Nikkei Breakout

What culture is more open to automation?

Is Powell Playing a Deeper Game?

Is Jerome Powell playing a far deeper game than most realize?

Someone asked about this article where Tom Luongo theorizes the Fed is playing a different game than most realize. Right off the top, I think it is very helpful to come up with these types of theories as thought experiments because they help crystallize interlocking parts of the market. Whether you end up agreeing with it or not, it can be helpful. The trouble with these theories is when they lean too much on conspiratorial thinking and not plain facts. You want to work back from the facts and then ask: how might the power players like to use this situation?

I've given examples before. One, Xi Jinping in China could have allowed a deflationary crash in the economy as a means of eliminating political opponents in the aftermath, since the public is always looking for scapegoats. He can also use a deflationary crash as an excuse for devaluing the Chinese yuan. He can also use the U.S. trade war as an excuse. A perfect retaliation for Biden's move on semiconductors would be letting the yuan drop, something that is inevitable anyway if the dollar continues rising with U.S. interest rates. If WW3 has started, retaliatory tariffs from the U.S. merely pushes along a tit-for-tat economic separation.

Conversely, we can play that same game with the U.S., which is where Luongo goes. The article is worth reading and the DiMartino Booth interview linked within is worth watching. Most of what follows is my riff on his article, as this article doesn't explain his position with much depth so I don't want to attribute things he may not believe.

When They Call For the Bailiff You Know You’re Winning

I haven't read Luongo all along, but my read of it is he's arguing the Fed is fighting against the Great Reset. He sees Truss getting knocked out as an anti-Brexit (can confirm reading all the people who think Britain will now return to the EU) and anti-Federal Reserve move. The Anglos are independent and aligned. He also notes which countries' banks are on the Fed's new commercial repo list: Anglos (he doesn't put it that way) and Japan.

Perhaps this is happening, perhaps not. Socialists love cheap money and any restrictive policy on credit will upset them. Since neosocialists (neoliberals, globalist, whatever) control most of the world's governments, they do not want tight credit policies and high interest rates. As commercial speculators, the Anglos are more comfortable with unleashing the wrecking ball of inflation to screw up their enemies and frenemies for fun and profit.

Another question is whether the U.S. will also exit as reserve currency. I've maintained for what seems like a decade now, that the dollar dies in deflation. All these foreign countries want to inflation. They don't like that the Fed is actually fighting inflation. The $100 trillion question is whether global capital would prefer to sit in socialist serial inflator countries or stay in the United States. The Empire Strikes Back if you know what I mean. It can all be boiled down to China and neverending belief that the yuan will become a reserve currency. Short of winning WW3 against the United States, China is still many decades away. Their capital account is closed! It's shocking that people still think China is in some kind of strong position here. A competitor to the U.S. dollar that is not gold is the Argentine peso in waiting. If gold, then the U.S. will depreciate more slowly versus gold.

The U.S. has already lost the trade war. The American worker is on the bottom looking up. He's being crushed by neoliberals in Washington, Wall Street, China, he's being overrun by migrant labor, he's watched his factories and then his neighborhood get packaged up and sold off to foreigners. Any shakeup in the global order has a high probability of helping the average American worker if only because everything has gone against him. That doesn't mean it will. Things can always get worse. Yet even if the dollar collapse scenario plays out, that would close the American consumer economy to the world because exports would be too expensive. Many products now imported would have to be made in the United States. A massive transfer of wealth from capital to labor would ensue. A massive transfer of employment from China and Germany to the USA. To think this through is to answer the question of whether any other nation wants reserve status. The U.S. has it. The Federal Reserve can gut other central banks like fish with rate hikes if that's their prerogative because whatever they say publicly, almost all the other central banks inflate harder than the USA. Only closely aligned nations that pull their security weight will be safe from retaliatory tariffs if currency devaluations start popping off.

Social mood is also negative and falling. The one out for a rising dollar would be Plaza Accord 2.0, but I've explained why this is impossible before. Social mood means nations will not cooperate. China has said it'll never go along with it. It's a dead story with the current geopolitical situation.

Where Can U.S. Policy Go?

