Italian yields are above 7% again – surprise factor 0. Portugal could be looking better, but what do you expect off a ratings cut?
Merkel discounts the possibility of eurobonds, even when her own Bundesbank brand is making a beeline for failure? We see another catch 22 appearing, and the market basically will be telling Merkel one day around here how wrong she is to maintain the hopes for the current policy path. QE or Quit; take your pick or the market will force one on you.
Sweden: Canary in the coal mine sings again just to die another day. We look at the equity index which is starting to push firmly into the year low territory again (there is a 7% margin on a (Close – Year intraday low) / Close basis, and the currency is already there at a punitive 0.8% off the USD lows. (Was within 0.4% earlier). The bounce and fall from grace has been absolutely brutal, providing much more of a firm directional move in the EURSEK than at nearly any other time this year. 3.4% might not sound like much in a month (it’s had days like that this summer), but the up/down days tell a clear story: 7/13. Nearly double on the swing, which is pretty crazily firm and indicates deteriorating liquidity availability and decreased risk appetite. This is rather insane given the structural benefits of Sweden, but a small export-powered economy will see its exports crumble unless there’s a QE or Quit response from Germany. The structural benefits are instead seen in the bonds (compare 10 year yield charts vs. Netherlands, Germany, well, anyone. There’s a spread to Japan and Switzerland, and that’s it) and there is the question if bond traders simply don’t look at currency weakness, or if they really are that squeezed by the sore lack of supply of Swedish paper (US$100 bn) and would rather take a “market effects” default, or just hope to see the currency stronger later. Technicals are discouraging from a momentum standpoint in EURSEK, and any euro policy problems are likely to come to light in terms of the massive resistances at USDSEK 7 and EURSEK 9.3 being broken. Keep a close watch on everything here, as there is strong dissonance in the short term (currency, equity) markets versus the long term (bond) markets. Also: smart money trades bonds, don’t expect them to stop doing that any time soon though.
IMF and S&P unite to tell everyone to short the strength out of Japan. The question remains: which Japanese official bribed you to do this in hopes to get the Yen down? I just want to know who should have his points for sorely needed innovation removed on grounds of sorely lacking intelligence. Japan has about 95% of JGB’s domestically held. Apply calculator and check that this translates to roughly 12% of GDP. Check stock market and realize that JGB’s are still a better place for the average Japanese person to invest (indeed, inflation adjusted yields are among the best in the world) and that this isn’t gonna change anytime soon. Savings rate is still there. A chart by the IMF which has been making the rounds everywhere from The Economist to ZeroHedge shows total indebtedness and scares literally everyone:
Question: Can someone for once show actual assets as well? Japan simply holds a lot of debt with its government, and that also holds assets of a significant part of that that could be spun off, and some structural reassessments like gambling industry licenses and phone operation reorganization also spring to mind for allowing increased revenue flow. Of course, these are all of doubtful value because valuations can’t be trusted in a true crisis, but then again, Japan as well as anyone else can print, and once you start saying that a larger crisis will happen and force a true sovereign bond issuer to confront default then don’t magically exclude bond prices from the calculation.
But the important point remains: Japan is a true sovereign exporter nation and immense net creditor with huge assets locked up in savings accounts (and transformed into government debt) and huge assets on the books of companies (not least of which is cash). Spin which we really don’t tend to think about? Most household company names in Japan are giant conglomerates which has quite a lot of room for spinning off corporate assets and split into smaller units should the situation call for it. The Economist recently drew similar parallels on the needed development mechanics changes in South Kore, and I strongly believe this to be the case for further developments in the Asia-Pacific region. Tell me when the prediction by the S&P comes true so that I can start asking for licenses to the show “PE Fund Fun” where ailing fractions of former companies give lap dances to hungry investors.
This will be never. With 12% debt/GDP outstanding – and subtract from that China’s share to arrive at liquidation pressure – plus massive assets and an independent central bank which has had the strongest case for printing more money in the history of money and firmly and consistently rejected it for fear of inflation (cue laughter), there’s a sliver of a cliff the speculators could get into, and there’s then on top of that a lot of boots ready to trample any hands that do grip on. Japan’s case is not so bullish as to be solved by speculator front running. The day of reckoning is when there is no more savings to plunge into JGB’s or no more assets to sell and divest from either government or corporates. This seems highly remote, and in my much more bullish forecast we actually finally see Japan coming to grips with some of the issues that has plagued it for the last 20 years, forcing a sell-out of government assets, a streamlining of businesses, and restructuring of the economy. Too bullish? The alternative, status quo train wreck, is too bad to contemplate and would double the world’s Europe woes and add high pressure to the rest of eastern Asia. It does sound familiar, but consider this: Europe getting its act together faster than Japan? I really can’t see how Japan could wiggle itself out of the market pressures should they arise, and that’s a pretty good thing. They’ll be forced into QE or Cataclysm, and I see both as relatively positive given the asset picture in Japan.
