducive to further growth of shadow banking.’”
I’m not convinced “the current environment in advanced economies seems conducive to further growth of shadow banking.” Actually, if I am on the right track with my bursting Bubble thesis, the surprise could be that fragility lurks in “shadow banking” – from New York to London to Tokyo to Beijing.
When it seems almost impossible, things somehow get even crazier. By Thursday afternoon (thinking ahead to my Friday writing project), I was discerning a backdrop increasingly reminiscent of the summer of 2012. Jumping a quick 50 bps, Greek bond yields traded above 8% on Thursday. Italian bonds and CDS were under pressure, as part of general concerns weighing on Europe’s vulnerable periphery (not to mention that nine Italian banks failed ECB stress tests). German bunds were in melt-up (record low yields with widening periphery spreads). It was also apparent that the direction of the yen and stability of yen “carry trades” were crucial to acutely unstable global markets – keys to the “risk on, risk off” speculative market dynamic. A strong yen would be problematic, perhaps even inciting deleveraging of trades in Greek, Portuguese, Italian and Spanish debt.
I guess I shouldn’t have been surprised to awaken early Friday morning and see that the Bank of Japan (BOJ) had stunned global markets with an up to 30% boost in its QE “money” printing operation (to $725bn annually!). A couple strategists offered apt quotes: “It was great timing for Kuroda.” “The timing of all this was very clever.” Clever indeed.
October 31 – Bloomberg (Kelly Bit): “Julian Robertson, the billionaire founder of Tiger Management LLC, called global monetary policy, such as Japan’s surprise expanded stimulus today, dangerous as central banks push bond yields down and create a bubble. ‘The monetary authorities all over the world are trying to cheapen their own currencies -- it’s a race everywhere and I’m not sure it’s the best thing to do,’ Robertson said… ‘We have a bubble developing because we have forced bonds to almost no yield and it’s really the thing that’s the most dangerous going on economically in the world.”
In the twelve trading sessions since the October 16th 1,813 (“Bullard”) low, the S&P500 rallied almost 11%. The semiconductors have surged about 18% from October 15th lows and the Biotechs 22%. The Nasdaq100 has jumped 12% and the Transports almost 14%. The small caps have rallied almost 13%.
With the Fed about to conclude QE, a couple weeks back global markets were facing their first serious bout of de-risking/deleveraging without certainty that the Fed was there as the market’s reliable liquidity backstop. Federal Reserve Bank presidents Bullard and Williams were quick to come to the markets’ defense, affirming market expectations that additional QE would be provided as needed. There have been as well leaks that the ECB was considering corporate bonds purchases, buying that would significantly increase the odds of Draghi making good on his talk of a Trillion euro ECB balance sheet expansion. And then Friday, the world sees more “shock and awe” from the BOJ’s Haruhiko Kuroda.
For yet another week that will draw the attention of future historians, there were scores of notable headlines: WSJ: “Kuroda Bazooka Round Two.” “Reuters: “Fed Set to End One Crisis Chapter Even as Global Risks Rise.” Financial Times: “Fed’s Grand Experiment Draws to a Close.” Wall Street Journal: “Fed Set to End QE3, but not the QE Concept.”
The week also saw commentators absolutely lavish praise upon the Fed and its QE measures.
Clearly, it’s ridiculously early to pass judgment on history’s greatest monetary experiment.
After all, QE is a global phenomenon that hasn’t yet come even close to running its course. And it’s a global Bubble, with both the BOJ and ECB both pushing ahead with even more aggressive global monetary inflation. Importantly, the hope that the ECB would grab the QE baton from Yellen has been fulfilled at the forceful hands of Draghi and Kuroda.
I noted above that the backdrop is reminiscent of the summer of 2012. At that time, the global financial system was at much greater risk than generally perceived. Markets were at the brink of a crisis of confidence in Italian debt, which would have triggered a crisis of confidence in Italian banks, European banks more generally and the euro currency. A run on European banks and the euro would have raised serious issues for the emerging markets and global leveraged speculating community, not to mention counter-party and derivative issues.