America First was policy until around 1945. Critics of American foreign policy will point out that didn't exactly end, but it's also true that the much of the country was supporting what in hindsight is the American empire because they were confronting global communism. Many people were appalled with U.S. actions against Serbia and Russia in the 1990s. The nationalist, anti-communist mask dropped from the globalist traitors within the U.S. government. USG has been openly and brazenly imperialistic in its foreign policy since then, as well as going to war with domestic opposition. Journalists are in prison. Books are banned. Social media accounts are censored and shutdown. A return to the 1920s, when the United States was still a mostly neutral global commercial power, seems impossible because of this war. It seems like there's no support for it because the political constituency for it is being openly crushed. Whether Powell is consciously or unconsciously driving policy in that direction, I cannot say, but he sure could go a long way to giving outsiders a chance at power.

None of this is to say things can't go poorly. The U.S. government can print up treasury bills. Another election like 2020 could unleash double-digit CPIs. I'd expect the Federal Reserve would be all but captured at that point, with any idea of inflation-fighting rate hikes going out the window. The general intelligence of the ruling class is going downhill at high speed with Kool-Aid drinkers replacing the mercenaries who instituted identity politics. Competent people implementing evil policies are retiring and the rising generation actually believe in the evil ideas such as white privilege. To say nothing of their near total ignorance of math, economics and physics. The wheels can certainly fall off if the value of the U.S. dollar collapses after socialist economic policies are passed.

Conversely, whether he cares or not, Powell dropping a deflationary bomb (disinflationary if you like) on credit markets is going to damage the outlook for socialism. People say the U.S. is bankrupt at 5 percent or 7 percent interest, but this isn't true. They say that because they take it as a given that U.S. economic growth will slow and that the government will never cut welfare and warfare spending. high interest rates will be expensive for the imperialist USA and could push it into a fiscal crisis, but it'll be a different story for a nationalist government. The debt will become a budgetary weapon that some have always dreamed it could be. The U.S. government is far too large and spends way too much money. If high interest rates instead force a political shift to economic nationalism that tears the welfare-warfare state down, then the U.S. not only won't go bust, but it'll enjoy high inflation via a rapidly growing economy with wage inflation assuming tariffs and nationalist development are part of the package.

Many predicted the U.S. dollar would crash when China started dumping treasuries, and instead the opposite happened because China was dumping to defend the yuan. The new common wisdom predicts high interest rates and an eventually lower U.S. dollar will wreck the U.S. Instead, it could power a rebirth of the U.S. domestic economy, rising wages, high nominal GDP growth and shrink the government's footprint in the economy. It depends in part on whether its done intentionally. It depends on who is in power. Is it a flailing incompetent government or a Machiavellian one that uses great turmoil to reshape the future? Will the Machiavellians be globalists or nationalists? Never let a crisis go to waste as they say. Whether Powell is kicking off that domino I doubt it, but it doesn't mean he isn't kicking it over accidentally.

Going back to Luongo's piece, one of the most important points is that the Federal Reserve will not pivot. I've said I could see them pausing and stock market bulls treating it a pivot, but looking at stocks and crude oil lately, I'm not sure they can pause anymore. The market is still extremely bullish, sentiment indicators be damned. For investors, that's the main point. The Fed will disappoint financial markets and global central banks alike until something really major breaks. Everything else is downstream of that.

Japan Stops Being Stupid, Oil Imports from Russia Increase by Infinity

Japan resumes oil purchases from Russia

In June, imports fell to zero as local refiners started to phase out Russian crude amid Ukraine-related sanctions.

While the ministry did not disclose the exact volume, it said July oil imports from Russia were 65.4% lower than the same time last year. The volume of liquefied natural gas (LNG) imports from Russia also decreased by 26.1% compared to July 2021, while coal imports dropped by 40.1%.

Japan Stocks

Three off a watchlist. One is at a 52-week high, one has a nice base, one is just for fun. The latter is a children's clothing company that is sinking into the financial abyss.

Mitsubishi.

Yawning Yen Chasm

If U.S. long bonds break out, how long until the yen moves towards the closing yield spread?

Gasoline Price Change Since End of 2020

Highest to lowest increase: USA, China, UK, Italy, Germany, Mexico, Japan.

