Category — Overseas News

Just when you think central bankers are as clueless as our Treasurer, they go and surprise you. The release of minutes from the latest US Federal Reserve Advisory Panel meeting was a bit of a revelation.

The Federal Reserve’s ‘mad scientists’ appear to realize they have created a financial monster. Call it Bernankenstein’s Monster if you like. Take this extract (bold emphasis is mine):

‘There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.’

Concern about an ‘unsustainable bubble‘? Given the Federal Reserve’s previous track record of creating bubbles (housing rings a bell), all they can muster is ‘concern’. What about fear and alarm?

Here’s another bit of genius from the minutes: [Read more →]

We’re starting to see some real signs of stress in the US bond markets.

Perhaps this is just some short term repositioning in case the US Federal Reserve actually follows through with its threats to lower the size of QE purchases.

Or insiders have been given word that it’s going to happen and they’re front running the crowd.

But one thing is certain. The US bond market and the spreads between US bonds and underlying corporate bonds are starting to widen. Volumes have exploded and there are some big moves… [Read more →]

Zugzwang describes a dilemma when any move you make puts you in a weaker position. It’s a German word but the idea is taken from the game of chess.

In chess, there’s no random element. There are eight ranks and eight files with pieces that obey fixed laws. Not so in markets today, where central bank intervention is so heavy we doubt any one price is where it should be.

Investors probably feel a whole lotta zugzwang right now. If you can’t trust any price signals, which asset do you trust? Doesn’t any move feel like you’re opening up a weak flank?

This is especially true for the country that dominated discussion in our Albert Park headquarters this week: Japan.

So it’s the task of today’s Money Weekend is to explore what it means for Aussie investors…. [Read more →]

If you want to understand the current price action in the markets you need to study Japan.

Everything that’s happening at the moment is a function of the huge monetary stimulus recently unleashed by the Bank of Japan (BOJ).

I’ve known it was important to understand, and I’ve followed proceedings closely. But it’s now becoming clear that most of the moves we’re seeing in markets world-wide can be explained by the enormous money printing by the BOJ.

Therefore, we can only decipher the road forward by analysing the Japanese currency and bond markets…

Imagine you’re a fund manager and the Bank of Japan and the Prime Minister of Japan tell you they have an explicit policy to print a huge amount of currency to incite inflation and lower the currency.

You borrow in that currency at incredibly low rates. You then invest offshore and receive much higher interest rates. You do this safe in the knowledge that the currency you’re borrowing in will most likely be weaker by the time you have to repay the loan.

That trade would have to be the ultimate ‘no brainer’. You can leverage that trade many times over. But this isn’t theory. This is reality. I can assure you this is what every man and his dog is doing at the moment. [Read more →]

The Japanese Topix Index is up more than 40% this year (and nearly 71% since July 2012) thanks in large part to Prime Minister Shinzo Abe’s unlimited stimulus initiative known euphemistically as ‘Abenomics‘.

The argument behind this spending is a classic one, at least in economic terms: stimulate the economy to produce higher inflation, weaken the currency and aid the exporters.

But like US Fed Chairman Ben Bernanke’s spending and Draghi’s spending in Europe, it’s ultimately going to fail.

Sure the short-term effects are great…a wildly enthusiastic stock market that’s trading at the highest levels seen in 4.5 years, a relaxation of risk and fresh strength in export focused companies that are showing stronger results on a devalued Yen. No question, I’ll take a bull market any day. [Read more →]

‘The market is behaving as if it’s all over for mining,’ laments Diggers & Drillers editor Dr Alex Cowie in his latest issue out this week. He goes on, ‘but nothing could be further from the truth.’

The good doctor probably feels like a lonely voice right now. It’s been a rough ride over the last two years in the mining sector. But you don’t find bargains when the outlook is rosy. So how do you find them? ‘Find the trend whose premise is false,’ says legendary speculator George Soros, ‘and bet against it’.

The premise, in this case, is that the natural resource bull market is all over. But… [Read more →]

Kudos to those who bought Japanese stocks. The Tokyo Stock Price Index, or Topix, is up 37% for the year and a blistering 60% since November. It was in December that Shinzo Abe came to power in Japan. He promised easy money. And the Bank of Japan delivered by promising to double the money supply. It was like waving a red cape in front of a bull. Olé!

The idea behind this spectacular rally in the one of the world’s largest stock markets is as simple as it is absurd. The impetus for the bullish charge is that printing lots of money is good for stocks.

Well, so far, it seems to be…but I wouldn’t bet on it lasting long…

I was at Grant’s Spring Investment Conference in Manhattan a couple of weeks ago. Mark Yusko, the CEO of Morgan Creek Capital Management, was there. He said Japanese stocks are a buy. Emphatically so. The argument was that a weaker yen would bring profits for exporters. And thatinflation (or currency devaluation) is good for stocks.

He particularly liked the financial companies in Japan. ‘These stocks are going to go up,’ he said. ‘It’s not a question of whether they might go up, it’s not a question of whether they might do well and make profits. They’re going to go up…’

Kyle Bass, chief of Hayman Capital Management, was also there and presented right after Yusko. If Yusko was a guy waving a red cape in front of the bulls, Bass was a guy brandishing a sword. [Read more →]

A few weeks ago, Russell Napier of CLSA suggested to me that the weak yen might at some point trigger an emerging markets currency crisis.

Last week, a note came through from Albert Edwards at Soc Gen suggesting much the same thing. Both are famous bears but both have also had good records of spotting the dangers other market participants prefer to close their eyes to…

It is also worth remembering, as Albert points out, that ‘yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse.’

Then a weakening yen and rising dollar put pressure on the many countries in Asia that in one way or another pegged their currencies to the dollar (their exports became less competitive relative to Japanese exports as the yen fell and the dollar rose).

That, along with a variety of other factors (this is one of the things academics have on their ‘argue about forever’ lists) led to devaluations across the board (starting with Thailand) and in turn put huge stresses on the many banks (and other companies) in Asia that held debt in dollars (in local currency terms their debts soared). It also meant hefty imported inflation — as currencies weakened, import prices rose. [Read more →]