Importantly, the risks were deeply systemic. Policy responses were systemic. Draghi moved forward with “Do Whatever it Takes,” followed soon by open-ended QE from Bernanke and Kuroda. I never bought into the notion that Fed “money” printing was about U.S. jobs. I don’t believe Kuroda’s move Friday was about Japanese inflation. Policy responses have been akin to Benjamin Strong’s 1927 “coup de Whiskey,” but on a multi-shot global basis (with chaser).
And over the past two years we’ve witnessed a 1927 to 1929-like market response, again on a globalized basis.
Predictably, throwing Trillions of “money” at a global Bubble has only exacerbated instability. Throwing Trillions of “money” at dangerously maladjusted global financial and economic “systems” will surely only worsen the addiction. I see Kuroda’s move as further evidence of global central bank desperation. Global risks have inflated profoundly since 2012.
October 28 – Bloomberg (Candice Zachariahs and Lukanyo Mnyanda): “For European Central Bank President Mario Draghi, the price of a weaker euro to boost the economy and stave off deflation is a record exodus from the continent’s financial assets. Domestic and foreign investors spurred 187.7 billion euros ($239bn) of fixed-income outflows from the euro area in the six months through August, the most in ECB data going back to the currency’s debut in 1999.”
.
Europe is again experiencing alarming outflows, even surpassing 2012 levels. Almost $240bn in six months, wow! And for the first time in a couple years I and others are monitoring ECB “Target2” balances (Eurozone central bank inter-bank balances). Target2 balances have surged euro 67bn in two months, the biggest move since the spring of 2012. Notably, Bank of Italy Target2 liabilities jumped $67bn in two months to $197bn, as “money” owed to the German Bundesbank moves higher. A quiet run from Italy?
I have posited that borrowing at zero in a devaluing yen to play higher global yields is likely history’s greatest speculative wager. I have pondered how Draghi’s “Do Whatever it Takes” market backstop for European periphery debt created the world’s most attractive higher-yielding securities for leveraging. I’ve as well presumed that the “yen carry trade” has likely played a significant role in financing a Europe periphery bond Bubble. Especially over recent weeks of global market instability, I’ve pondered the consequences of a “yen carry” unwind. To this point, the weak euro has not hurt those leveraged in European periphery debt – not if these speculations were financed by borrowing in a devaluing yen. But in a world of increasingly vulnerable speculators and a heightened risk of de-leveraging, a yen rally could have very well pushed European debt markets over the cliff. When it comes to global monetary policymaking, I do not believe in coincidences. Kuroda to the rescue.
There remain these two parallel universes. There’s the Truman Show World: Kuroda has essentially nothing to do with the great U.S. bull market. It is instead driven by robust economic fundamentals, including strong GDP and corporate profits. The U.S. is simply the best place in the world to invest – and American equities are a friggin’ slam dunk, all-in buy.
King Dollar is confirmation of all that is good in the U.S.
The alternative universe is a totally different world: Kuroda is one of a very select group of leading central bankers working desperately to sustain a runaway global financial Bubble.
There’s a historic experiment in “money” printing that is at the brink of failure. Around the world there are speculative financial market Bubbles of unprecedented proportions at risk of bursting. History’s Greatest Credit Bubble already has serious cracks. Moreover, the incredible widening gap between (Truman Show) securities prices and deteriorating (bursting Bubble) fundamental prospects boosts the likelihood of a global market accident.
One of these days, global central banks will lose control. For now, they will continue to print “money,” spur destabilizing speculation and exacerbate global imbalances. Importantly, their measures continue to promote wealth redistribution and inequality – within nations and among nations. Bernanke previously referred to Kuroda’s policy as “enrich thy neighbor.” I wonder if Japan’s neighbors these days see it in such rosy light. With Draghi and Kuroda promoting King Dollar, I wonder how commodity-related companies and countries are feeling about the state of the world. Gold sank below $1,200 this week, crude traded below $80 and the GSCI Commodities Index traded to new four-year lows. Central bank policies are inflicting some real (inequitable) damage this time around.
