pebblewriter

Tag: Bank of Japan

  • BoJ Rolls the Dice

    The Bank of Japan has kept interest rates at or below zero for years. Their bet was that the suppression of interest rates (by purchasing Japan’s net issuance, the BoJ now owns over 50%) would offer sufficient protection against both inflation and the 263% debt:GDP – exacerbated by the rapid depreciation of the yen.

    Investors, including yours truly, have had their doubts. While effective at propping up equity prices [see: The Yen Carry Trade Explained], the yen’s plunge greatly amplified food and energy price increases. Inflation reached 3.6% in October.  It seemed as though something would eventually have to give.

    It just did.

    The BoJ just announced that they would allow rates to move to as high as 0.5%, sending the 10Y soaring from 25 to 42 bps…

    …and the USDJPY plunging (yen strengthening) by 3.3% – below its 200-day moving average for the first time since Feb 2021.

    The BoJ is essentially betting that the small increase in rates will

    continued for members… (more…)

  • Charts I’m Watching: Sep 1, 2022

    Futures are off about 0.5% this morning as the economic data was somewhat better than expected.

    It’s an important juncture for the market, as USDJPY has reached our 139.43 target at the same time that ES is approaching our 3902 backtest target.

    continued for members… (more…)

  • Update on Nikkei: Jan 20, 2022

    In our last update on NKD [see: Nov 30 Update], I somewhat snarkily disparaged the index’s legitimacy.

    The Nikkei 225 is less a securities index than it is a measure of how much intervention the Bank of Japan feels like throwing its way. It’s what the Dow aspires to be when it grows up.

    At the time, NKD was approaching a trend line connecting five recent lows, none of which had quite backtested the obvious Fibonacci support at 26,463. It was also backtesting a TL connecting recent highs.

    As the chart above shows, NKD is backtesting a TL off the Feb 16, 2021 highs. This could be all we get, as the BoJ dislikes anything smelling like a correction.

    As it turned out, the low that day was all we got. NKD rallied into year end, putting in a respectable +5.1% return for 2021 versus the 1.2% losses which would otherwise have occurred. Japanese “investment” managers no doubt cheered the rally, just in time for bonus calculations.

    The rally left a bad taste, though, and I left the 27,156 target where it was – partly for spite and partly because the BoJ’s pathetic manipulation has become laughably predictable. Guess where NKD just tagged?

    continued for members… (more…)

  • Update on NKD: Nov 30, 2021

    The Nikkei 225 is less a securities index than it is a measure of how much intervention the Bank of Japan feels like throwing its way. It’s what the Dow aspires to be when it grows up.

    So, it’s only at times like this that I bother to post it anymore.

    continued for members… (more…)

  • The Japanification of the US Markets

    If you blinked, you might have missed the S&P 500’s 1.1% plunge last Wednesday… …following the highest CPI print since 1990.The print was followed two days later by the lowest consumer sentiment reading in 10 years, a result driven primarily by…wait for it…inflation fears.  Stocks actually rose on the day.Until a few months ago, the market’s non-reaction might have been driven by the “bad news is good news” meme. Translation: bad economic news will prompt the Fed to pour a few more trillion into the markets.

    But, the Fed recently announced that it is trimming its $120 billion in monthly stimulus by $15 billion per month, with an eye toward raising interest rates sometime in 2022. Shouldn’t that mean “it’s different this time?”

    Even with the taper, the Fed still has $105 billion to play with this month — plenty enough to move markets and stoke further inflation. And, with his job on the line, Jay Powell is unlikely to allow markets to experience a long-overdue correction, no matter how justified such a reaction might be.

    It’s not entirely Powell’s fault. He’s simply following in the footsteps of his predecessors, both here and abroad. Central banks’ policy mistakes have been years in the making, based on the erroneous assumption that markets can be manipulated indefinitely without consequence.

    The all-time champion of market manipulation, of course, is the Bank of Japan. Japan has ¥1.2 quadrillion in debt (about $12 trillion USD), which is roughly 277% of its GDP. Its annual budget deficit is approximately 14% of GDP. It pays about 40% of every tax dollar it collects to service just the interest on its mountain of debt.

    The country has managed to stay (nominally) afloat only because the Bank of Japan, the GPIF and large Japanese banks purchase nearly all of Japan’s debt issuance — artificial demand for securities which arguably don’t merit any demand at all.Last night, the Japanese Cabinet Office announced that Q3 GDP had declined at an annualized rate of 3% vs -0.7% expected. Below the surface, the data was even worse. Private consumption fell at an annualized pace of 4.5%, capital spending dropped 14.4%, and exports fell 8.3%. How did the market react?