Political Assassinations Begin

Political assassinations are going to rise in the coming decade as social mood collapses to levels unseen in nearly a century.

Assassination of former Japan leader Shinzo Abe stuns world leaders

Abe, 67, was shot from behind in Nara in western Japan while giving a campaign speech. He was airlifted to a hospital but was not breathing and his heart had stopped. He was pronounced dead later at the hospital. Abe was Japan’s longest-serving leader before stepping down in 2020 for health reasons. Police have arrested a suspected gunman at the scene.

Japanese Prime Minister Fumio Kishida, who hastily returned to Tokyo from campaign events around the country, called the shooting “dastardly and barbaric.”

Japan has been making peaceful noises around the war in Ukraine: War in Ukraine prompted Kishida to host G7 summit in Hiroshima

He only started to lean toward Hiroshima after Russia launched its invasion of Ukraine in late February.

In late March, as the fighting in Ukraine entered a deadlock and concerns about Moscow’s possible use of nuclear weapons grew, Kishida and U.S. Ambassador to Japan Rahm Emanuel paid a visit to Hiroshima Peace Memorial Park.

“It’s important to make efforts to have political leaders learn the reality of suffering atomic bombings and communicate it to the world,” Kishida told reporters after the visit.

NATO escalations will not lessen the risk of nuclear weapon use.

Japan Should Unilaterally Lift Russia Sanctions

The yen and Japanese bonds could stabilize and people all over the world would benefit from lower energy prices. Even the Biden administration would benefit because Americans would care about gas prices falling, but not care that much about Biden being humiliated by Japan. There's a low political cost because America can't afford to isolate Japan in the current geopolitical situation. Very possible that if Japan warned they will do this, the Biden admin would fold and shift their policy first to avoid the embarassment. They've already admited the sanctions backfired privately. It's a matter of giving them the push to reverse policy.

Wild Close Incoming: Japan Govt Bond Yield

There is a lot that can happen between today and Tuesday's open. My main worry is that Japan experiences a surprise in the bond or currency market.

ECB Emergency Meeting, FOMC and Japan's Crisis

ECB calls surprise meeting as borrowing costs rise

European Central Bank policymakers called an emergency meeting on Wednesday, as more indebted eurozone states have come under pressure from rising borrowing costs. A week after a regular gathering, the governing council will hold an "ad-hoc meeting"...

...The switch in the central bank's policy has raised the spectre of "fragmentation" in the eurozone, where the borrowing costs for some, more indebted members rise faster than for others.

My guess: Powell told the ECB a 75 basis point hike is coming. Spreads have been widening in Europe and the market action makes an emergency meeting warranted, but why not Monday or this Friday? The day of the FOMC announcement makes me think they want to project stability ahead of a surprise. Even if I am wrong, I view the emergency meeting as a sign a culmination move is underway or possibly even over. 

There hasn't been a highlight-reel blow-up like Bear Stearns yet, but the market fell about 20 percent into January 2008 and then retested that level in March 2008. It then rallied on the Bear Stearns bailout.

My view of the current situation: the economy is in worse shape than in 2000 and 2008. The Fed really screwed up leading into 2000 and set the course for everything that followed. The 2008 crisis was one where everything happened very rapidly. There was a slow buildup with housing topping around 2006-2006, the Bear Stearns hedge funds failing in August 2007 and an emergency rate cut by the Fed, auction securities failed in February 2008, Bear Stearns in March...and then everything collapsed at once. 

I do not expect everything will collapse at once this time, at least not until there is actual deflation in the economy. Instead, I expect something a longer period of decline similar to the 1970s. "Authorities," such as the ECB today, will step in and try arresting the decline. There is a case to be made for slowing the process of rate hikes, drawing out the pain to lessen the risk of a catastrophic collapse. 

