SEE YOU ON THE BOARD

2016-04-26 6pm EDT  |  #stocks #Nikkei #Japan #BoJ #silver #gold

I am always kind of amazed at finance guys who get all offended when someone disagrees with their view. Maybe it was because I spent too long on a trading desk, but I don’t see any point in getting upset at differing opinions. After all, if no one disagreed with you, who would you trade with? Every time you execute a trade, the other side has a different view. When we disagreed on the desk, we would often settle it with a “see you on the board” snark. That simply meant there was no sense arguing anymore, and the next logical step was to execute a trade to express our views.

It’s not like we are talking about astro physics. There is often no “right” answer. And most importantly, no one, and I mean not a single soul, is never wrong. The investing game has a way of humbling even the smartest amongst us.

I try to make it a habit to read and listen to those with differing views. I am wrong all the time, so having others sketch out the reasons for my error is always helpful.

This is a tough game. If you don’t understand your opponents’ argument at least as well as they do, you will probably be the patsy sitting at the poker table.

This morning I tried turning on the twitter account of a rather prolific market pundit. I actually enjoy reading this fellow’s views. He makes me think, and I appreciate that. This guy happens to be one of those shorts who is steadfastly fighting the stock market rise. Again, it’s not like I am unsympathetic to this view. The fundamental backdrop of this market is about as appetizing as lunch at a busy Disney resort on a hot summer day. But I had to turn this fellow’s twitter account right back off when he made a big deal of publicly “blocking and muting” someone who was giving him a hard time about the call. I have no problem with him muting whoever he wants, but why make the big show? I can only surmise he is feeling sensitive about his offside short position.

Which brings me to my point. There are often differing views in the market, but I cannot ever recall a period where so many investors hated a stock market rise, and where tensions regarding this divergence between opinion and market action, has created so much sensitivity. Tensions are strung about as tight as I have ever seen. They are so wound up, I will probably offend someone with this post, but I don’t care. I’ll just see them on the board.


Why are we surprised?

Yesterday the financial media was all aghast at the realization the Bank of Japan has become a Top 10 Shareholder in 90% of the firms of the Nikkei 225.

Why was this news? The Bank of Japan has been telling us for the better part of three years of their bat $hit crazy monetization plan. Not only are they buying every JGB they can lay their hands on, but their equity and REIT buying programs are unprecedented. The BoJ is printing Yen and writing blue tickets at such an unbelievable rate, nothing should surprise us anymore.

What is more surprising is that anyone thinks the Bank of Japan will give up on their monetary madness. There is no going back. Period. The BoJ will never be able to sell these securities.

Actually I take that back. When the whole Japanese system explodes in a inflationary melt up, then eventually the Bank of Japan will be able to sell these securities at huge nominal gains. But there is no way the BoJ will ever normalize policy by selling equities in the coming few years.

The Bank of Japan will do more and more quantitative easing until they finally get the inflation they are so desperately hoping for.

I agree with Goldman Sachs who recently forecast that at the coming BoJ meeting:

… we think the BOJ is most likely to ease mainly via the qualitative measure, with increasing ETF purchasing the central pillar, with a view to improving business confidence. We think the market is already factoring in an increase in annual purchasing from 3.3 tn to 5-6 tn, and we thus think the BOJ may look to slightly more than double its current figure to around 7 tn.

And for those who are wondering why the world stock markets refuse to roll over, have a look at this chart:

Goldman’s conclusion is worth repeating here:

In a nutshell, it is the view of the writers that one or a series of permanent fiscal expansions accommodated by expansions and/or an extension of duration of JGB purchases by the BoJ could be a pretty strong policy mix that could help to boost inflation expectations, as it should become increasingly clear that monetary and fiscal policy independence remains an institutional feature de jure, but less so de facto. And, once started, the government could also continue to announce monetary financed expansionary fiscal policies, at least until inflation reaches the new target.

In the same Wall Street Journal interview cited above, Governor Kuroda strongly defended the independence of monetary and fiscal policy (and ruled out the use of ‘helicopter money’ and the risk of fiscal dominance), but he also acknowledged that the “monetary authority and the fiscal authorities can cooperate and coordinate their policies, and quite effectively”. A more open coordination could move market expectations.

As our Japan economist Naohiko Baba wrote in “Fiscal discipline at a critical juncture with three-dimensional monetary easing” the fiscal and monetary policy mix could turn out to be similar to that implemented in the 1930s during the Takahashi administration. The outcome could even be an overshooting of the BoJ’s 2% inflation target.

It is striking that markets are not pricing this scenario at all. On the contrary, markets still doubt Prime Minister Abe and BoJ Governor Kuroda’s commitment to reflate the Japanese economy. We in the FX strategy team do not.

Over the past three years the Bank of Japan has taken their balance sheet from 35% of GDP to 85%! And it shows no signs of stopping. The ludicrousness of this move makes me shake my head. No wonder stock markets have become so difficult to trade.

And if you think these shenanigans are limited to Japan, think again.

The fact the CME offers Central Banks discount rates to trade S&P 500 E-mini futures says it all…

Most investors are busy fighting these flows, assuming the Central Banks will come to their senses. I think the better trade is to assume they will keep printing until they get the inflation they yearn for.


Selling my silver and replacing it back with gold

Proving a stopped clock is right a couple of times a day, I managed to get one call right when a month ago I reported I was shorting the gold/silver ratio (GETTING WAY TOO CUTE WITH GOLD FOR MY OWN GOOD).

Silver has had a tremendous run and the gold/silver ratio has declined from 83 down to 72.

The trouble is, the trade is getting crowded. Have a look a the chart of the net silver spec longs:

I am moving a good portion of my silver back into gold. Although I think the GSR ratio will eventually head much lower, I suspect it has run a little too far over the short run.

I still like both metals, but think we could easily get a move back to the high 70s for the GSR ratio.

Thanks for reading,
Kevin Muir
the MacroTourist