    The Nikkei 225 futures dipped less than 0.5% intraday and are back in the green as we go to press.

    What do we mean by “Japanification?”

    The US’ $29 trillion in debt is about 126% of GDP. The budget deficit, almost $3 trillion in 2021, is roughly 13% of GDP.  Interest on the debt is roughly 9% of taxes collected — more than the federal spending on food and nutrition services, transportation, housing, or education.

    Thanks to the Fed’s intervention, however, interest rates are near all-time lows. Equities, real estate, and nearly all other asset classes are at or near all-time highs. About the only thing falling with any consistency is vol, particularly when any overhead resistance is met.

    While arguably better off than Japan, the US is clearly following in Japan’s footsteps when major economic missteps result in minuscule market reactions. It might take time for the economic tax imposed by the Fed’s inflation policies on lower and middle-income Americans to show up in the data, let alone the financial markets. But, the absence of price discovery exposes the same stunning lack of market integrity seen in Japan.

     

     

  • Don’t Fight the BoJ

    I know what you’re thinking: it’s “don’t fight the Fed.” While that’s generally true, too, the Bank of Japan is the central bank which most conspicuously wears its balance sheet on its sleeve. When my charts are a farrago of bearish indicators, but the Nikkei pushes up through resistance? I’ve learned to ignore the indicators and become bullish.

    Conversely, when the narrative is incredibly bullish but the NKD slips below important support, it’s time to short. For those who haven’t been paying attention, that’s where we are right now. We’ve had a few hints over the past week or so, but the NKD suggests there’s more to come. US stocks just haven’t gotten the message yet.

    continued for members… (more…)

  • Why the Market Didn’t Correct Today

    Hint: it’s the same reason the “market” hasn’t corrected much at all for the past six weeks.  And, no, there’s no free lunch involved.

    The day started with some tragic news out of Brussels.  ISIS terrorists attacked innocent civilians at the airport and a metro station, killing dozens and wounding hundreds.  Brussels is the de facto capitol of the EU, so the attack understandably sent investors scurrying for cover.  Only, it didn’t last — thanks to crude light (CL.)

    For those who weren’t watching, CL spiked almost 3% in about 90 minutes on absolutely no news whatsoever.  Why?  Because, stocks were selling off.  That’s it.  If you don’t believe me, read on.

    2016-03-22 CL 5 0807 SPX had dropped almost 10 points (0.5%) in the first 5 minutes of trading.  This took it directly to a trend line connecting the last two lows (3/16 and 3/22) seen below in red.  It dithered here for a few minutes, then broke through the TL and started lower — seemingly to backtest a rising channel line or the 200-day moving average.

    2016-03-22 SPX 5 0807But, at exactly the same time that SPX reached that trend line, CL swung into action.  It reversed higher, pushing up through its short-term moving averages and, ultimately, through two falling TLs of its own.  It didn’t stop until it had topped yesterday’s highs.

    This would normally be highly unusual, given that CL had just broken down through a TL (from Mar 15) and reversed at a key Fibonacci level (the white .618 at 41.42.)

    2016-03-22 CL 15 0837But, it is most decidedly not unusual for CL, which has taken over from USDJPY as the single most influential driver of equity algorithms.  Needless to say, SPX reversed back above its broken TL and went on to register new highs for the fifth session in a row.

    How it Works

    Want SPX to stop dropping, or even reverse higher?  How about popping up through important overhead resistance?  All it takes is a sudden spike higher by CL.  The chart below illustrates how commonplace it’s been in the last few sessions.2016-03-22 SPX 1 0837The first instance on the chart above was when CL gapped higher in order to get SPX up past its SMA200.  There were many other instances when CL either reversed or at least propped up SPX (the yellow arrows.)

    Occasionally, an intraday SPX backtest of a Fib is prompted by a CL drop.  But, for the most part, CL’s drops are limited to after-hours — when S&P 500 futures are easily propped up in the light volume.

    When the “market” reopens in the morning, CL has already been reset and is ready to spike higher all over again in order to support SPX for the next 6 1/2 hours.  It’s been going on for months.  But, it’s never been more obvious than since our bottom call on Feb 11 [see: USDJPY Finally Relents.]

    The Unbroken Broken Channel

    CL traced out a rapidly rising (white) channel from Feb 11 to Mar 14, at which point the channel broke down (the red arrow.)  Normally, this would portend a reversal of some significance.

