An Each Way Bet On Boom And Bust
A report from Bloomberg. “Japanese government bonds’ steepest tumble in more than three years is feeding speculation that central-bank easing is nearing its limits. A four-day rout pushed 10-year yields to within three basis points of turning positive on Tuesday for the first time since March, after Bank of Japan policy makers disappointed investors last week by leaving bond buying and their negative deposit rate unchanged. Pacific Investment Management Co. and former Ministry of Finance official Eisuke Sakakibara both say central bank Governor Haruhiko Kuroda is running out of room to expand stimulus.”
“‘The selling is insane,’ Satoshi Shimamura, head of rates and markets for the investment strategy department of MassMutual Life Insurance in Tokyo, said Tuesday. ‘The market is picturing an end to Kuroda easing. There’s no telling how far this will go.’”
“For some investors and economists, and at least one member of the BOJ’s policy board, this year is reminiscent of 2003, when benchmark yields almost tripled within three months. Known in Japan as ‘The VaR Shock,’ an initial jump in yields triggered a sudden selloff by breaching models banks were using for estimating potential losses, based on the statistical technique of ‘value at risk.’”
“The four-day surge in Japan’s 10-year bond yield brings it in line with Germany’s for the first time since April 2015, when bunds experienced a rout of their own. There are parallels in Japan now, where the BOJ’s record bond purchases have sapped liquidity and hampered the market’s efficiency. The central bank owns more than a third of outstanding debt, the most of any investor class, and volatility has surged this year to the highest level since 1999.”
From CNBC. “Japan’s failure to stimulate much with its latest stimulus serves as a reminder of how few tools global policymakers have left to drive growth. Fiscal and monetary authorities announced more plans over the past few days to spur inflation in hopes of driving broader economic hopes. They were rewarded with a stronger currency, a sea of red in both global equity prices and bond yields, and a market that generally was disappointed that Japanese leaders were not willing to do more to jump-start the long-moribund economy.”
“Japan has tried this literally dozens of times over the past quarter century, most often with the same results — perhaps a momentary bounce in activity that ultimately leads back to the same dreary growth pace. Despite all the stimulus, the economy has grown by barely 1 percent a year. In the U.S., a variety of stimulus packages over the years also have failed to achieve exceptional results. The 2009 spending package of $830 billion, seven years of near-zero interest rates and about $3.7 trillion in money-printing — called quantitative easing — resulted in an economy that has yet to register a calendar-year gain above 3 percent since the financial crisis.”
“The Fed now finds itself with a credibility problem in which investors not only doubt its ability to goose the economy; there are also questions about the veracity of policy statements and forecasting acumen, as well as doubts about whether the central bank will be able to act should an unexpected crisis hit. Some $11.5 trillion in sovereign debt now carries negative interest rates. There are trillions more with yields barely in positive territory or running well below historical averages.”
“The situation with low-yielding debt has gotten so extreme that Fitch Ratings warned Tuesday that a simple normalization of yields to 2011 levels could cause investor losses of $3.8 trillion. The losses would come in the form of principal plunges, as prices fall when rates rise. The low-yielding debt is held almost exclusively by institutional investors, meaning it poses systemic risks.”
“‘After all the QEs, after bond rallies globally, nothing appears to be the antidote to lumbering, low growth both in the U.S. and other developed economies,’ Marilyn Cohen, CEO of boutique money managers Envision Capital Management, told clients. ‘We are looking straight at the Japanification of the U.S.’”
“Cohen’s advice to clients is representative of a growing chorus that believes central bank maneuvers have run their course. ‘Under no circumstances should you listen to the Fed. Cover your ears and maybe hold your nose — this Fed and their Fed speak is so out of touch, so out of tune, that we deem their words white noise,’ she said. ‘In the past the saying, ‘don’t fight the Fed,’ were words to believe in. Not now.’”
From Ian Verrender at ABC News. “In Japan, the central bank on Friday developed a severe case of cold feet, with a decision to not push even further into the monetary policy unknown. It was expected to embrace a new round of radical policy known as Helicopter Money. While it did announce an extra round of stimulus, with a policy to pump even more cash into the economy, it opted not to board the chopper.”
“Helicopter Money is a process where the government rains cash down on the country with direct deposits into citizens’ and company accounts. The idea is that this would be financed by the central bank buying government bonds. That, however, is a policy that ultimately destroys the concept of an independent central bank, as monetary policy is employed to finance government largesse.”
“The fact that it was a close call tells you that not only is it being considered but that the global economy is in serious trouble.”
“After decades of poor performance, Japan has embraced the most radical monetary policies the world has ever witnessed and on a scale that could never have been imagined. It has ramped up its Quantitative Easing program - a euphemism for money printing - to never before seen levels and hacked interest rates to below zero, a policy it swore it would never embrace. On Friday, Bank of Japan governor Haruhiko Kuroda merely tinkered around the edges with some modest extra spending. More importantly, he raised questions about whether the central bank had gone far enough and said it was time to assess the impact of their policies.”
“On Tuesday, our very own central bank gathers to ponder the very same questions. It will be Glenn Stevens last meeting as governor. Pressure is mounting for the Reserve Bank of Australia to apply pressure to the currency, to deflate the Australian dollar in a bid to boost inflation and lift global competitiveness.”
“Having deliberately fired up the already inflated east coast housing market to promote a construction boom, the central bank can ill afford for prices to head further into la la land. Stopping that will require it to restrict lending for housing, a policy it has been reluctant to implement and even more hesitant to enforce.”
“Then there is the point Kuroda made on Friday. Would another cut have any beneficial impact? Would it encourage greater consumption or ignite business investment? The answer is probably no. Australians have the highest household debt in the world and the rate cuts have prompted many to merely pay down their loans quicker. There is nothing wrong with that. But the point is, it comes at the expense of boosting consumption and business turnover.”
“When it comes to business, lower rates have had the perverse effect of inhibiting investment. Shareholders, unable to secure a decent return on bonds or cash, have demanded ever greater dividends from corporations.”
“For more than two years, bonds and stocks have been heading in the same direction. Both have been hitting record highs. It’s an each way bet on boom and bust and it’s unheard of. Something has to give at some stage. Either the global economy will recover, rates will rise and those holding bonds or overpriced real estate will do their shirts. Or stock market investors will wake up one day and discover that central banks have run out of ammunition causing a stampede for the exits. Either way it won’t be pretty.”