There is one exception for a crisis. A sovereign debt blow-up and currency crisis in a major nation. Candidate number one is Japan: Japanese Bond Futures Suffer Biggest Rout Since 2013, Trigger Circuit-Breakers After 'Soros'-Style Bets Build

I will kick myself if this crisis kicks off now because I closed out my JPY shorts, but I do not think this is coming right now. Like the housing crisis though, a JGB-yen crisis can be seen from miles away, in fact it was seen at least a decade away. This phase from John Mauldin was seared into my mind 12 years ago: Japan Is a Bug Searching for a Windshield

Maybe we'll do it like Japan? Japan is a disease. They're like a bug searching for a windshield. It's a dying country. Nominal GDP is where it was 17 years ago. Plus, the population is very old. When they stop funding their own debt [as a result of retirees ceasing to save], it's going to get ugly. You're going to see the yen valued against the dollar go to 100, and then 120, and then 250, 300. They won't care how low it goes. They can sell more Hondas and Toyotas to us. They're just going to print money. 40% of their budget right now is borrowed. Think about that. They're in deep dire trouble with a government that has no clue. I think Japan will implode within the next two to three years. It will not be good for the world.

This event didn't happen in two or three years, but most people thought QE1, QE2 and QE3 would lead to the inflation seen now, in 2022. It took catastrophically bad policy in response to a novel respiratory virus, along with years of stupid energy policy, to get us to this point. Long Nikkei/short yen will be one of the trades of the decade if events continue playing out on the current trajectory. 

Short-term: I expect a bounce in stocks, a pullback in the dollar. After that, the deluge.

Bond Troubles Could Resume on Stock Slide

The spread between the 2s10s, 10yrs in US and China, and 10yrs in Japan and US, plus the 10yrs for Germany and the US for laughs.

Long Japan, Short Yen Update

Back in March I posted: Trade of the Decade: Long Nikkei, Short Yen

I neglected to mention in that post that there is an ETF that does exactly this trade: DXJ. It made a new all-time high intraday today.

Shorter-term of years makes the Nikkei look like it will bounce versus the S&P 500 Index, note that currency depreciation massive enough to push the stock index higher would boost NK over ES. Longer-term, Japanese stocks looks like an abandoned asset class relative to the S&P 500 Index.

I'm only short the yen for now. DXJ is a decent vehicle becauase WisdomTree tilts the porfolio into export companies. It is at least a great starting point for people who want to maybe construct their own Japanese-stock portfolio. Speaking of myself, I seldom look at Japanese stocks and almost no one speaks of them outside of a few major exceptions that trade in overseas markets or are extremely high-profile companies.

Globalism Goes Down the Tubes

ZH: China Holds Secret Bank Meetings To Plan For Protecting Assets From US Sanctions

China is taking serious steps to prepare itself for potential future US sanctions such as have been imposed against Russia's banking sector, with regulators recently convening an emergency meeting of domestic and foreign banks to examine how to best protect the country's overseas assets.

Over the weekend the FT identified that the internal conference was held on April 22 and included top officials from China's central bank and finance ministry. It's also said that representatives were sent from every domestic and Chinese overseas bank, and additionally some China-tied international institutions, notably among them HSBC. The somewhat secretive conference was held as Russia is charging Washington with stealing $300 billion of its assets held overseas.

The end of globalism was signaled clearly a decade ago when China escalated a political dispute to an economic one and restricted rare earth exports to Japan. China had a monopoly on rare earth exports and this told the world that would need to diversify their supply. Continueed attacks on Japan caused that nation to diversify its supply chain: Japanese firms accelerating exit from China

Back in 2014 I posted The Logic of Strategy: Yuan Devaluation and the Road to Trade War. I thought yuan depreciation and possible devaluation would trigger this fracture. Instead, it was driven by politics.

Now USG has exploited its monopoly over the reserve currency and financial markets, signaling to China (and all nations) that they cannot rely on the U.S. currency or its financial markets and financial assets.

The Hill: The plan to seize Russian oligarchs’ assets sets an appalling precedent

The Bible’s Eighth Commandment prohibits thievery or stealing. It is understandable, nevertheless, that on Wednesday, the House of Representatives, infuriated by Russian aggression against Ukraine, would vote 417-8 to authorize President Joe Biden to steal the assets of Russian oligarchs allegedly linked to President Vladimir Putin to benefit the people of Ukraine. The vote for H.R. 6930, the “Asset Seizure For Ukraine Reconstruction Act,” may be politically astute, but it is not law and is an appalling precedent.

