Tuesday, December 1, 2009

Japan Pledges a New Round of Quantitative Easing; Speculators Worldwide Rejoice

A bit of a curveball last night - traditionally of late we have seen rallies Monday after Monday after some region, country, or government reiterates some combination of fiscal or monetary policies stressing easy money for as far as the eye can see.  That wallops the dollars, and lets risk takers know they have nothing to worry about.... stocks surge.  [Nov 20, 2009: What the Heck is Going on During Mondays Lately? Always Up]  There was no such meeting or communication this past weekend, so Monday was very muted & aside from a late day "month end mark up" there was little to get giddy over.

However, last night the Bank of Japan, especially worried about how awful the US dollar (the new carry trade currency) has been acting in relation to the once equally as limp yen (the old carry trade currency) - struck in a surprise emergency session! [Sep 18, 2009: US Dollar Replaces Japanese Yen as "Carry Trade" Currency]   In an effort to help debase their currency (and thus help their exporters) and fight against deflation - more free money will be provided to the world.  Obviously the yen is taking it on the chin, and the knee jerk reaction worldwide is "more free money, buy anything that moves".  As "competitive devaluation" amongst desperate countries takes place, this is only good for gold for very obvious reasons.  As each unit of paper fiat currency becomes ever more worthless, hard goods look more appealing.

As to Japan specifically.... they've been doing these sort of things year after year after year.  As you well know, when something has not been working for a few decades, the obvious solution is.... to do it again.

Via Bloomberg:
  • The Bank of Japan said it would pump more cash into the banking system after an emergency meeting it called on Tuesday in the face of political pressure to help fight deflation and avert recession before upper house polls next year.
  • The Bank of Japan unveiled a 10 trillion yen ($115 billion) program to help an economy battered by falling prices and the yen’s surge to a 14-year high. The bank will accept a wider range of assets including government bonds as well as debt issued by local governments. The program has no time limit.
  • .....in a near replica of attempts to stimulate lending after a property bubble burst in the 1990s.
  • Bond yields fell the most in 13 months, lowering borrowing costs for companies whose profits are being threatened by deflation and the yen’s advance. Today’s action constitutes “quantitative easing in the broad sense” said BOJ Governor Shirakawa.
  • The yen pared losses after earlier falling the most in more than a month on speculation the bank would take action that would limit the currency’s appreciation. It traded at 86.83 per dollar at 11:39 a.m. in London from 87.53 before the announcement. Last week the yen reached 84.83, the highest since 1995, threatening earnings at exporters including Toyota Motor Corp.

The Japanese stock market surged on the news, in a complete parallel to the US whenever Ben Bernanke takes steps (or reiterates) he will do whatever is necessary to step on the neck of the dollar.  Our timing could not of been more perfect on our shorting of the Japanese market yesterday (sarcasm) ... as I often say to people now: the market used to be hard enough on its own when we had to deal with 3 dimensions; now we have to somehow account for the 4th dimension of government / central bank interference which makes the number of outcomes expand exponentially.   I will probably move my stop loss up by half a percent to see if this is a 1 day wonder (knee jerk reaction) or not...

Ironically last night on Fast Money, technician Carter Worth noted the same divergence in Japan that I had noted last week.  What struck me about this video is for all the talk about how "we are not Japan", the US and Japanese central bankers act almost identically, and the stock markets have been in almost a complete parallel death grip with each other until the past month or so.  (also please note that Worth mentions the average stock has actually been down for 3 weeks in a row, even as the indexes trend sideways - another thing I have been mentioning just from a cursory glance at my watch lists)

[Video below]

So here we are again, rallying on the exact same thing that we've been reacting to over and over.  But to switch it up a bit, our central bank handout came on a Monday night rather than a weekend.  I will just continue to laugh that a policy that has been an abject failure in Japan for decades is being celebrated today in its upteempth iteration, as it is in the US when wrapped in Ben Bernanke's arms.  But this is what the computers are programmed to do, so up, up, and away we go on free money.

If we get back over S&P 1112 or so I'll be joining the party as I slather myself in yen.  Otherwise we are moving into week 4 of a limited range where fewer and fewer stocks are participating in Kool Aid.

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