This was another week to ponder some of my favorite Credit Bubble adages: “Bubbles tend to go to unimaginable extremes – then double!” “Things turn crazy in the ‘Terminal Phase’ of Bubble excess.” “Liquidity loves inflation.” “Central banks can create liquidity but they cannot dictate where it flows.” “It is a myth that central banks control a general price level.” “Credit Bubbles are all about wealth redistribution.”
Despite Kurodamania and record stock prices, I contend that the great global Credit Bubble has been pierced. Energy and commodities prices have collapsed, inflicting irreparable harm on scores of highly-indebted companies and economies. Importantly, King Dollar has turned increasingly destabilizing. I ponder how Putin today views “Western” policymaking that further pressures the price of it key national resource. The Bank of Russia Friday boosted interest-rates 150 bps to support its flagging currency. Ominously, the ruble sold off on the news, ending the session down 3.5%.
The bursting global Bubble thesis holds that others at the “periphery” are now at risk of a downward spiral of sinking commodities prices, “hot money” exodus, acute financial instability and economic vulnerability. In this regard, Brazil joins Russia at the top of the watch list.
Despite recessionary conditions, Brazil’s central bank raised rates Thursday to support its faltering currency. The real bounced 2.5% Thursday on the rate news, only to sink 3.0% in Friday’s Kuroda-induced King Dollar drubbing.
It’s worth noting that Brazil’s central bank has issued over $100bn of currency swaps, payable in local currency (reals). Writing these derivatives – insurance against a declining real – has allowed international speculators and investors to easily hedge their Brazilian currency exposure. And these types of arrangements work wonders – until they blow up. A big downward move in the real would require the “printing” of tens of billions of reals to pay on the central bank’s swap contracts – printing that would further depress the real and perhaps even risk a crisis of confidence. King Dollar is a big problem for a sadly vulnerable Brazil.
With the S&P500 having now recovered all losses from the recent bout of market instability, the bulls are ready for another leg higher. Certainly, investors and speculators alike have been reassured by the words and deeds from the Fed, ECB and BOJ. Worries that central bankers might not be there to backstop markets have been alleviated. The rabid bulls have been emboldened.
The mortgage finance Bubble was initially pierced in the spring of 2007, as subprime securities suffered losses and “hot money” flows abruptly reversed course. An aggressive Federal Reserve policy response helped push U.S. and global stocks to record highs in 2007’s fourth quarter.
These reflationary measures spurred Bubble excess, including a speculative run in equities and $145 crude. At best, however, these measures only slowed the deflating Bubble as it gravitated from subprime to prime mortgage Credit. I’ve always been convinced that 2007 reflationary measures only exacerbated the 2008 global crisis. International risk markets turned more speculative (and highly correlated), when general stability would have been better served by a more orderly deflating of Bubble excess.
Each bout of market instability (August ’07, November ’07, January ’08, March ’08 and July ‘08) worked to solidify the view that policymakers had everything under control and would not tolerate a crisis. After trading above 30 in five separate bouts of market turbulence (August ’07 through July ’08), the VIX dipped below 20 by late August 2008. About six week later, in the midst of a so-called “black swan” financial panic (central banks actually don't have things under control!), the VIX reached 80.
And this gets right to the heart of the fundamental problem with central bank (“Keynesian”) market manipulation and “money” printing: there’s a fine line between acting to lessen the effects of a bursting Bubble and measures that inflate and prolong precarious Bubble excess. As we’ve witnessed, the deeper policymakers fall into the market intervention and manipulation trap the greater the fragility. And the more acute the fragility the more quickly officials must intervene to ensure that things don’t start to come unglued. In the end, it regresses into desperate measures to hold collapse at bay – 2012 to 2014.
October 30 – Bloomberg (Ben Moshinsky): “The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates. The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120% of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board… Shadow banking ‘tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets… The current environment in advanced economies seems conducive to further growth of shadow banking.’”
I’m not convinced “the current environment in advanced economies seems conducive to further growth of shadow banking.” Actually, if I am on the right track with my bursting Bubble thesis, the surprise could be that fragility lurks in “shadow banking” – from New York to London to Tokyo to Beijing.
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