THIS YEN DECLINE IS DIFFERENT
(and what this might mean for risk assets)
I had planned on writing my "green" bubble candidate post today, but then the Yen went and had its third biggest move in the past couple of years.
You might be saying, "so what? Currencies move all the time. Why is this move important?"
Yen declines are typically associated with risk-on environments, so when the Yen started cratering this morning, the machines grabbed a huge stack of blue tickets and bought equities like they were the final few Admirael van der Eijck tulip bulbs on offer.
I have a theory why Yen declines are often accompanied with risk-on buying. More often than not, it's the massive Japanese post office or other pension plan selling Yen to buy US assets. They drive down the price of the Yen while simultaneously sending up the price of stocks. The algos have rightfully recognized this relationship and often front-run the buying. Regardless, the important thing to understand is that the Yen declines not because of a fundamental issue with the Japanese currency, but rather due to portfolio moves from investment plans.
This is NOT the reason for today's move.
The Japanese have recently experienced their second worst quarter of GDP growth in the past decade.
The reason FX traders are selling Yen with both fists? Because the Japanese economy is imploding.
I don't want to get into the stupidity of Japanese economic policy, but instead stress one important point - the Yen selling was not because of portfolio flows, rather it was investors fleeing Japan because of poor economic prospects going forward.
Yeah, a good portion of that money found its way into US risk assets today, but this is not a positive development.
The world is slipping into a global slowdown (recession?) and America is attracting all the capital from investors who believe the US is somehow immune.
We have seen this situation before. Remember back to 2018. For the first three quarters of that year, the US dollar was on a tear as capital was attracted to America's stimulative fiscal stance and the tighter-than-the-rest-of-the-world monetary policy.
During this period, the financial airwaves were filled with comments how American stocks were the "only place to be". There were so many references to "the cleanest shirt in the dirty laundry pile" I felt as if no one owned a washing machine.
Well, what happened to that clean shirt?
The American stock market proved it was not immune to the global credit contraction created by Powell's tighter-than-the-rest monetary policies.
What's my point? Today, everyone is foaming-at-the-mouth bullish because the US dollar is rising along with the rip-roaring American stock market.
This cannot continue indefinitely. Eventually we will reach a point where the US dollar rise will sow the seeds of the stock market's demise.
Maybe this time the Federal Reserve realizes the conundrum they face and provide the liquidity the world's financial system requires. That could be. But if that happens, then both commodities and stocks will rip even more.
We are at a scary point. The Yen declining at this rate, along with the US dollar flying against the Euro and the rest of the other currencies, might feel good over the short run, but I am not as confident you want to be chasing up here.
I am especially concerned because the Yen is declining, not because Japanese portfolio managers have decided the US offers such an attractive place to invest, but are selling Yen due to the poor economic prospects in Japan. Today's Yen decline is different. The algos don't realize the subtle difference, but human beings will go over the data tonight, and I am worried they will come to the same conclusion as I have.
For all those US dollar bulls, be careful what you wish for - you might get it - good and hard!
Thanks for reading,