The American ruling class is doing as it has done for two generations now: systematically destroying the institutions and foundation that built America and American wealth. For now, the American people are still going along for the ride.

Tomorrow's News Today

ZH: "The Biggest Story No-One Is Talking About": Why Albert Edwards Expects "Something In The Market Is About To Snap"

But according to Albert Edwards, who refuses to let this story drop, not only is this divergence about to get much worse, but it will lead to catastrophic market consequences. It's also "the biggest story no-one is talking about."

In a note published late last week under the same title (and available to all professional subscribers), Edwards turns his attention to the yen and yuan, and writes that "surely all of us working in finance realize by now that something is likely to snap in the financial system and probably quite soon."

Why? Because according to the SocGen strategist, "the rapidity of current market moves and the polarisation of the now extreme Fed (hawkish) and BoJ (dovish) policies almost guarantees that outcome.... Maybe the outcome wouldn’t be so ugly if central bankers had not spent recent decades ramping up asset prices to today’s grotesque levels through their monetary incontinence. But they did."

He fleshes out what I was talking about in the prior post:

Of course, in the end one of the two central banks will capitulate first, and that will most likely be the BOJ as it has far less firepower - both monetary and verbal - than the Fed. One can watch this in real time as US Treasury yields soar higher, while the 10y JGB yield keeps knocking at that 0.25% YCC door "and the louder it knocks, the more rapidly the yen plunges." Indeed, as we forecast a month ago, at some point, either the yen will snap, or the BOJ's defense of the upper YCC barrier will fail (or both).

What happens then? Well, according to Edwards, the crashing yen has been propping up US Treasuries, as yen carry traders flee local assets and find (relatively) safety in US paper. This means that any direct intervention to prop up the yen by the BOJ will lead to another snap higher in US yields as the Japanese carry trade buyer drops out of the picture.

But the move higher in US yields would be child's play compared to the total collapse that would follow in Japan as the entire MMT paradigm is exposed for one epic fraud. To wit, when answering the question what happens to JGB yields when the BOJ pulls an RBA and no longer defends the 0.25% barrier, Edwards writes that while "the BoJ will persist in maintaining the 0.25% cap and all that implies" once "it abandons this ceiling or resets it higher" look no further than Australia for what happens next, which he shows shows below.

The conclusion: "When Australia ended YCC yields snapped higher – much higher!" A similar interest rate move in Japan, still the world's second largest economy, and one can kiss all remaining central bank credibility goodbye forever... and with it, also say goodbye to the fiat regime, which perhaps may just be the endgame here.

I like his title, "The Biggest Story No-One Is Talking About." I've been talking about the yen for many months. It's a topic I've gone over many times because the fundamental case has been there for more than a decade and the chart was screaming trouble. Yet, very few people notice. The Sounding Line picked up Ready for the Yen Shock? Albert Edwards and others have been warning clients I'm sure. There is Santiago Capital on Twitter, he's active and a good resource for similar ideas.

I have stopped reading Twitter after leaving the bird site for good (I gave it one more shot in May 2022 with Elon threatening a take over), with new censorship rules destroying its functionality. Not only political, but in how they throttle/shadownban users. To give a separate example, when I search I sometimes rapidly refine my search to hone in on what I'm looking for. When I still used Google, it would sometime throttle me with a message asking if I'm human. These systems are designed for the average user, tailored to them, and behavior outside of the system is viewed suspiciously. There is a lot more than simple political censorship going on and people should be wary of handing power over to unproven automated systems that lack human intelligence. Unproven here means hasn't faced a Turkey Day yet. (Doubly so automated systems augmented by demented, psychotic and totalitarian sysadmins.) I am rather certain, but have no precise prediction, that a few of the algorithmic and HFT traders will play a prominent role in the coming endgame. Not driving it, but there will be spectacular failures like the 1987 portfolio insurance debacle. But I digress. There are lots of macro theories out there with similar ideas if you want to find them.

As for where the yen goes. A reversal keeps with history. Markets down, yen up. Important for trading, but nothing to worry about if you know the standard playbook of the past 14 years.

