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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.