    2016-03-22 CL v ES 5 0931This breakdown occurred as SPX had finally climbed back to its 200-day moving average — a 10.5% rally off its Feb 11 lows.  Again, normally we’d see a significant reversal upon reaching major overhead resistance such as this.  Combined with the CL channel breakdown, it looked like a sure thing.

    Instead, it was limited to a minuscule 13 points.  And, few traders would have had the nerve to participate.  It came on a gap lower following a 3-day, 54-pt rally that saw SPX slice through the SMA100 without blinking and close above the SMA200 two days in a row.2016-03-22 SPX 60 1500Why such a puny reaction?  First, CL not only cut short its decline, it pushed back above its SMA20, SMA100, a TL from June 2015 and the midline of a channel from Oct 2012.  Second, just for good measure, it even gapped right back into the channel from which it had broken down (the yellow arrow above.)

    After already spiking 49.6% (in the face of obviously deteriorating fundamentals) between Feb 11 and Mar 11, this latest CL spike amounted to another 18.2% off the Mar 15 lows.  In those five sessions, it lifted SPX a total of 51 points (2.54%), with each day seeing a new higher high.

    What Happened Today

    Though it’s not particularly unusual, today’s action clearly illustrates the manipulation going on.  Note that CL broke down again from its rising white channel this past Friday.  It seemed destined for a backtest of its 10-day moving average (at least) when it was pressed into duty to prop up SPX.

    2016-03-22 CL 5 1500It bounced around a bit while SPX found its feet, then zigzagged higher until SPX backtested a little H&S neckline (purple.)  When SPX faltered there, CL suddenly popped up through a TL that had connected its overnight highs.  With SPX threatening to reverse lower, CL suddenly broke out through a TL (white) that connected the highs made since last Friday.  This drove SPX up over the neckline.

    With SPX back on track, CL was free to fall back below the white TL.  And, it was time for USDJPY to take over. 2016-03-22 USDJPY 5 1500

    USDJPY had sprung to life just as SPX had reached the neckline, zooming back to the top of the channel whose bottom it had briefly broken as the terrorist attack hit the newswires.  It was a strong 1% move in about 10 hours, and involved USDJPY breaking out through a TL (red, dashed) it had established overnight, and again through a TL (white) connecting Monday’s highs.

    But, after reaching the top of the rising red channel, USDJPY had nowhere to go.  With oil prices having increased so much over the past month, the Japanese need a strong yen to compensate — hence USDJPY’s flatlining since Feb 11 (there’s that date again.)2016-03-22 USDJPY v SPX 5 1500SPX saw USDJPY’s predicament, and started back down — only to be rescued again by CL, which not so coincidentally maintained an uptrend until the close.  At that point, it was free to reset — which it did.  It’s not free to do it all over again tomorrow if TPTB deem it desirable. 2016-03-22 CL v SPX 5 1500

    What Now?

    Speaking of TPTB, who’s behind this daily manipulation?  Some blame the big banks, which have much at stake in the energy sector.  I favor the central banks themselves, especially the BoJ.  It has a huge equities portfolio.  By my calculations, it costs about 5-10 cents on the dollar to prop up SPX with CL — a bargain if there ever was one.

    I firmly believe that central banks colluded to crash oil in order to keep the yen carry trade alive.  But, it got out of hand.  Oil companies started suffering.  More importantly (to the central banks, anyway) the banking industry started to suffer.  There came a point (probably about Feb 10) that they decided it was time for prices to recover.

    This was tricky, because with a terribly devalued yen (sky-high USDJPY) higher oil prices were a burden Japan couldn’t bear.  This explains why USDJPY has repeatedly returned to the Feb 11 lows (a more valuable yen) while CL and, hence, SPX have soared.2016-03-22 USDJPY v ES 60 1500How long can this go on?  It pretty much depends on us.  The stock “market” has rallied nicely, which benefits those with substantial equity portfolios.  But, the 64% spike in CL since Feb 11 amounts to a tax on everyone else.  The average price of regular unleaded gas has risen over 18% since Feb, making a mockery of central banks’ relentless “we need more inflation!” mantra.

    When rising gas prices are again deemed a problem, or start to show up in official inflation data, CL’s run will be over — not a moment sooner.  At that point, look for the yen carry trade to return in all its glory.  Or, maybe by then, the ECB will have established the euro carry trade.  Or, maybe the whole steaming pile of crap will implode under its own weight.

    As always, there will be winners (the “haves”) and losers (the “have-nots.”)  Guess which constituency TPTB will bend over backwards to protect?