If the yen keeps falling...the chart below I first posted in early April is humorous because most charts don't resolve this way, especially currency charts. But calling it the Godzilla pattern is accurate because the damage to Japanese assets would resemble that of a Godzilla attack.

I ended the prior post talking about Japanese stocks. For myself, I've exhausted the topic of the yen. News and events worthy of comment will pop up, but I have the thesis and targets. Trade execution follows. Maybe the yen really is done for now with all the attention on it. That's been the story for 14 years: every time it looks like the barrel is about to go over the falls, the system bounces back. For big ideas though, it's time to start thinking about what comes next.

Similarly, it was nine years ago that I posted: Chinese Yuan Could Devalue 50% Or More. I recently posted USDCNY 10 and If Yen Doesn't Reverse, But Gains on Yuan looking at the implications of continued yen weakness and what looks like a major reversal in USDCNY.

And also Another Deflationary, DXY 160 Moment Begins. It's my long-standing theory that the endgame goes from periphery to core, with USD either blowing up simultaneously with all fiat or soaring as the system collapses with a series of fiat dominoes tumbling. There are two main scenarios One where JPY and EUR bear the load with USD in a China-led emerging market crisis and the ultimate endgame where even the euro and yen collapse.

In conclusion, I think about the long-term future when it comes to macro and I've added charting skills for myself for when those theories pan out or not. The most profitable moments are when theory and charts line up. Bear markets and major macro moves come about once a decade, with minor moves every few years such as as oil tumbling twice in the past decade. If this is the big one though, follow on events will pale by comparison. For bears and volatility junkies, this will be the peak of their trading life if they trade it well. Trading the move down and catching the bottom will produce a lifetime of profits, probably more than several lifetimes.

Death By Quant

In 1998, LTCM almost blew up Wall Street because bond spreads broke from history. They were trading with a model that had unbounded potential, but considered it bounded because history lacked an extreme move. A turkey problem: turkeys think the farmer loves them until the day before Thanksgiving.

In 2008, Wall Street almost blew up the world because home prices broke from history. Home prices never went down nationally. The quants created the correlation with their financial models though, they made it possible and it happened.

Today, I see similar setups throughout the market. Consider this discussion of yen weakness being a threat.

WSJ: Japanese Yen’s Drop Raises Potential for Broader Market Trouble

But the yen’s rout might cut into Japanese demand for Treasurys. That is because as the yen weakens, Japanese investors with dollar-denominated assets will have to pay more to hedge against the risk of currency fluctuations cutting into their returns.

This is the exact opposite of reality, but there are models that assume this is how the market works because it has worked in the past. The model is not prepared for Turkey Day. At higher-order stages of collapse, money flows to higher-order monies, which in this case includes U.S. treasuries and U.S. dollars.

I like to say, somewhat teasingly as I am a fan of Austrian economics, that Austrian economics only works about once a decade. I'm referring here to forecasting for investment purposes, not for guiding a government or society over the long-term. During the boom periods, many economic models work because the system isn't stressed. The same way the CCP or any other central planner can appear genius during a boom. It is only when the system breaks that the model fails. Between the busts, the tail can wag the dog. The tail can wag the dog for so long than "everyone" thinks the tail is the dog, and the dog the tail. Or maybe the dog doesn't exist anymore.

The endgame is when the Japanese investor incinerates the yen by dumping U.S. treasuries, triggering a rise in yields than feeds back into a weaker yen. In the endgame scenario where European, Chinese and American investors join in, global rates rise to the point where the yen has to be defended by rate hikes...that trigger currency collapse. Japan's total debt to GDP exceeds 1000 percent. There's no need to be precise because we're playing global thermonuclear war. What is the increase in nominal GDP if the average yield on Japanese debt is 3 percent? At 1000 percent debt-to-GDP, it's 30 percent. Catastrophic deflation or inflation are the options when a system this stretched reaches the crisis point. The euro and yuan are toast in that scenario too. Then the dollar as the last domino when the system reflates.

I have been ever so slowly increasing the amount of time I spend researching Japanese stocks. Still very little time spent on it, but up from zero in recent years. At some point the Japanese market could warrant substantial attention, and better to pay that attention before everyone else figures it out.

The Price Illusion

My suspicion is the economy is already in recession. From an investment/trading view, I don't think it matters if I am wrong. Maybe it's better than I think, but that's still worse than the average investor thinks.

The stats out of Japan put a giant exclamation point on the price illusion caused by inflation. Exports rose 15 percent, imports 30 percent. Back out price effect and exports fell 2 percent, imports unchanged from a year ago. They're paying 30 percent more for the same volume of imports...now the tumbling yen makes perfect sense, right?

It's worse, so much worse on Japan's import side. Total imports were up more than 30% (THIRTY!) yy in March. By value.

Actual quantity imported was 0.0% yy. Zero.

The Japanese paid almost a third more than last year to get the same mostly raw materials. That's going to be bad. pic.twitter.com/6v6XmYSp0S

— Jeffrey P. Snider (@JeffSnider_AIP) April 21, 2022

Somebody Noticed the Yen and Yuan

ZH: Yen At Risk Of "Explosive" Downward Spiral With Kuroda Trapped... And Why China May Soon Devalue

The yen's recent nosedive has heightened fears of a vicious cycle as Japan's worsening current-account balance threatens to spur more selling while the BOJ's dovish scramble to prevent rates from blowing out means that even modest countertrend buying will promptly reverse.

While a soft yen has long been seen as a boon to Japan's economy, not to mention the stock market, and was one of the key drivers behind the launch of Abenomics whose anchor pillar was printing ginormous amounts of yen (and monetizing just as massive amounts of JGBs to monetize Japan's prodigious deficit), now that benefits have tilted toward certain exporters and the wealthy while individuals and small businesses feel the pain of higher commodity prices, Japan may need to rethink a fundamental assumption of its economic approach.

As argued here, inflation is a yen killer. If yen tanks, then what do Korea, China and Europe do? All of them are also energy importers, plus food for Japan and Korea.

But while Japan may be a lost cause, a bigger question emerges: how will Japan's latest devaluation impact its fellow exporting powerhouse competitors, i.e., China, and as Edwards frames it, "this beggars the question how will China react? Maybe just like they did in August 2015 when the PBoC devalued? Back then persistent yen weakness had dragged down other competing regional currencies and left the renminbi overvalued."

Wait, yen weakness leading to China devaluation? According to Edwards, that indeed was the sequnece: as he shows in the chart below, the super weak yen of 2013-15, by driving down other competing Asian currencies, ultimately led us to the August 2015 renminbi devaluation.

Yen and yuan both strengthened as soon as the yen made it into headlines and financial media attention, but barring a major reversal in King Dollar, this will only be a consolidation. More over, both currencies are at major turning points. USDJPY's next up move will clear a 20-year base and USDCNY sits right below a decade-plus support line. Since China has said it won't follow Japan in the 1980s, then it isn't going to let its currency appreciate...even if that was in the cards.

I've argued for years that the yuan can experience a major devaluation. Nothing in the fundamental economic argument has changed. If anything, Europe's reaction to Russia's invasion of Ukraine has made the euro far weaker than it was. I had previously expected the yen and euro could absorb some currency flight from a yuan devaluation, but now it looks like the dollar may rise alone in a scenario where nearly all fiat currencies collapse.

Nobody Cares About Yen Implosion

Yet.

Trade of the Decade: Long Nikkei, Short Yen

Long Nikkei, short yen. Not a go out tomorrow and buy trade because Nikkei will track south with global indexes. The yen leg of the trade also looks extended here. In 10 years time however, these will look like rounding errors if the trade works. This was a trade people thought about putting on a decade ago, but it's time may have finally arrived.

Will Japan wither away in the Age of Automation or be reborn as the export powerhouse>? It is one of the few nations that could credibly become the Global Hegemon if AI and robotics dominate warfare. China's 1 billion people is no advantage on 100 million Japanese, nor is 400 million Americans. All that matters is the technological edge. The transtion period will be expensive though. Japan is a commodity importer, it has a massive debt/GDP ratio and terrible demographics. Its exit from the malaise will hammer the currency.

Nikkei vs Russell 2000 ETF